GPIF says its focus on ESG disclosure having an effect

Japan’s Government Pension Investment Fund (GPIF) says its index-based campaign to improve listed company reporting on environmental, social, and governance (ESG) issues appears to be paying off already, giving it more reason to deepen its commitment to sustainable investing.

In September last year, the ¥158.58 trillion ($1.4 trillion) pension scheme announced it had chosen to track two new indices -- the S&P Global Ex-Japan Large MidCap Carbon Efficient Index and the S&P/JPX Carbon Efficient index.

And as of March-end this year, it had allocated ¥378.8 billion ($3.5 billion) to the latter and more than ¥1.2 trillion to the former, Naori Honda, a spokesperson for GPIF, told AsianInvestor on Wednesday.

Survey data based on the responses of 604 Japanese companies suggests the strategy is already yielding some fruit.

“The ratio of companies that publish integrated reports or an equivalent exceeded 50% for the first time,” GPIF said in a summary posted online earlier this month. “In addition, among the respondents that did not yet publish such reports, approximately 60% stated that they are planning to publish them or are considering doing so, which indicates rapid spread of the making of integrated reports.”

Market sustainability is a core strategic goal for GPIF. As Hiro Mizuno, the fund’s chief investment officer, has put it: “GPIF is committed to promote ESG integration through our investment chain in order to ensure the sustainable performance of the pension reserve fund for all the generations.”

“Our aim [with] ESG investing is to improve the sustainability of the whole capital market, based on our characteristics as a universal owner and cross-generational investor,” Honda said.

This broader aim is, in part, a function of GPIF's huge size.

“As GPIF is a universal asset owner that represents 8% to 10% of the Japanese market and [has] large global exposures, it’s really difficult for them to outperform the market because they are the market,” said Mona Naqvi, New York-based senior director for ESG indices with S&P Dow Jones Indices.

So it has to consider ways to reshape the market in its desired image, given its high level of conviction on ESG investing. These low-carbon indices are one way of doing that, she said.

What the index first does is take the starting weights from the parent index (the S&P 500, for example) and adjust them according to how well a company discloses its carbon footprint. If it is sufficiently transparent, its weighting gets a 10% boost.

“So as companies become familiar with it, they immediately will look to improve their reporting if they can see that this provides them with better index weighting,” Naqvi told AsianInvestor.

SURVEY DIFFERENCES

Not that the GPIF survey responses from Japanese companies were all positive. One company described the criteria for disclosing or not disclosing evaluation methods as “ambiguous”, while another said negative screening was still a more suitable strategy for dealing with environmental issues.

Still, over the long term the low-carbon index approach provides an incentive for companies to de-carbonise and transform their businesses.

Significantly, S&P Dow Jones Indices doesn’t take a simple carbon re-weighting approach. For all 61 industry groups, from energy to media, it takes into account differences based on the carbon intensity of the industries before ranking every company.

“If an industry is in the high-impact category, it means the spread of possible emissions is large and the reason that’s significant is if you’re a company that’s in the top decile, you are one of the most carbon-efficient companies and one of the leaders in the space,” Naqvi said. “If you’re at the bottom of one of the high-impact industries, there’s a lot of room to improve, given the currently available technologies in your industry.”

She added that GPIF’s activity is helping companies better understand the methodology behind the index and how they can improve their standing within it.

The effect is also being felt among asset owners across the region, particularly in Australia, Naqvi said, with other institutional investors now looking at this approach to low carbon investing, and listing rules being modified to improve reporting.