Japan’s Government Pension Investment Fund (GPIF) said its equity investments based on environmental, social and governance (ESG) criteria have outperformed as global stocks slump on concerns over inflation and monetary tightening.
According to the fund’s latest ESG report released August 24, seven of eight ESG index funds in which GPIF is invested beat benchmarks during the fiscal year that ended on March 31 2022, the end of GPIF’s fiscal year 2021 (FY2021).
All the ESG vehicles have outperformed over a five-year period, the report noted.
GPIF reported total passive ESG index investments of ¥12.1 trillion ($88 billion) as of FY2021. That was an increase above 14% as of FY2020. The amount invested in ESG-related bonds, such as green and sustainability bonds was ¥1.6 trillion, up 45% year-on-year.
GPIF’s chief investment officer, Eiji Ueda, pointed out that the fund has seen turmoil in capital markets following monetary tightening with interest rate hikes by the US Federal Reserve and the Russian invasion of Ukraine.
“The same is true in the field of ESG investment. Since these assets avoid investments in energy-related stocks and military-related stocks, ESG funds focused on investing in growth stocks are struggling due to sudden changes in the market environment,” Ueda noted in the report.
As a long-term investor, Ueda pointed out that GPIF continues the task to build out the collaboration with index companies to improve indices engagement. He addressed the need to also involve asset managers and academia to push for overall sustainable growth while also improving the earning power of investee companies.
“GPIF cannot achieve this alone. With the cooperation of everyone involved, we will continue to promote ESG from the perspective of securing sustainable earnings and investments,” Ueda wrote.
GPIF's latest addition to its ESG indices came in March 2022 when it announced that it had adopted the FTSE Blossom Japan Sector Relative Index.
The fund commenced passively investing ¥760 billion in assets tracking this Japanese general ESG index. Initial investment included new allocations as well as allocations from passive investments tracking other ESG indices.
"GPIF will aim to ensure long-term profits from the sustainable growth of portfolio companies and the market as a whole through its ESG investment and stewardship activities, continuing to improve the indexes we have already adopted and adopt new indices," Miyazono said in March.
The world’s largest pension fund posted its first quarterly loss in two years as declines in global stock and bond markets for the three months to the end of March 2022 hurt the value of its assets.
GPIF's saw the portfolio drop 1.1% overall during the quarter, reducing its total assets to ¥196.6 trillion ($1.46 trillion).
GPIF has since updated the size of its total portfolio size to ¥193 trillion as of the end June 2022, after a negative return on investments of -1.91% in the first quarter of its FY2022.