Japan Launches Passive ESG Mandates

Shanny Basar

Japan’s Government Pension Investment Fund, the largest global pension fund in the world with more than $1.3 trillion in assets, has chosen three environmental, social and governance indices as benchmarks in a ‘landmark’ for passive ESG strategies.

The pension fund has selected two broad and one thematic ESG index for Japanese equities and started passive investment tracking. The two broad index mandates are the FTSE Blossom Japan Index and MSCI Japan ESG Select Leaders Index. In addition the fund has chosen a thematic index, the MSCI Japan Empowering Women Index, which focuses on gender diversity.

David Harris, FTSE Russell

David Harris, group head of sustainable business at London Stock Exchange Group, told Markets Media: “This is a landmark both for Japan and globally. The pension fund is of a size and scale that everybody sits up and takes notice and it is a clear signal that ESG matters.”

Norihiro Takahashi, president of the Government Pension Investment Fund, said in a statement: “GPIF expects that the selected ESG indices incentivize Japanese companies to improve their ESG evaluations and enhance enterprise values in the long term. If overseas investors focusing ESG with longterm horizon follow, the investment returns of Japanese equities are likely to improve.”

Takahashi continued that the passive investments against these three indices will initially account for 3% of the Japanese equity portfolio, or ¥1 trillion ($8.8bn), and will be increased. Harris added that GPIF’s passive ESG exposure is due to increase to $27bn over the next three to five years.

In September 2015 GPIF became a signatory to the six Principles for Responsible Investment set up by the United Nations. In April this year the PRI, UNEP Finance Initiatives and the Generation Foundation published a report, The Japan Roadmap, which recommended actions on ESG in the country’s stewardship and corporate governance code.

Harris continued that when he joined FTSE4Good 15 years ago, ESG only applied to retail investments. There has since been a long phase of ESG integration into active funds and in the past 12 to 18 months this has expanded to passive funds.

In November last year, FTSE Russell, the index provider owned by London Stock Exchange Group , created the FTSE All-World Ex CW Climate Balanced Factor Index. This was the first FTSE Russell index to combine climate change considerations with a smart beta factor approach, where index design is not just based on market capitalization. Legal & General Investment Management chose this index for its new Future World Fund, which was also the default equity option for the HSBC Bank’s UK defined contribution pension scheme, worth £1.85bn.

GPIF has selected the new FTSE Blossom Japan index, which has been designed using an industry-neutral weighting approach to match the industry weights in the underlying FTSE Japan Index while integrating ESG considerations.

In addition the Japanese pension scheme has chosen the MSCI Japan Empowering Women Index (WIN) and the MSCI Japan ESG Select Leaders Index.

MSCI said in a statement: “Recent research has suggested that greater participation of women in the workforce may have benefits for the Japanese economy. As a result, the Japanese government has set out explicit goals to encourage women’s participation and promotion in the business world.”

The WIN index includes companies whose gender diversity initiatives have been determined by MSCI ESG Research to encourage more women to enter or return to the workforce.

The MSCI Japan ESG Select Leaders Index targets companies with the best ESG profile relative to their sector peers.

Seiichiro Uchi, head of Japan index & ESG coverage at MSCI, said in a statement: “These two indexes come at a time when the importance of ESG integration is becoming ever more important and diversifying Japan’s workforce is increasingly viewed as a key factor in the country’s continued economic development.”

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