There’s a lot of responsibility that comes with managing a fund with $1.5 trillion in assets—a responsibility that Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world, faces every day. We have more than 5,000 stocks and 3,400 bond issuers in our portfolio, and the fund is designed to operate with a 100-year, multigenerational time frame.
Unlike investors with a shorter time horizon, we consider climate change to be a systemic risk affecting the entire range of our investments, one that can’t be eliminated simply through diversification.
We could certainly reduce the carbon footprint of our portfolio dramatically if we divested from certain carbon-intensive industries, but this would only result in a transfer of ownership to investors who are not as concerned about climate issues and thus would do little to contribute to a less carbon-intensive world. Our approach, rather, is to encourage companies with a large carbon footprint to adopt a more sustainable business model. I believe long-term investors have a duty to support corporate leadership that is embarking on a low-carbon transition.
A better way for us to deal with climate change is to integrate environmental, social and governance (ESG) issues throughout our whole investment process. We require all our asset managers to include these criteria in their investment analysis and decisions. Our equity portfolio managers are also obligated to engage with the companies they invest in on critical environmental issues.
In addition, over the past two years, Japan’s pension fund has been aggressively investing—a total of around $32.8 billion as of the end of March 2019—in funds that take into account ESG factors. Last year, we selected two climate-focused benchmark indices that incorporate two key elements: They seek out companies with high carbon efficiency within an industry. They also highly value companies that proactively disclose climate information. We don’t divest; we rebalance and engage.
We recently began using ESG factors in making decisions for our bond portfolio as well. In partnership with the World Bank Group, we have worked to cultivate the green bond market. Encouragingly, we’ve seen signs that these bonds are becoming more mainstream.
Skeptics question the effect of ESG investment on financial performance, but we emphasize that climate change and other ESG-related risks materialize only over the long term. Assessing the financial validity of ESG investing over a span of only a few years is therefore misleading. Having said that, almost all our ESG indices have outperformed the market since inception.
Since our ESG investment began in earnest in 2015, we are encouraged that our efforts have reverberated throughout the business community—particularly in Japan, where many companies are making a dramatic push to improve their ESG profile.
The GPIF of Japan will continue on this path, but we cannot do it alone. We call for deeper collaboration among shareholders, financiers and policymakers everywhere. Together, we can work toward the goal of creating a more sustainable world for future generations.
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