Japanese pension fund pushes asset managers to get tougher on sustainability



Impactalpha, Nov. 25 – A shift of up to $50 billion by the world’s largest pension fund has sent a message to the world’s biggest asset managers.

We’re serious. 

Japan’s Government Pension Investment Fund, at $1.6 trillion the world’s largest “supertanker” of institutional capital, is stewarding its assets for the long term. It wants the asset managers it hires to do so as well.

A mandate last spring of 5,373 billion yen, or about $50 billion, to Legal & General reflects GPIF’s push for more active oversight of the “negative externalities” created by companies in its portfolio. L&G, one of the U.K.’s largest asset managers, this summer attracted attention when it divested some holdings in ExxonMobil because of the oil giant’s inadequate response to climate change.

Asset-management giants like BlackRock, which has managed the largest share of GPIF’s assets, took notice. As a manager of mostly “passive” portfolios pegged to indexes, BlackRock has been loath to divest from fossil fuels and other environmentally destructive industries and only rarely bucks management on shareholder resolutions.

GPIF’s tougher stance reflects a critical shift among owners of some the world’s biggest pools of capital. “Universal owners” who know they can’t escape systemic risks of climate change and income inequality are selecting managers willing to drive companies toward long-term sustainability. Active “stewardship,” sometimes called shareholder engagement, is the new competitive differentiator for managers of so-called passive portfolios. 

Expect more pressure on corporate management for climate-risk disclosure and other environmental, social and governance, or ESG, issues.

“Negative externalities created by the portfolio companies will affect our portfolios at the end of the day,” GPIF’s Hiro Mizuno said at the London Stock Exchange last month. “Even for our active managers, delivering alpha is no longer good enough. We evaluate how you control externalities caused by your portfolio companies’ business.” 

Mizuno is pushing index providers and credit-rating agencies, as well as asset managers, on climate and ESG. “I don’t know how many of them really understood how serious we are,” Mizuno said. “So if you have a chance to talk to asset managers, please tell them, ‘We are serious.’”

Active passive investing 

The changes GPIF is driving in how it invests in “passive” equity portfolios are rippling through the $74.3 trillion asset management industry.

Passive investors keep fees low by investing according to an index. But if stock purchases are essentially automated, why should asset owners pay any fees at all – a machine could easily rebalance portfolios. That makes construction of an index in the first place the most important lever to pull. “I think the index provider is actually the most critical asset manager,” Mizuno said at the stock exchange. 

Earlier this year, GPIF moved $40 billion in its equities portfolio from a traditional passive index based on market capitalization to one weighted for environmental, social and governance themes and, in particular, de-carbonization. The climate-focused benchmarks—one for Japanese equities and the other for foreign equities– weight companies in the portfolio based upon carbon efficiency and proactive disclosure of climate information.

Beyond construction and selection of the index, Mizuno figures, the only other way for managers of passive portfolios to add value is through the stewardship of those assets. In 2017, the GPIF raised the weighting of “stewardship activities” in its selection criteria for passive equity managers to 30% (from 5% for passive foreign equities, 15% for domestic equities). 

That is the criteria under which Legal & General won its new mandate. A comparison of GPIF’s passive foreign equities mandates as of March 2019 with March 2018 shows that at the same time L&G won its mandates, State Street also increased its role in GPIF’s passive equities portfolio. BlackRock’s mandate was cut fell for BlackRock Japan. GPIF’s also reduced the passive equity mandates to Mitsubishi UFJ Trust and Banking Corp. and Resona Bank (formerly Daiwa Bank).

A spokesman for BlackRock declined to comment for this article. 

L&G touts its “climate impact pledge,” a commitment to engage with 84 large companies to improve their climate-change strategies. If after two years of efforts, companies don’t respond to L&G’s climate concerns, the firm’s policy is to divest from its sustainability funds and vote against board chairs across all of its funds. 

In June, L&G said it would exclude ExxonMobil from its Future World funds because of climate change risk. The company has added back Occidental Petroleum and Dominion Energy Corp., dropped earlier, after they addressed concerns. 

L&G says it uses a set of tools – collaboration, targeted proxy voting, public policy, public statements and even divestment – to escalate the stakes of company engagement.

“If you cannot divest, it’s like going into negotiations with one hand tied behind your back,” L&G’s John Hoeppner, who heads stewardship and sustainable investments for the firm’s U.S. unit, told ImpactAlpha. “If management chooses to ignore our views, there is an escalation process to drive action.”

L&G manages about $1.3 trillion in assets, compared to nearly $7 trillion for BlackRock. The company recently beefed up its ability to compete for sustainability mandates with a partnership with OpenInvest, a technology platform that enables the creation of “dynamic custom indices” that incorporate ESG criteria.

Agent of Impact

Mizuno, who returned from 13 years in London to manage GPIF in 2015, was recently reappointed to his position, at least through March. Because of GPIF’s structure as a 100-year-fund to backstop Japan’s social security system in the fact of the country’s aging, shrinking population, Mizuno’s strategic priority has been to align managers with the fund’s long-term perspective. Borrowing from Pope Francis, Mizuno uses the term “cross-generational” to signal that he has an investment horizon of 30, if not 50, years.

The legislation that created the fund requires the GPIF to place its assets with outside managers. When Mizuno arrived, 75% of the assets were in Japanese government bonds. Now it’s half in equities and half in fixed-income. The main responsibility of the fund’s 120 employees is the selection of outside managers.

“When we sit down to have a tough discussion with an asset manager, I tell them, ‘We will remain the biggest customer of your industry,’” Mizuno says. “We are working hard to send the message that we are trying to protect long-termism in the capital markets.”


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