Three ESG Indices Selected to Incorporate ESG Factors into Japanese Equity Investment

GPIF website.

Japan's Government Pension Investment Fund (GPIF), the world's largest pension fund, announced on July 3, 2017, that it has selected three ESG indices for incorporating ESG factors of environment, social and governance into Japanese equity investment. In this article, we will explain the characteristics of these indices, including the purpose of their selection, expected benefits and selection process.

GPIF selected three ESG indices for Japanese equities and commenced passive investment linked to these indices. Since the solicitation period last summer for ESG stock indices, 27 indices have been proposed by 14 companies in Japan and abroad. In selecting the indices, GPIF emphasized that (1) highly-rated shares are selected via "positive screening", (2) the evaluation should be based on public information, and its methods and results should be disclosed and, (3) ESG evaluators and index providers should be properly governed and their conflicts of interest should be managed.

As a general index targeting all three ESG factors, GPIF selected the UK's FTSE, the USA's MSCI and the MSCI Japan Empowering Women Index, a thematic index focusing on social factors. Passive Investment tracking the ESG indices commenced, initially accounting for 3% of the Japanese equity portfolio (about 1 trillion yen or US$ 9 billion).

The three selected indices are: the FTSE Blossom Japan Index, the MSCI Japan ESG Select Leaders Index and the MSCI Japan Empowering Women Index. The FTSE Blossom Japan Index only selects companies skilled in dealing with domestic and overseas environment, social and governance factors. The MSCI Japan ESG Select Leaders Index selects high ESG-rated stocks from each sector until they reach 50% coverage of the sector's market capitalization of the parent index. The MSCI Japan Empowering Women Index selects the top half shares with high gender diversity scores from each sector of the parent index. Aside from these indices, GPIF continues to screen other thematic indices related to the environment.

President Norihiro Takahashi noted that, "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 on ESG with a long-term horizon follow, the investment returns of Japanese equities are likely to improve. GPIF, as a universal owner (large-scale investor holding well-diversified portfolio), is responsible for yielding benefits for its pension beneficiaries by optimizing the investment value chain".

Expansion of ESG investment results in a virtuous cycle leading to building a sustainable society. The expansion encourages companies to enhance their activities in improving their ESG evaluations, increases Japanese enterprise values and improves the performance of Japanese equities and soundness of pension finance. GPIF noted that while checking the effectiveness of ESG investments in the medium-term, it will expand ESG investments including active investments and utilization of other ESG indices in the future.