Socially responsible investing (SRI) is gaining steam at a rapid pace. What was a scarcely understood novelty several years ago has now become a necessity in every “know-your-client” discussion.
Until recent years, the demand for Environmental Social and Governance (ESG) and SRI investing has primarily come from individual investors who wish to align their portfolios with personal values and beliefs. They want to do good with their investments. Institutional investors, by contrast, have been much slower in adopting the strategy due to a lack of awareness and the common belief that ethical investing leads to lower returns. (For more, see: Advisors: Incorporating Impact Investing in Client Portfolios.)
The attitude is changing, however, as evolving research on the topic is debunking some of those concerns and institutional investors are quickly becoming the leading source of growth in sustainable investments. There are now $23 trillion in assets of professionally managed sustainable investment strategies, according to a 2016 survey by the Global Sustainable Investment Alliance (GSIA), a jump of 25% from 2014. The fastest-growing region was Japan, thanks to greater reporting and sustainable investing activity by institutional investors.
Japan's GPIF Takes the Lead
One notable example is the Government Pension Investment Fund (GPIF) in Japan, the world’s largest pension fund with 144 trillion yen ($1.3 trillion) in assets under management. GPIF has become a major player and stalwart of responsible investments worldwide - especially in Asia where, ex-Japan, SRI investments remain a minuscule slice of the asset pie under professional management (0.8% to be precise).
In July last year, GPIF announced plans to raise its allocation to ethical and socially responsible investments to 10% of its stock holdings from 3%, Reuters reported. This is one in a series of moves the fund hopes will set a standard for the rest of the continent as well as overseas.
Hiromichi Mizuno, GPIF’s chief investment officer, said his goal is to increase the fund’s ESG allocation to a point where it impacts performance, reported Bloomberg. From a fund manager’s perspective, there’s no point otherwise and 3% is simply too small to have any meaningful impact, Mizuno explained.
Concurrent with the pledge, GPIF allocated 1 trillion yen ($8.9 billion), or 3%, of its stock portfolio to companies that exhibit strong environmental, social and governance practices. The fund did not specify a timeline for fully implementing the rest of the 10% allocation, but once complete it will have poured a total of 3.5 trillion yen ($29 billion) into ESG-related investments, Reuters calculated. This is a significant boost to the global ESG market and one of the largest allocations of any asset manager. (For more, see: How to Talk to Clients About Socially Responsible Investing.)
As a long-term investor, Mizuno believes minimizing so-called negative externalities is not just about doing the right thing, it’s also about protecting returns, according to Bloomberg. If a company produces anything externally negative, that risk will be observed in another part of GPIF’s portfolio, he said.
In 2015, GPIF joined the Principles for Responsible Investment (PRI) network, a global coalition backed by the United Nations that now boasts 1,750 signatories across more than 50 countries. Signatories of PRI vouch to adopt and implement six main principles aimed at improving ESG practices and reporting. Principle one states: “We will incorporate ESG issues into investment analysis and decision-making process.” Mizuno is one of PRI’s board members.
To take it one step further, GPIF selected three SRI-specific benchmarks for the 10% allocation instead of using traditional indices. The MSCI Japan ESG Select Leaders index and the FTSE Blossom Japan index, which was created specifically for the fund, make up the broad market indices, while the MSCI Japan Empowering Women index is a socially themed index that tracks companies who are leaders in promoting and maintaining gender diversity.
The Bottom Line
GPIF president Norihiro Takahasi said the pension fund expects the ESG-driven indices to incentivize Japanese companies to improve their ESG evaluations and enhance enterprise values in the long term, according to an IPE article. Takahasi also called on foreign investors to take note, remarking that ultimately, pension beneficiaries will reap the most benefits by the optimization of the investment value chain. (For related reading, see: These SRI Funds Focus on Empowering Women.)