The giant Japanese Government Pension Investment Fund (GPIF) is pushing its external managers to fulfil stewardship responsibilities and improve their own governance, as part of its conscientiousness as a “super-long-term investor”.
About 24 per cent of the fund is in domestic equities and it exercises its voting rights via external asset managers. Therefore, it fulfils stewardship responsibilities by promoting constructive engagement between its external asset managers and investee companies. In 2016, all of the fund’s external asset managers exercised their voting rights.
The ¥144 trillion ($1.26 trillion) GPIF has clear expectations of its external managers around stewardship, including improving their own effective governance, exercising voting rights and integrating environmental, social and governance (ESG) principles.
This year, in addition to those tasks, GPIF is also asking external managers to establish a remuneration system for directors and employees of asset managers to prevent short-termism, and to look at passive management in the context of stewardship.
The fund is also calling for applications for more fund managers in passive Japanese equities.
About 80 per cent of the fund’s domestic equities are already in passive management.
In the qualitative assessments of GPIF’s external passive managers, the weighting to “activities of stewardship responsibilities” has been raised to 30 per cent, from 10 per cent. However, engaging fully with companies is difficult territory and some of the fund’s passive managers have indicated that the current fee structure does not provide enough compensation for the stewardship responsibilities they are asked to fulfil.
Of the fund’s 19 external domestic equities managers, 16 have signed the United Nations’ Principles for Responsible Investment, and seven have introduced independent outside directors.
In a formal summary report of its stewardship activities in 2016, GPIF indicated it would move away from one-way annual monitoring and toward constructive communication. It will also expand its stewardship activities to asset managers handling international equities. About 23 per cent of the fund is in foreign equities.
In the 2016 stewardship report, the fund states that: “It is essential for GPIF as a ‘universal owner’ (an investor with a very large fund size and a widely diversified portfolio) and a ‘super-long-term investor’…to minimise externalities of corporate activities (environmental and social issues, etc.) and to promote steady and sustainable growth of the overall capital market.
Equities managers step up efforts
The report also showed that all the fund’s domestic equities managers have set up or reinforced departments or committees dedicated to overseeing stewardship activities and stepped up their efforts to include continuous organisation-wide stewardship activities, not merely voting rights. They also all responded positively about ESG integration, although only a few of them have used ESG meaningfully in actual engagement.
Since 2001, the fund has returned 2.7 per cent annualised. It has been focusing on stewardship and ESG activities since May 2014, when it announced acceptance of Japan’s Stewardship Code.
More recently, it established a stewardship and ESG division comprising seven members – including two full-time staff members. And in November, it convened the Global Asset Owners’ Forum, to exchange ideas with global pension funds on ESG issues.