GPIF puts passive managers at the forefront of corporate stewardship

Passive equity managers accounted for 62.6 per cent of the engagement activity conducted on behalf of Japan’s $1.86 trillion Government Pension Investment Fund last year, as the pension giant pushes index-tracking strategies to take on a bigger share of its stewardship load.

GPIF is one of the biggest passive investors in the world due to its size. Approximately half of its total book is in equities ($925.7 billion) and more than 90 per cent of the allocation is passively managed, according to the fund’s annual stewardship report.

“For passive investment, we believe engagement activities are critical to encourage investee companies to achieve a long-term increase in corporate value and, in particular, to promote sustainable growth of entire markets,” the fund said.

Demonstrating its emphasis on governance, stewardship responsibilities account for 30 per cent of a passive equity manager assessment in GPIF’s framework for external manager evaluation, compared to only 10 per cent for active managers. This includes the exercise of proxy voting rights, adherence to GPIF’s stewardship codes and disclosure of proxy voting records.

With passive managers 70 per cent is linked to criteria including investment process, policy, human resources and organisations.

Passive and active equity managers are also given different goals in engaging with companies. While passive engagement is expected to improve the “sustainable growth” of the overall market, active engagement is aimed at improving shareholder value of selected investee companies. It is a sign that, as a universal asset owner, GPIF believes strong market beta is critical for securing consistent returns.

In addition, the fund has a separate sleeve of the so-called “engagement-enhanced passive” investments which counts four managers on the roster. It includes firms such as FIL Investments which has the target of improving market beta by encouraging behavioural changes in large-cap Japanese companies through engagement.

The manager engages with portfolio companies across social, environmental, governance, capital allocation and management strategy issues. It then established three indicators to track its impact: input (issues of improvement the manager shared with corporates), output (corporates taking actions as a result) and outcome (positive stock price performance and market reception).

As of March 2026, FIL Investments engaged with about 80 per cent of its target companies (input), 70 per cent of portfolio companies have taken action (output), and 50 per cent of the company actions were positively recognised by the market (outcome).

The asset owner is looking to allocate to ESG funds in domestic and foreign equities, which have to meet its newly established criteria to contribute to improving sustainability-related risks; meet “market average return”; and meet KPIs related to ESG factors which are self-established and need to be made available to GPIF.

In the year to December 2025, domestic equities managers engaged with 1039 Japanese companies on behalf of GPIF, representing 57.7 per cent of all engagement efforts. By scale, all TOPIX 100 companies the managers engaged with agreed to a conversation, while companies on the smaller end of the spectrum are less willing to engage.

Passive managers account for 62.6 per cent of the number of dialogues held with companies, while active managers accounted for 37.4 per cent in the year to December 2025.

Investor engagement is the cornerstone of governance reform in the Japanese capital markets, the fund said, highlighting “the importance of institutional investors (asset owners and asset managers) proactively expressing their views”.

The Japanese finance regulator, the Financial Services Agency, alongside the Tokyo Stock Exchange formalised a major update to the corporate governance code last month, urging company boards to reorient balance sheet resources to promoting growth, rather than short-term activities such as share buybacks.

“As an asset owner, GPIF will continue to engage in dialogue with external asset managers regarding engagement and proxy voting practices related to corporate governance toward the revision of the code,” the fund said.