GPIF, AP2 go granular on ESG integration

The $1.3 trillion Government Pension Investment Fund of Japan is actively promoting environmental, social and governance integration at all levels of its investment chain.

Hiro Mizuno, chief investment officer of GPIF, said that because the fund outsources investments, ESG integration can be done only through the investment chain.

“We work hard internally to consider ESG in our asset manager evaluation,” Mizuno told delegates at the PRI in Person conference in Berlin. “We are encouraging our passive managers to set up as active stewards. They hold a lot of our voting shares and they need to consider ESG in their business activities. We are one of only a few asset owners to change our mandates to passive managers according to the quality of their ESG activities. We also try to hear more from corporations [about] what they want to hear from us and are promoting ESG at the company level.”

ESG factors should be a part of all asset classes, he said.

“We will integrate ESG into every single investment we make, regardless of asset class or geography,” he said. “We are now starting infrastructure and real-estate investing; they are new asset classes for us, so it’s easy to integrate ESG.

“We have a 25-year investment horizon, we spent a lot of time on finding managers to generate good alpha but at the end of the day that doesn’t matter for our performance. The financial system has to be sustainable,” he said. “It’s important for us to make sure we affect the whole investment chain and it becomes more sustainable by taking ESG into consideration.”

Mizuno said the fund was looking at engagement with index vendors, whose indices also play an important role in making sure the investment chain is more sustainable.

“Performance is measured by traditional benchmarks, but we need to change that to enforce alignment with ESG priorities,” he said.

Expectations for managers

GPIF has three explicit expectations of managers, outlined in its stewardship principle guidelines.

It asks managers to become signatories to the Principles for Responsible Investment or explain why they don’t need to do so; it expects managers to integrate ESG into their investment decisions; and it asks managers to engage with companies on serious ESG issues.

The fund also has recommendations for other asset owners, to help forge a sustainable financial system.

“Short-termism is not just a problem at corporate or asset manager level, but also at asset owner level,” Mizuno said. “I encourage all asset owners to stop producing quarterly reports. It’s hard to step back from that because it seems like going backwards in transparency.”

Speaking alongside Mizuno, on a panel titled Systematically Integrating ESG Across Asset Classes for Long-term, Sustainable Returns, Eva Halvarsson, chief executive of AP2, said integration means having a sustainability lens throughout the organisation.

“To be successful, you have to have commitment from the top,” Halvarsson said. “We are very lucky to have that. Every board meeting, management meeting and meeting with our staff we talk about sustainability. It’s commitment and culture. This is part of our DNA at AP2; everyone is engaged with these issues. I’m a strong believer that this should come from within. These are not issues for the ESG department.”

Halvarsson said the motivation for ESG integration comes from an investment imperative.

“The investor with the best and most information can make the best investment decision. You need a new kind of information,” she explained. “One of our most important values at AP2 is constant improvement. If we are to achieve that, we need to learn a lot of new things…You can apply that in working with ESG.”