This week, Japan’s Government Pension Investment Fund (GPIF), the world’s largest managed retirement fund with nearly $1.5 trillion in assets, announced that four of its five selected indices for Environment, Social and Governance (ESG) factors had beaten both their parent indices and stock market averages over the past two years. The news was reported in Chief Investment Officer magazine.
These include the MSCI Japan ESG Select Leaders Index and the MSCI Japan Empowering Women Index (WIN), which systematically exclude companies that exceed a designated “controversy score” on environmental or human rights issues, and the FTSE Blossom Japan Index.
While the announcement is good news for ESG adherents, the Japanese pension fund’s allocation to listed ESG targets remains small. Only about 3% ($32.4 billion) of the mega-retirement fund’s trillion-plus AUM is concentrated in public indices explicitly focused on ESG targets, with the fund planning to raise that commitment to 10% within no particular timeframe.
ESG in alts, real assets
GPIF also integrates ESG practices into its alternative investment funds, noting that the longer investment time frames involved in alts allocations make them especially well-suited to ESG. This is particularly true for real assets like property and infrastructure.
The fund’s ESG criteria for alts include controls on the use of hazardous materials and increased energy efficiency features in buildings that the fund buys or develops. (A 2017 study from researchers at the University of Tokyo and Pennsylvania State University found that Japanese certified green buildings with these ESG features command a rent premium).
While GPIF continues its proactive allocations to targets that score highly on ESG criteria, the fund does not actually divest from companies that fail to meet its standards. In its 2018 ESG Report, GPIF stated, “If we were to exclude a company with a significant environmental footprint from our portfolio, the value of our assets may eventually be damaged by the negative impact generated by this company in the long run.”
But questions about the return profile for ESG-driven investments continue to drive ambivalence among alternative asset managers—even in the pioneering Asian markets.
Higher multiples for Asia private market ESG deals
Earlier this year, private equity giant Bain Capital released results of their study on the relative performance of ESG-driven private equity deals in the Asia-Pacific region. Sampling 450 private equity-led exits in the region over the past five years and isolating dedicated impact funds as well as other highly ESG-rated companies, Bain found that the median multiple on invested capital was 3.4 for deals with an ESG impact profile, compared to 2.5 for other deals.
Bain’s 2019 Asia-Pacific private equity report also found that 90% of regional general partners (GPs) surveyed had “accelerated” efforts to invest sustainably over the past 3-5 years and also planned to increase these efforts in the next few years.
However, only 13% said they had integrated ESG considerations at the investment committee level or had actually taken any action to improve the ESG performance of their portfolio.
Still, the attractiveness of Asia as a destination for alternative asset manager ESG funds abides. This month, it was announced that UBS had invested $225 million in KKR’s Global Impact Fund, which is aiming for a $5 billion fund raise that would include a heavy focus on Asian targets.
Meanwhile, GPIF is expanding its ESG campaign into fixed income. Last month, the pension fund announced a new initiative to promote green bonds issued through the Asian Development Bank, months after making a similar joint commitment with the World Bank.
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