External managers not correctly compensating ESG staff, says Japan government fund GPIF

World’s largest pension fund releases incentives study by Mercer

Many external asset managers running assets for Japan’s ¥159trn (€1.3trn) Government Pension Investment Fund (GPIF) are not compensating their heads of ESG in a way that aligns with their responsibilities, according to a newly released study from the giant fund.

The review of external manager remuneration found that a “very limited number” of asset managers for the world’s largest pension fund offered information on the staff heading up ESG departments, and “not many” had appropriate compensation structures for their roles and responsibilities.

Meanwhile, “almost all” asset managers surveyed have effective compensation structures to avoid short-termism, the study said.

The report is the result of a study commissioned by the pension fund as part of a comprehensive exercise to improve long-term investment performance.

Following an RFP last year, GPIF took on Mercer to analyse a survey of the fund’s external equities and fixed income managers to see whether they had appropriate incentive schemes in place for avoiding short-termism and promoting long-term returns, in line with GPIF’s expectation.

GPIF has said it intends to use the results of the survey to inform manager selection and evaluation, and as an engagement tool.

According to the FT, active managers for GPIF include JPMorgan AM, Amundi, Schroders, Invesco, Eastspring, Nomura, Fidelity International and UBS.

GPIF, which calls itself a “super long-term investor” is a vocal proponent of ESG in Japan and further afield, breaking new ground with the introduction of ESG benchmarks and its demand that managers consider and engage companies on ESG factors.

Japanese law restricts the mammoth pension fund from telling its asset managers how to invest, meaning it places particular emphasis on manager selection, evaluation and long-term alignment with GPIF investment goals.Its efforts in this vein so far have included the introduction of a performance-based fee structure and multi-year contracts with active managers.

GPIF said in a media release: “Compensation structures could be considered to reflect asset managers’ investment philosophy as well as their shared values and beliefs, such as corporate culture. GPIF believes that compensation structures are useful measures to enhance alignment for pursuing long-term partnership with the asset managers.”

The initial questionnaire looked at the compensation structures of the CEOs, CIOs and portfolio managers of all of the giant pension funds’ asset managers.

It analysed the responses, classifying compensation structures into “lagging”, “average”, and “leading”.

“Leading” asset manager practice included the “strategic use” of compensation structures, basing individual bonus KPIs [key performance indicators] on investment performance rather than on assets under management, and the assessment of mid-long term investment performance.

Solvency guidelines in the UK and EU were noted to mean that almost no compensation structure was found to promote short-termism, though some lagged in their failure to use compensation structures strategically.

The study noted that most Japanese asset managers do not use compensation structures “strategically”; instead, their compensation is often based on the parent company’s standard remuneration structures.

GPIF released its investment results for 2018 last week, reporting a 1.52% return over the fiscal year, compared to a 3.03% cumulative return since 2001.

It also announced last week that it was partnering with the European Investment Bank in an initiative to promote green, social and sustainability bonds.

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