Japan’s GPIF sees drop in carbon intensity and commits to engage with asset managers to foster ‘Society 5.0’

Pension giant also said it would consider revisiting stock lending ban, as government discusses green recovery from Covid

Japan’s Government Pension Investment Fund (GPIF) has reported a 15.3% drop in the carbon intensity of its equity and corporate bond portfolio between 2018 and 2019, a change it attributes mainly to its shift to low-carbon indices.

In its latest ESG report, GPIF said the drop in its portfolio’s Weighted Average Carbon Intensity (WACI) – from 2.29 tons of carbon dioxide per million yen of company sales to 1.94 tons – is mostly due to changes in its holdings. In 2018, GPIF started investing in the S&P/JPX Carbon Efficient Index for domestic stocks and S&P Global LargeMidCap Carbon Efficient Index for foreign equities, which were designed to increase investment into ‘carbon efficient’ companies.

It said company emissions also generally reduced, and that corporate profits had expanded, all contributing to the reduction in carbon intensity.

The results are just one piece of GPIF’s expanded climate risk stocktake, released for its second year of TCFD reporting. Overall, it looks at transition and physical risks and opportunities across its bond and equity portfolios. It has used FTSE and MSCI data for the analysis, in addition to data from S&P Trucost that it used last year. Alternative and short-term assets were not included in the analysis. 

The WACI of its sovereign bond portfolio, meanwhile, is slightly higher than the benchmark, and more exposed to physical risk, according to the report’s section on climate risk in government bonds using FTSE Russell and Beyond Ratings data.  

GPIF’s bond portfolio comprises mainly sovereign notes – 91% of its domestic bond portfolio and 85.1% of its foreign bond portfolio are government bonds. 

Its overall portfolio is around 46% equities and 47% bonds.

In terms of carbon footprinting, GPIF’s domestic bond, domestic equity and foreign equity portfolios have all seen steady declines over the past two years, while the footprint of its foreign corporate bond portfolio has shot up more than 100% since 2016, according to S&P Trucost data.

GPIF said this may be due to the fact that it expanded the weight of foreign bonds and decreased domestic bonds in 2019 when it moved to a new basic portfolio. “In this way, changes in greenhouse gas emissions for each asset can be greatly influenced by the amount of investment in that asset, although the carbon efficiency of the investee company also affects it,” the report noted.

It uses MSCI’s Climate Value-at-Risk (CVaR) method to project how climate change could affect company valuations under multiple scenarios, for both its equity and corporate bond portfolios. It found the negative impact to valuations across the portfolio was largest in a 3°C scenario. The 2°C scenario was more favourable, with the positive impact increasing further at 1.5 degrees.

In its ESG report last year, it found its portfolio emissions were consistent with more than 3°C of warming, but it hasn’t performed the same exercise this year. 

The English translation of this year’s ESG report is forthcoming. 

GPIF has also released a report on sustainable development and investing in innovation, in collaboration with the University of Tokyo and powerful business lobby Keidanren. 

The report, The Evolution of ESG Investment, Realization of Society 5.0 and Achievement of SDGs, considers how ESG investing can support the UN SDGs and the establishment of what is referred to in Japan as Society 5.0 – “a sustainable, human-centred society” harnessing technology to achieve medium- and long-term growth and solve social problems.

The report outlines opportunities for investing in ‘next-generation’ healthcare, smart mobility, energy, fintech, smart living, smart agriculture and cybersecurity, and considers disclosure standards and guidelines to allow investors to identify and evaluate companies promoting Society 5.0, which it defines as “companies that can grow from a medium- to long-term viewpoint and contribute to a sustainable society”.

The report contains an action plan for GPIF based on the report, which includes collaborating with fund managers to evolve ESG investment.

New GPIF President Masataka Miyazono also reportedly said last week that the fund could review its high-profile stock lending ban. 

“If the environment changes we may have the opportunity to review our position, but we’re not in that situation at the moment,” Miyazono said.

The spatter of news from GPIF comes as the Asia Investor Group on Climate Change (AIGCC) warns of “significant transitional risk in the Japanese and wider Asian energy market” revealed in the scenarios published by the Network of Central Banks and Supervisors for Greening the Financial System. 

AIGCC said the scenarios show a Japanese energy mix consistent with an orderly transition to limit global warming at 1.5°C would include approximately 50% renewable energy and 20% nuclear power by 2030, with only limited use of coal and gas and both coming out completely of the system between 2035-2040. Japan’s current basic energy policy, which will be reviewed next year, outlines an “ideal supply” of 27% gas and 26% coal.

And next Thursday, the Japanese Minister of Environment Shinjiro Koizumi will chair a meeting for ministers globally on tackling the COVID, climate and environmental crises, in a bid to “build momentum toward COP26 in 2021”.