Japan’s $1.3trn GPIF leads call for better ESG data and standards for fixed income market

Japan’s $1.3trn Government Pensions Investment Fund (GPIF), the world’s largest pension fund, has published research claiming ESG risks can be material for fixed-income investments, and calling for the development of clearer standards and better data to help mainstream investors integrate ESG into bond portfolios.

The findings, which challenge the “myth” that considering ESG in fixed-income harms financial returns, are outlined in a new report, Incorporating Environmental, Social and Governance (ESG) Factors into Fixed Income Investment, created with the World Bank Group. It is based on research and interviews with over 30 leading investors, ESG data providers and rating agencies.

The report is part of a broader collaboration the two, launched last year to “promote strategies for including ESG criteria in investment decisions across different asset classes”.

The World Bank Group and GPIF also convened a workshop on the topic in Washington earlier this month.

The inaugural report finds that ESG can “strengthen” risk management and “contribute to more stable financial returns” and therefore should be included in fixed-income investors’ overall credit risk analysis.
However, it identifies “significant constraints” to achieving this, such as a lack of standard ESG definitions, poor (though improving) data, obstacles to engaging with issuers, the role ESG plays in credit ratings and a lack of ESG-focused products, particularly indices.The fixed-income market has been relatively overlooked in ESG discussions to date, which have tended to focus on equities. But efforts to address this have been stepped up in recent weeks, with the launch of three initiatives last month aimed at ‘greening’ fixed income, including the Green Bond Pledge – led by the Climate Bonds Initiative and Ceres – and The Green Loan Principles, launched by the Loan Market Association and the Asia Pacific Loan Market Association in partnership with ICMA. Earlier this year, RI covered efforts in Europe to ‘tag’ bank loan books and mortgage activities to measure their greenness.

GPIF and the World Bank have produced “practical recommendations” to help encourage the uptake of ESG within fixed income. These include the development of more “innovative and scalable” ESG products, the refinement of ESG standards and improvements in data – particularly on the “relationship between ESG factors and financial risks and returns”.

GPIF’s Chief Investment Officer, Hiro Mizuno, said the pension fund was “committed to working with our external fixed income managers to integrate ESG”, adding the research efforts sought to “encourage greater awareness and wider adoption of ESG integration in fixed income”.

It will now work with the World Bank on a number of initiatives to promote ESG, with potential areas for further research including the creation of benchmarks, guidelines, rating methodologies, disclosure frameworks, reporting templates, and “risk correlation for incorporating ESG considerations into fixed income portfolios, including for sovereigns and sustainable bond markets”.