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Japan’s GPIF allocates €5.6bn to FTSE ESG index fund

The fund had sought an ESG index with no exclusions and minimal tracking error.

Japan’s mammoth Government Pension Investment Fund (GPIF), which represents the largest pool of pension assets globally, announced Wednesday a ¥760 billion ($6.2 billion; €5.6 billion) investment in the local equities-focused FTSE Blossom Japan Sector Relative Index.   

The move brings the total number of ESG indices adopted by GPIF to eight, comprising of indices from S&P, MSCI, FTSE and Morningstar. Four of these are considered by the fund to be ‘General ESG’ indices, with the balance equally split between the themes of ‘Climate Change’ and ‘Women’s Empowerment’. 

GPIF said that the FTSE index was selected after it scored highly on key criteria, which includes having no “negative screening which excludes specific industries or businesses”, a relatively small tracking error and high transparency of its underlying ESG ratings. 

According to FTSE, the constituents of the Blossom Japan Sector Relative Index are selected from the top 50 percent ESG Japanese stocks within their respective sectors (based on FTSE ratings) and must score highly on a Transition Pathway Initiative assessment if among the top 10 percent of carbon-intensive stocks within its sector. 

The index returned 14.12 percent over the last five years, compared with the TOPIX benchmark’s 12.67 percent. 

“GPIF will aim to ensure long-term profits from the sustainable growth of portfolio companies and the market as a whole through its ESG investment and stewardship activities, continuing to improve the indexes we have already adopted and adopt new indices,” said GPIF president Miyazono Masataka in a statement. 

Over the past few years, the largely passively-managed GPIF has sought to allocate more of its assets to environmental, social and governance investment in line with its diversification-focused investment principles. The fund reported that 80 percent of its assets were passively managed in 2021, with an overall asset mix divided equally between domestic and foreign bonds and domestic and foreign equities at around 25 percent each. 

GPIF recently posted a quarterly return of $15 billion in Q2 2021 (July to September) – around 0.98 percent of total assets – bringing its total AUM to $1.59 trillion. 

The fund has also noted the appointment of Sumitomo Mitsui Trust Asset Management and Resona Asset Management to provide engagement services for its passive investments, according to its annual Stewardship Report (Japanese only), also published Wednesday.  

Additionally, GPIF said that it will soon embark on a series of engagement-focused initiatives such as establishing a “passive investment model that emphasises stewardship activities”, evaluating stewardship roles for bond investments and conducting research on the results of engagement. 

Separately, Hong Kong stock exchange HKEX has announced that it will launch a new digital trading platform this year that will trade ESG-related products, such as carbon emissions-related contracts and potentially digital assets. 

It comes weeks after regional rival Singapore launched its own digital marketplace for carbon credits, which is jointly backed by DBS Bank, Singapore Exchange, Standard Charted and state-owned fund Temasek.