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Japan’s GPIF eyes contribution to “capital market sustainability” in new index framework

More details on giant funds new ‘Index Posting System’

Japan’s Government Pension Investment Fund (GPIF) has officially kicked off its hunt for new ESG indices, inviting providers to submit sustainability solution ideas to a newly launched “Index Posting System” (IPS).

An overarching idea is for the indices to contribute to “capital market sustainability”.

“Indices should be based on a concept that contributes to capital market sustainability”

Upon the recent launch of the pilot phase of the IPS – a new framework for collecting index information on a continuous basis – the fund has published fresh information about the type of indices it was hoping to receive.

GPIF had previously said that the trial phase would see the fund accept ideas for foreign equity ESG indices, foreign equity diversity indices, and domestic and foreign green bond indices.

Now the world’s single largest pension fund has added that indices should not use negative screening, “should be based on a concept that contributes to capital market sustainability”, and should be able “to accommodate a sizeable amount of investment assets”.

The fund also expanded on its request for ideas for environmental bond indices, specifying that it was looking for green bond indices, bond indices selecting or weighting constituents according to environmental factors, or a hybrid of the two.

It said index constituents could include government and supranational bonds as well as corporate bonds.

The fund’s CIO, Hiro Mizuno, has previously branded green bonds a “lose-lose” proposition, and warned that cost and liquidity drawbacks could mean the asset class becomes a “passing fad”.But the pension fund has also called green bonds a “direct” way to make ESG investments, and has green, social and sustainability bond “partnerships” in place with the Nordic Investment Bank, the European Investment Bank, the Asian Development Bank and the World Bank Group.

For the foreign equity ESG index and foreign equity diversity index, it said it preferred products with a universe similar to the MSCI ACWI (ex-Japan), its policy benchmark.

The fund is accepting both existing and new indices, provided that the submitters have previously developed indices that have been linked to assets under management in the past.

Index “posters” are expected to update index performance on a monthly basis after making their initial submission.

GPIF’s passive asset managers will be in charge of index-linked investments after index selection – scheduled for December this year at the earliest.

Asset managers hoping to manage assets linked to the indices must first register to GPIF’s Manager Entry System – introduced in 2016 to speed up and facilitate manager selection – and be selected by the fund as a passive asset manager.

GPIF said the new system would allow it to “efficiently gather the latest new index information for the purpose of enhancing our overall fund management”.

The full launch of the IPS, when GPIF will accept a wider variety of indices based on market cap, smart beta and other themes, is tentatively planned for FY2020.