Governance

OECD calls on Japan’s giant Government pension fund to integrate ESG

Report suggests world’s largest asset pool should sign up to UN PRI

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Japan’s giant Government Pension Investment Fund – the world’s largest pool of pension assets at JPY120trn (€1.1trn, $1.4trn) – should integrate environmental, social and governance (ESG) factors, according to analysis from researchers at the Organisation for Economic Cooperation and Development. They say this would help it keep pace with its peers and diversify its investments.

“The investment policy should consider the fund‘s potential impact on the domestic economy and financial stability and it should integrate environmental, social and corporate governance (ESG) factors,” the report by the OECD’s Fiona Stewart and Juan Yermo states.

It adds: “The GPIF could become a signatory of the UN Principles of Responsible Investment.” The paper’s authors argue the GPIF is “out of step” with its international peers – reserve funds in Canada, France, Ireland, New Zealand, Norway and Sweden – in not being a signatory.

Although the OECD does not directly promote socially responsible investing (SRI), the authors say“such a stance could help the Japanese government meet its targets for increased overseas investment in regions such as Africa”.

The comments come in a working paper entitled Options to Improve the Governance and Investment of Japan’s Government Pension Investment Fund.

The governance structure of the fund “does not meet some of the basic criteria” of the OECD Guidelines for Pension Fund Governance, the study argues, adding: “The GPIF does not appear to be a fully independent, segregated entity.”

Stewart and Yermo are principal administrators in the Financial Affairs Division of the OECD‘s
Directorate for Financial and Enterprise Affairs; their views do not necessarily represent those of the OECD itself. They make a series of recommendations to improve the governance and the investment allocation of the fund.

These include setting up a Board of Directors and a separate executive team led by a CEO and CIO, who are selected by the Board following a “transparent, professional” hiring process.