UK and Canada government bond holdings most vulnerable to climate risks, GPIF finds

The Japanese pension fund reported improved ESG ratings for portfolio companies following third-party engagement.

The UK and Canada government bond holdings of Japan’s Government Pension Investment Fund (GPIF) could lose more than 7 percent of their value respectively over the next 30 years if climate policies are brought in at pace, according to the investor.

The finding is based on an MSCI analysis of GPIF’s sovereign bond portfolio using the data provider’s climate value-at-risk (CVaR) metric, which estimates how much the value of an asset could decline across different climate scenarios.

Treasuries from both countries were found to be at risk of a 5 percent loss over an ambitious net-zero transition trajectory where climate policies are introduced immediately.

Potential losses ratcheted up to 7.7 and 7.6 percent for UK and Canadian bonds respectively in a scenario where net zero is achieved through uncoordinated, divergent climate policies and results in higher costs for consumers.

The scenario, known as “divergent net zero”, also assumes a lower availability of carbon dioxide removal technologies. However, it is also the most effective scenario compared with others at limiting physical climate risks despite significant inflationary costs. Sovereign issuers were found to be at their most vulnerable under this scenario.

All scenarios were developed by the NGFS central banking group.

GPIF did not comment on the results but noted that the CVaR is also dependent on the duration of the bonds held by the pension fund, in addition to how each sovereign issuer is impacted by transition and physical risks. It added that the relatively longer duration of some bonds in its portfolios compared to others would result in a higher CVaR.

The UK and Canada were the worst performing sovereign issuers in GPIF’s portfolio under a divergent net-zero scenario, followed by Japan at 6.6 percent potential losses, the US at 6.4 percent, Germany and France at 5.1 percent respectively and Italy at 4.6 percent.

The fund reported a foreign fixed income exposure of $261 billion earlier this year but did not disaggregate sovereign debt from the headline figure. Responsible Investor has contacted GPIF for additional details.

The information was presented in GPIF’s annual ESG report, published yesterday. The investor, considered the largest pension fund in the world, also reported some improvements in the ESG ratings of portfolio companies following engagement by Japanese manager Asset Management One over a four-year period.

GPIF is primarily a passive investor but has made efforts to integrate stewardship into its portfolio in recent years, awarding AM One a tailored engagement mandate to improve the ESG performance of TOPIX 500 companies in 2018.

Researchers commissioned by the fund found that companies which were subject to engagement showed a 0.21-point average boost in their overall FTSE ESG scores, and a 0.29-point improvement in their FTSE environmental scores.

However, there was no significant difference in the overall MSCI ESG scores for the same companies, despite a 0.1-point improvement in their MSCI governance scores.

This was attributed by researchers to variations in the scoring methodologies of individual providers; MSCI, for example, does not automatically reward companies for disclosure, in contrast with FTSE. Engagement was found to be most effective at boosting ESG scores among laggard companies, compared to those which are already class-leading.


A second study commissioned by GPIF found that the fund’s creation of a women-focused gender index had encouraged firms to increase the representation of women in the workforce and at management levels, as they competed for inclusion in the index.

Internally, the pension fund reported that 28 percent of new hires were women, an increase compared to the previous year’s 12 percent. Despite this, the overall number of women employees at GPIF fell to 27.7 percent of its workforce, down from 28.7 percent a year ago.

Separately, GPIF reported the results of an inaugural analysis of its portfolio’s avoided emissions, or the emissions which have been avoided by replacing carbon-intensive activities with greener alternatives, carried out by data provider ICE.

For electric vehicles, one of two sectors analysed, ICE found that the avoided emissions from Japanese makers within GPIF’s portfolio were extremely small but are on track to exceed those of their Chinese counterparts and reach closer to European manufacturers by 2030.

In parallel, ICE found that avoided emissions from Japan’s utilities sector were small compared to other regions due to Japan’s reliance on fossil fuels, but would increase in the years approaching 2050. This will be driven “primarily by the resumption and expansion of nuclear power generation”, said ICE, which did not explain how Japan’s longstanding aversion to the power source would be reversed.