Initiatives for Improving
ESG Passive EquityInvestment

April 2023
Government Pension Investment Fund

Initiatives for Improvement of ESG Passive Equity Investment[GPIF’s Basic Approach to ESG Investment]
 GPIF’s investments are conducted by taking ESG into consideration based on its belief that the sustainable growth of investee
companies and the capital market as a whole are vital in enhancing long-term investment returns. We positively implement thePDCA cycle.
 The fluctuation of performance due to factors other than ESG is undesirable, which we will avoid as much as possible.
[Initiatives for the Improvement of ESG Investment] Main initiatives implemented in FY2022:(a) Improvement of Index Methodology through Consultations (Pages 3 to 5)⇒ Change in the constituent weighting method of the MSCI Japan Empowering Women Index (WIN)⇒ TCFD-based information disclosure is taken into consideration in the evaluation for the S&P Carbon Efficient Indexseries.
(b) Adoption of Gender Diversity Index (Note 1)⇒ Adoption of Morningstar Japan ex-REIT Gender Diversity Tilt Index (GenDi J)(c) Enhancement of Risk Management in ESG Passive Equity Portfolio (Review of Allocation of Assets underManagement)⇒ Funds equivalent to 500 billion yen were allocated to the GenDi J Index from the existing ESG Indices. (Note 2)(d) Implementation of ”Measurement of the Impacts of Stewardship Activities and ESG Investment” (Page 6)⇒ A public consultation started in FY2022, and the analysis will be carried out from FY2023 to FY2024.
Note 1: For details, please see “Adoption of ESG Index and Portfolio Adjustment”
Note 2: The estimated TE of the entire ESG portfolio of domestic equities is expected to decline by 10 bps due to the relevant rebalancing and the change inthe constituent weighting method of WIN.

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Improvement of Index Methodology: Present Status of WIN• Regarding the MSCI Japan Empowering Women Index (WIN), the gender diversity score to evaluate corporate initiatives for women’s
empowerment positively contributes to stock price performance. However, the performance tends to deteriorate mainly due to the weight adjustmentusing the quality score.

Gender Diversity score: Trend of spread andreturn(Past three years after change of parentindex)

Performance trend of WIN
60%

15%

40%

10%

2.5%

6.0%

2.0%
20%

5%

4.0%

1.5%
1.0%

2.0%

0.5%
0%

-20%

0%
Cumulative excess return(right axis)

0.0%

0.0%

-0.5%
-5%

月次（左軸）
Monthly (left axis)-1.0%

累積（右軸）-1.5%-40%
2017/3 2018/3 2019/3 2020/3 2021/3 2022/3-10%

Note: The parent index of the MSCI Empowering Women Index (WIN) was MSCI Japan IMI 500 before
November 2019.

-2.0%

Monthly (right axis)

-4.0%

-2.0%
-2.5%
-6.0%2020/2 2020/8 2021/2 2021/8 2022/2 2022/8 2023/2
Note: The constituent stocks of the MSCI Japan IMI 700 were divided into two groups of high and lowscores of gender diversity score, and the average return of each group was calculated, of which difference
was recorded.

[Outline of the methodology of WIN (before change)]• Based on the gender diversity score which evaluates corporate initiatives for empowering women, stocks with a high score in their industry were selected as
constituent stocks.
• The weighting of constituent stocks is determined by the following formula: Weighted overall market value x Gender diversity score x Quality score (ascore calculated from ROE, debt ratio and profit variability)
Source: Prepared by GPIF based on the data of MSCI.

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Improvement of Index Methodology: Review of WIN• GPIF positively conducts dialogue on the improvement of ESG evaluation methodology and index methodology with ESG ratings agencies andindex providers.
• Regarding the MSCI WIN Index, the adjustment of the weighting using quality scores led to the deterioration of performance, thus GPIF had adialogues with MSCI. MSCI decided to exclude the adjustment of weighting using quality scores through the process of consultation* (to be appliedin May 2023 and thereafter).
* When ESG ratings agencies and index providers consider changing the methodology of index construction or ESG evaluation, they holds consultation to index users.

Performance of New WIN (Simulation)
60%

15%
Cumulative return of new MSCI Japan Empowering Women Index (New WIN)
(left axis)
Cumulative return of Parent index (MSCI Japan IMI 700: left axis)

40%

10%

20%

5%0%

0%
Cumulative excess return of new WIN (rightaxis)

-20%

-5%

Cumulative excess return of conventional
WIN (right axis)
-40%

-10%
2017/3

2018/3

2019/32020/32021/32022/3

Source: Prepared by GPIF based on the data of MSCI.
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Improvement of Index Methodology: Carbon Efficient Index• Under the Corporate Governance Code which was revised in June 2021, the companies listed on the Prime Market have been required to “disclose
information based on TCFD or a framework equivalent to it.”• As a result of repeated dialogues with S&P Dow Jones Indices, consultations concerning changes in the methodology of the S&P Carbon EfficientIndex series were implemented, and the said company decided to reflect TCFD-based corporate disclosure in its evaluation (to be applied in June
2023 and thereafter).

[Method to determine the investment weighting in the S&P Carbon Efficient Index series (in the case of a medium-impact sector)]
Carbon emissions / Net sales
Intra-industry rank
Status of disclosure ofcarbon emissions

First decile (Top 10%)DisclosedNotdisclosed

Second decile (Top 20%)

Disclosed

Not
disclosed

Third decile (Top 30%)

Disclosed

Not
disclosed

Fourth to Seventh deciles

Disclosed

Not
disclosed

Eighth decile (Bottom 30%)

Disclosed

Not
disclosed

Ninth decile (Bottom 20%)

Disclosed

Not
disclosed

Tenth decile (Bottom 10%)Disclosed

Not
disclosed

TCFD-recommended disclosure

Yes

No－

Yes

No－

Yes

No－

Yes

No－

Yes

No－

Yes

No－

Yes

No－

Adjustment of investment
weighting*

40%

35%

30%

30%

25%

20%

20%

15%

10%

10%

5%

0%

0%

-5%

-10%-10%-15%-20%-20%

-25%

-30%

Note: In the adjustment of investment weighting*, a three-fold value is applied in the above table for high-impact sectors, whereas a 0.5-fold value is applied to low-impact
sectors.
Source: Prepared by GPIF based on the materials of S&P Dow Jones Indices, etc.

[Characteristics of S&P Carbon Efficient Index series]• The S&P Carbon Efficient Index series, adopted by GPIF as one of the benchmarks for passive investment, evaluates carbon emissions per sales andinformation disclosure concerning carbon data to determine investment weighting.
• In the evaluation of information disclosure by conventional methodologies, evaluation was conducted only by the presence or absence of information
disclosure concerning carbon emissions. However, from June 2023, the evaluation will be conducted based on whether disclosure is in accordance with
the TCFD in addition to the disclosure of carbon data.

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Measurement of the Impacts of Stewardship Activities and ESG Investment• A certain period of time has passed since the implementation of GPIF’s stewardship activities and ESG investments, and the relevant data havebeen accumulated.
• Therefore, in order to appropriately implement the PDCA cycle, we will conduct measurement of quantitative impact from FY2023 to FY2024 incollaboration with a research institute or a consulting firm which have expertise in sophisticated statistical analysis as follows.

■ Overview of the measurement of impact

Measurement of the impact of
stewardship activities

Measurement of the impact of
ESG investments

Project theme

Specific details (example)

Verification of the impact of engagement

To identify the causality of the impact ofengagement on the improvement of ESG
indices and corporate value

Verification of voting rights held by asset
managers

Analysis of difference when asset managers
exercise voting rights in stakeholders and innon-stakeholders.

Verification of impact of passive equity
investments based on ESG indices

Analysis of impact of ESG investments on
corporate behavior

Study on the ESG factors that contribute to theimprovement of corporate value and investment
returns

Identification of the causality concerning theESG factors and the improvement of corporate
valule/investment returns* The theme of project and the timing of implementation are subject to change in the future.
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