July 3, 2017

GPIF Selected ESG Indices
GPIF selected three ESG indices for Japanese equities and commenced passive investment tracking thoseindices. Investment heeding ESG factors is expected to enhance risk-adjusted return over the longer term. In
choosing the ESG indices, GPIF emphasized that (1) “positive screening" that determines constituent companies
based on their ESG evaluation should be adopted, (2) the evaluation should be based on public information andits method and results should be disclosed and (3) ESG evaluators and index providers should be properly
governed and their conflict of interests should be properly managed.

<Three selected indices>
GPIF selected two "broad" indices covering all of the environmental, social and governance factors, and one"thematic" index focusing on the gender diversity among social factors.
Type

Name of index

Broad index

FTSE Blossom Japan Index

Broad index

MSCI Japan ESG Select Leaders Index

Thematic/social (S)MSCI Japan Empowering Women Index (nickname: WIN)* Thematic index for environmental factor is still examined.

<Comment by President Norihiro Takahashi>
GPIF expects that the selected ESG indices incentivize Japanese companies to improve their ESG
evaluations and enhance enterprise values in the long term. If overseas investors focusing ESG with longterm horizon follow, the investment returns of Japanese equities are likely to improve. GPIF, as a universal
owner (a large scale investor holding well diversified portfolio), and its pension beneficiaries are
considered to reap most benefit by the optimization of investment value chain.
GPIF’s passive investment tracking the selected ESG indices initially accounts for 3% of Japanese equity
portfolio (about 1 trillion yen). GPIF aims to expand ESG investment by adopting other indices or active
investment. GPIF commits to actively engage in the ESG investment and the promotion of the ESG
concepts.

Results of ESG Index Selection
July 3th, 2017

Summary of ESG index selection andthe list of selected indices（GOVERNMENT PENSION INVESTMENT FUND）

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ESG index selection (Summary)
1. Expect portfolio’s risk-adjusted return to be improved over the long run.
○ Aim for maximizing the long-term return of the portfolio by minimizing the negative externality of environmental andsocial problems.

2. Adopt positive screening based on public information and aim for boosting equity markets in Japan.
○ Adopt positive screening based on ESG evaluation and provide opportunities for a wide range of companies to be includedin the indices and avoid categorically excluding companies providing specific goods and services in order to boost overall
equity markets in Japan.

3. Select multiple indices for them to be collectively balanced and not to be biased to a specific theme.
○ Select multiple indices such as indices evaluating comprehensive ESG factors or a index focusing on gender diversity forthem not to be biased to a specific theme and work on a wide range of themes.

4. Evaluate investment and manage risk appropriately.
○ Monitor the selected indices by evaluating investment and managing risk properly, and review them as needed if the risk
return profile does not improve in the medium to long term.

5. Commence investment from 3% of Japanese equity portfolio (1 trillion yen) and aim for increasing itin the future.
○ Commence investment from 3% of Japanese equity portfolio funded in part by restructuring current holdings. Aim forincreasing it including other products in the future.
（GOVERNMENT PENSION INVESTMENT FUND）

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List of selected ESG indices
Thematic indicesBroad indicesE(Environment)

Under examination

FTSE Blossom
Japan Index

MSCI Japan ESG
Select Leaders
Index

S(Social)MSCI Japan
Empowering Women
Index (WIN)G

N/A(Governance)（GOVERNMENT PENSION INVESTMENT FUND）

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Objective of ESG index selection,
expected effect and the selection process（GOVERNMENT PENSION INVESTMENT FUND）

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GPIF as a universal owner and a super-long-term investor-- universal ownership - UNEP Finance Initiative "Universal Ownership" (2011)"Leading institutional investors are, in effect, universal owners (shareholders that broadly encompass the entire capital markets)since over the long run they invest in well diversified portfolio that represents the world's capital market.
Their portfolios are inevitably exposed to ever-growing costs incurred due to environmental damage caused by corporate activities.
To minimize such costs as a whole and reduce externality, institutional investors are able to influence ways of engaging in businessactivities. Long-term economic stability and beneficiary benefit are now faced with a crisis. Institutional investors can, and must,
work together to take action to lower financial risks resulting from environmental effects." (excerpt from "Responsible Investment"
by Takeshi Mizuguchi)■ GPIF's shareholding (as of the end of March 2016)
Number of major indices' constituents and that of GPIF's shareholdings<Japanese equities>(Number of stocks)<Foreign equities>(Number of stocks)

Passive-active composition of equity investment<Japanese equities><Foreign equities>

Active18.48%

Active15.85%

Passive81.52%TOPIX

GPIF'sJapaneseshareholdings

MSCI ACWI(excl. Japan)

GPIF'sForeignshareholdings

Passive84.15%(Source) Annual Report for Fiscal Year 2015

* In the case of passive investing based on the full replication method using TOPIX as its benchmark, any of its shareholdings essentially continues to be held as long as it
remains listed on the Tokyo Stock Exchange (TSE) First Section.

（GOVERNMENT PENSION INVESTMENT FUND）

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Objective of soliciting proposals for ESG indices For GPIF as a universal owner (a large scale investor holding well diversified portfolio), it is rational to seek to maximize
its portfolio's investment return over the long term by minimizing negative externalities (e.g. environmental and social
issues).
 Considering the risk-reduction effects that are expected to be realized by integrating the environment, social andgovernance (“ESG”) factors into the investment process, the longer the investment horizon is, the greater the effects
improving risk-adjusted investment returns will be.
 GPIF called for applications for the indices (ESG indices), by which risk-reduction effects and acquisition of excess
returns can be expected from a medium- and long-term perspective through the effects of ESG integration, with the aimof exploring the feasibility of passive investment in Japanese equities that integrate ESG factors.

Universal owner

GPIF
Super-long-term investor

Minimizing
negative
externality

Investment and engagement

External asset manager
ESG index

ESG integration

Mitigating

short-termism

Investment and engagement

Company
Promoting ESG information disclosure

ImprovingESG
evaluation

Boost of Japanese Equity Market（GOVERNMENT PENSION INVESTMENT FUND）

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Expected effect by expanding ESG investment
 Expanding ESG investment brings many benefits not only to GPIF. The increase in fund for ESG investment encourages
companies to improve their ESG evaluations and enhanced ESG activities lead to the increase in enterprise values in the longterm.
 Further, if the improvement of the ESG evaluation of Japanese companies leads to the inflow of foreign funds placingemphasis on ESG evaluation, the performance of Japanese equities is expected to improve. GPIF, as a universal owner, and theinsured of the public pension are considered to reap most benefit with investment value chain optimized.

(Low) ← ESG evaluation (pt) → (High)<Internatinal comparison of ESG evaluation>(based on the number of stocks)<Virtuous cycle brought by the expansion of ESG investment>

ESG evaluation by FTSE (FTSE Global constituents)

Expansion of ESG
investment(Investment opportunity
at low cost)(Low) ← ESG evaluation (pt) → (High)

South
Korea

Hong
Kong

Japan

U.S.

Canada Australia Switzer- Germany
land

UK

France

ESG evaluation by MSCI (MSCIACWI constituents)

Improving thesoundness of pension
finance

Building
sustainable society

Improvement of
ESG investment andthe performance ofJapanese equities

China

India

Japan

Taiwan

U.S.

Japan

Canada Australia

UK

Increasing
incentives toenhance theresponse to ESG
by companies

Improvement of the
ESG evaluation ofJapanese companies

France(Note 1) Analysis based on the ranking of ESG evaluation (average) of the top 10 countries (regions) in terms of the constituents of each index(Note 2) Constituents and ESG evaluation are as of June 2017 (Source) Prepared by GPIF from MSCI and FTSE

（GOVERNMENT PENSION INVESTMENT FUND）

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Process of ESG index selection
 During the solicitation period from the end of July to the end of September 2016, 27 indices were proposed by 14
companies, including asset managers and index developers at home and abroad. To examine the proposed indices both
qualitatively and quantitatively, several dozen rounds of interviews have been conducted, field research has been
implemented, and the Investment Advisory Committee has been convened seven times.
<ESG factor considered in proposed indices>First screening- Outline- Performance analysis

Other, 3,11%
G only, 1,
4%-

S only, 2,
7%E only, 4,
15%

ESG
integrated,
17, 63%

Second screening
Company and organizational system
Concept of the index
Index establishment process
ESG evaluation method

Additional screening and field research- Governance- Conflicts of interest management- Fee structure

Report to andDiscussion at
theInvestment
Advisory
Committee

Selection of index(Note) Legends shown are in the order of categories, number of
proposals, and percentage. Classified by the GPIF（GOVERNMENT PENSION INVESTMENT FUND）- Allocation policy8Points of ESG index selection
1. Positive screening
2. Encouragement of disclosure and improvement of ESG
evaluation method
3. Governance and conflicts of interest（GOVERNMENT PENSION INVESTMENT FUND）

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Evaluation point (1)Positive screening

Not a few indices incorporate different factors such as low volatility or quality in the formulation process in addition to the ESG factors and someof them may be more influenced by these factors even though they identify themselves as ESG indices.
Indices were evaluated in the context of the purport of solicitation “indices by which risk-reduction effects and acquisition of excess returns can be
expected from a medium to long term," by putting emphasis on the fact that the index mainly focuses on ESG evaluation.
As a result of positive screening based on ESG evaluation and from a view point of boosting overall equity markets in Japan, appreciated indicesprovide opportunities for a wide range of companies to be included and avoid categorically excluding companies providing specific goods andservices. From the same perspective, the balanced combination of broad indices and thematic one was also considered.

<Risk/return of the indices that passed the first screening><Combination of ESG broad index and thematic index>
Thematic
index A

Return (%)

ESG
broad
index
TOPIX (incl. dividned)* As for risks and returns, the annual average for the 36 months from the endof June, 2016 is being calculated. * The red dots show the ESG indices thatclearly consider factors including low volatility and quality upon the selection.
Blue dots show others.

Risk (%)（GOVERNMENT PENSION INVESTMENT FUND）

Thematic
index B

Overall market(Overall portfolio)

10Evaluation point (2)Encouragement of disclosure and improvement of evaluation methodIn order to improve the accuracy of ESG evaluation, the "promotion of the disclosure of ESG information by companies" and the "improvement of
ESG evaluation method" are essential, and reactions to these issues are evaluated in selecting the indices.



Both FTSE and MSCI are actively engaged in the detailed disclosure of ESG evaluation methods and results, providing the results of evaluation tocompanies, having dialogues with investors using the ESG indices, and are planning to analyze the results to improve ESG evaluation.

“MSCI Japan Empowering Women Index (WIN)” was highly appreciated because it incentivizes constituent companies to disclose theinformation (companies with less disclosure are assigned low score).

<Comparison of ESG evaluation by FTSE and MSCI>
50

100

150

200

250

300

350

400

450

50

[Current situation of ESG evaluation]100

 Unlike financial analysis, ESG evaluation does nothave a long history, and the standard method of
evaluation is yet to be established. Diclosure of
information necessary for evaluation is also not
sufficient.

(High evaluation) ← FTSE → (Low evaluation)(High evaluation) ← FTSE → (Low evaluation)

0
0

150
200
250

 The correlation of ESG evaluations by FTSE andMSCI is very low.

300
350
400
450

(High evaluation) ← MSCI → (Low evaluation)(High evaluation) ← MSCI → (Low evaluation)(Note 1) Universe for the analysis are 430 Japanese companies commonly surveyed FTSE and MSCI (as of July 2016)(Note 2) The plot of the diagram shows the ranking of ESG evaluation of each company (from 1st to 430th)（GOVERNMENT PENSION INVESTMENT FUND）

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Evaluation point (3)Governance and conflicts of interest
 In the case of the traditional capitalization weighted equity indices, constituent companies are determined "automatically"
based on the market capitalization and liquidity. On the other hand, in the case of the selected ESG indices, there is larger roomfor "human" involvement such as analysts implementing ESG evaluation and analysts devising the methodology to establish
the index. That is, when guaranteeing the continuity, transparency and neutrality of ESG evaluation, governance andmanagement to prevent conflicts of interest are critical. From such perspective, field research was implemented at multiple
bases.

<Governance and philosophy of ESG evaluation>
FTSE

Governance/
management
to prevent
conflicts ofinterest

ESG
evaluation
philosophy

MSCI• Parent company (London Stock Exchange Group) becomes listed in UK • Listing of U.S. NYSE (there are no strategic investors who threaten theneutrality of ESG evaluation among large shareholders).
(there are no strategic investors who threaten the neutrality of ESG
evaluation among large shareholders).
• Decision of ESG evaluation, ESG evaluation, and the management/change
of index methodology are implemented only by in-house staff members• Changes in the general framework of the ESG evaluation scheme andunder a strict firewall from the perspective of information management
index methodology are decided at the committee comprised of only
and the ruling out of insider dealing. The results are disclosed together
external experts.
with reasons, allowing for external validaion.
• Have no involvement in services with which the interests may conflict,• Have no involvement in services with which the interests may conflict,such as consulting service
such as consulting service• In the course of transition to a sustainable economy and low-carbon
economy, we support all participants in the capital market, including• While society is increasingly becoming unable to bear costs of negative
issuer companies, investors and brokers.
externality generated from corporate activities, such ESG risks are not• In order to support the inclusion of sustainability in capital allocation,
priced in adequately in investors' portfolios.
data are improved and engagement is promoted.
• Allow the market participants to actively incorporate sustainability upon • We invest in the central area of the finance community by providing
formulating investment strategy, and involvement with improving theforward-looking evaluation on these risks so that investors' portfolios cancorporate value of invested companies (engagement and stewardship).
aim for long-term sustainable growth.
• Strive to improve the transparency of ESG data and provide quality
ESG data widely among market participants.

（GOVERNMENT PENSION INVESTMENT FUND）

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Classification in the manager structure and the future policy Investment tracking the selected ESG indices is classified as passive investment. Within passive investment, the investment
tracking the ESG index is managed and evaluated comprehensively in parallel with capitalization weighted investment and smartβ.
 Passive investment tracking the selected ESG indices was commenced from 3% of Japanese equity portfolio (about 1 trillion yen)funded in part by restructuring current holdings. While checking the effect of investment in the midium to long term, aim for
expanding the ESG investment covering Japanese equities (passive and active investments based on other ESG indices) in the
future.
 As for ESG investments covering foreign equities, proposals are accepted in the framework of the current Asset Management
Registration System and screening is implemented in sequential order.

<Manager structure in Japanese equities>
 Previously

Passive In the future (centrally manage the ESG index)- TOPIX
Market- JPX Nikkei 400
capitalization - MSCI Japan Standard- Russell/Nomura Prime
Smart β- Nomura RAFI
- S&P GIVI Japan- TOPIX
Market- JPX Nikkei 400
capitalization - MSCI Japan Standard- Russell/Nomura Prime

Passive
ESG

ActiveSmart β- FTSE Blossom Japan- MSCI Japan ESG Select Leaders- MSCI Japan Empowering Women- Thematic index of environment (E) (underscreening)- Nomura RAFI
- S&P GIVI Japan

Active（GOVERNMENT PENSION INVESTMENT FUND）

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Summary of selected indices
FTSE Blossom Japan Index
MSCI Japan ESG Select Leaders Index
MSCI Japan Empowering Women Index（GOVERNMENT PENSION INVESTMENT FUND）

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FTSE Blossom Japan Index
 Index concept•

The Index uses the ESG standards that are applied to the FTSE4Good Index Series which has one of the longest
track records globally for ESG indexes, having been launched in 2001.

•

Employs a clear ESG rating methodology which is aligned with international standards that provide a strong basis
and framework for stewardship and engagement with companies

 Constituent universe (Parent index)•

FTSE JAPAN INDEX (approximately 500 stocks ) Constituent selection rule•

Only includes companies that demonstrate strong ESG practices. Those who have controversies based on public
information will not be included.

 Weighting•

Market Cap weighted (Industry neutral compared with the parent index to bring Industry weights in line) Number of index constituents•

151 stocks (as of June 2017)（GOVERNMENT PENSION INVESTMENT FUND）

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MSCI Japan ESG Select Leaders Index
 Index concept•

The MSCI Japan ESG Select Leaders Index is a broad ESG index that integrates various ESG risks/opportunities
into the today’s portfolio. The index is based on MSCI ESG Research that more than 1,000 clients use globally.

•

ESG investing attempts to mitigate the long-term risks from ESG issues such as climate change, demographic
change and the like because such risks affects the long-term performance of universal owners’ portfolio.

 Constituent universe (Parent index)•

Top 500 companies (in terms of float adjusted market cap) in the MSCI Japan IMI (MSCI Japan IMI Top 500
Index)

 Constituent selection rule•

Select the higher ESG-rated stocks from each sector up to 50% of the sector’s market cap of the parent index(Stocks involved with very severe controversy are out of the index.) Weighting•

Float-adjusted market cap Number of constituents•

251 stocks (as of June 2017)（GOVERNMENT PENSION INVESTMENT FUND）

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MSCI Japan Empowering Women Index (WIN) Index concept•

MSCI calculates the gender-diversity scores based on various information disclosed under “the Act on Promotion of
Women's Participation and Advancement in the Workplace”. The index is the first of its kind, and selects companies
with better gender diversity scores from each sector.

•

Due to the aging society in Japan, the companies with better gender diversity scores can withstand the long-term labor
shortage risk by having access to wider talent pool. The index also aims to encourage more female employment among
Japanese companies, so that the overall economic growth will be improved.

 Constituent universe (Parent index)•

Top 500 companies (in terms of float adjusted market cap) in the MSCI Japan IMI (MSCI Japan IMI Top 500 Index)

 Constituent selection rule•

Select stocks with better gender diversity scores from each sector of the parent universe excluding REITs. (Stocks
involved with very severe controversy, and severe controversy on human rights and labor rights are out of the index.) Weighting•“Float-adjusted market cap” times “Composite score”

Composite score: “Sector-adjusted gender diversity score” times “Sector-adjusted quality score”

 Number of constituents•212 (June 2017)（GOVERNMENT PENSION INVESTMENT FUND）

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Risk and return of each ESG index
MSCI Japan ESG SelectLeaders

FTSE Blossom Japan(End of March 2012 =100)(End of March 2012 =100)

MSCI Japan Empowering
Women(End of March 2012 =100)

FTSE Blossom Japan Index

MSCI Japan ESG Select Leaders index

MSCI Japan Empowering Women Index

Parent index (FTSE Japan)

Parent index (MSCI Japan IMI 500)

Parent index (MSCI Japan IMI 500)

ReturnRisk[Risk and return of each ESG index]
Name of index

Index in question (A)Parent index (B)Difference (A) - (B)Index in question (C)Parent index (D)Difference (C) - (D)(1) FTSE Blossom Japan Index(2) MSCI Japan ESG Select Leaders Index(3) MSCI Japan Empowering Women Index
Entire ESG portfolio*(Note 1) Risk and return are computed from the historical data for the past five years (from April 2012 to March 2017) and annualized. The parent index for (1) is FTSE Japan Index, and that for (2) and (3) is
MSCI Japan IMI 500 Index(Note 2) *As for the entire ESG portfolio, it is an estimate allocated with the proportion of 2:2:1 for (1), (2), and (3) ("2" for integrated index and "1" for thematic index). * shows the risk and return of TOPIX.

（GOVERNMENT PENSION INVESTMENT FUND）

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Corporate profile of each company
FTSE
•

•

Corporate
profile•••FTSE Russell is a major index, data and analytics
provider, and a part of the London Stock ExchangeGroup (LSEG).
Has developed a comprehensive range of ESG indexes
since the launch of the FTSE4Good Index Series in2001 which sets thresholds based on good practicestandards which companies need to meet to gain andretain inclusion.

MSCI•

MSCI is listed on NYSE (Ticker: MSCI)•MSCI is located in 24 countries around the world, andwith over 3,000 employees and more than USD 11 trillion
is benchmarked to MSCI indexes..

•

MSCI is #1 in the global ETF space in terms of thenumber of ETFs and ESG indexes.

•

MSCI provides ESG Ratings on more than 6,000
companies worldwide, and it’s widely used for ESG
integration by global asset owners and asset managers.

•

MSCI ESG Research is the largest provider of ESG
research with more than 170 ESG analysts, and with morethan 1,000 clients worldwide.

•

MSCI is a PRI signatory.

Researches and gives ESG Ratings to companies in 47
countries including approximately 750 Japanesecompanies.
Provides comprehensive ESG solutions to institutional
investors utilising in-house capabilities of ESG
research, company communication, ESG Ratings
methodology development and management, as well as
custom index and research capabilities.
FTSE is a founding signatory of the UN supported
Principles for Responsible Investment and was the firstindex provider signatory.

(Source) FTSE, MSCI（GOVERNMENT PENSION INVESTMENT FUND）

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