ESG REPORT 2017

For All Generations

GPIF and ESG in numbers

156¥

Universal
Ownertrillion[As s et s un der management]
World’s largest pension fund5114

securities[Number of securities owned by GPIF]
Holding stocks of almost all major domestic
and foreign companies

Super longterm investor

100[investment time horizon]

Playing a role in a pension finance withan investment time horizon of over 100 years

1.5¥

GPIF’s ESG
activities(investment)

years

trillion[Assets under management
to track ESG indices]

GPIF integrates ESG factors into theinvestment process in all asset classes

74.1

（*）

％

[The percentage of listed companies thathighly evaluate overall stewardship activities
of GPIF, including ESG investment]* The figure is from the results of a survey of listed companies conducted by GPIF in January and February 2018.
All other data are as of the end of March 2018.

1

ESG REPORT 2017
Message from President

3-4[Chapter 1] GPIF’s Initiatives■ GPIFʼs Major Initiatives on ESG

5■ Revision of the Investment Principles

6■ Adoption of ESG Indices and RFP for
Global Environmental Stock Indices

7-8■ Collaboration with the World Bank Group regarding ESG
in Fixed Income Investments

9-10■ GPIFʼs ESG-themed Engagement Activities

11-16■ Column: Global Trends in ESG

17-18[Chapter 2] Measuring the Impacts of ESG Activities■ Approach to Measuring the Impacts of ESG activities

19-20■ Measuring the Impacts of ESG Activities

21-26■ Column: ESG Evaluation and AI

27-28■ Remaining Issues in ESG Evaluations

29-30[Chapter 3] Appendix

2

In t r o duc tion

M es s age from Pr e s i d e n t

GPIF is committed to fulfilling our fiduciary duties inorder to retain suff icient pension reser ve for both the
cur rent and future generations of benef iciaries. GPIF
believes that it is vital to minimize negative externalities byintegrating ESG factors into the investment process, inaddition to improving the governance of investee companies,
to ensure its portfolio’s investment returns over the long term.

President
Norihiro Takahashi
Government Pension Investment Fund, Japan

3

The mission of Government Pension Investment

GPIF has stepped up its ESG activities since weFund (GPIF) is to retain sufficient reserves for future

signed the Principles for Responsible Investment

pension beneficiaries through investment manage-(PRI) in September 2015.

ment activities for pension reserve. GPIF invests in

In fiscal 2017, GPIF selected three ESG indices fora wide range of domestic and foreign companies

Japanese equities and commenced investment

and other organizations; therefore, sustainable andtracking those indices. In addition, we revised ourstable growth of the entire market is essential for us

Investment Principles to expand the scope of

to increase pension reserve. In addition, it is of vitalstewardship activities from equities to all asset

importance for GPIF to ensure its portfolio’s invest-

classes. Furthermore, GPIF conducted a joint

ment returns over the long term as an investor

research with the World Bank Group on ESG

responsible for supporting pension finance with an

integration in fixed income investment, with the aim

investment horizon of as long as 100 years.

of expanding ESG activities from equities to all

Considering these factors, GPIF believes that it isasset classes.

essential to minimize negative externalities (e.g.

GPIF has decided to publish the ESG Report forenvironmental and social issues) by integrating

the first time, to report on our ESG activities andESG (Environmental, Social, and Governance)

their impacts to the public. GPIF’s ESG invest-

factors into the investment process, in addition toments are designed to achieve investment returns

improving the governance of investee companies.

over the long term, and it takes a long time to

GPIF outsources the investment management

produce results. However, for GPIF to eventuallyactivities of all the assets under management toattain the desired impacts and confirm the direc-

external asset managers, with the exception of ation of our ESG activities, it is necessary to regular-

portion of domestic bond investments. In order toly examine the impacts of such activities. GPIF

increaseappropriately

seeks to verify the long-term impacts of our ESG

selects and evaluates external asset managers, andactivities by constantly examining impacts on aencourages external asset managers to engage inyearly basis.

constructive dialogues with investee companies

GPIF’s ESG activities have just begun, but allthat are conducive to sustainable growth, with theexecutives and employees of GPIF pledge toaim of achieving its main goal of increasing its

devote all of our efforts to ensuring long-term

portfolio’s investment returns as well as improving

investment returns for pension beneficiaries andthe sustainability of the overall capital market andfulfilling our fiduciary responsibilities. I would

encouraging its growth.

sincerely appreciate your continued understanding

pensionreserve,GPIF

and support.

What is GPIF?

GPIF undertakes the management and investment of the pension reserve of the National Pensions andthe Employees’ Pension Insurance, entrusted by the Minister of Health, Labour and Welfare.
GPIF’s assets under management were 156 trillion yen as of the end of fiscal 2017, making us theworld’s largest pension fund. In order to diversify investment risks, GPIF invests in various assets, andits portfolio comprised 506 domestic bond issuers, 2,700 foreign bond issuers, 2,321 domestic stocks,
and 2,793 foreign stocks, as of the end of fiscal 2017. GPIF’s investment target is to secure a long-term
real return (net investment yield on the pension reserve less the nominal wage growth rate) of 1.7% withthe minimal level of risk, and we are taking measures to produce results that exceed that goal. As aresult, the cumulative returns since fiscal 2001, when the GPIF started investing pension reserve in themarket, has grown to more than 60 trillion yen.

4C h a p t er 1

G PI F’s I n it i a t i ve s

GPIF’s Major Initiatives on ESG
GPIF has stepped up its ESG activities since signing the PRI in 2015. Because this is our first ESG Report,
we summarized our major ESG activities so far.

2015

● Published the Investment Principles● Signed the Principles for
Responsible Investment (PRI)● Established Business and Asset Owners’ Forum2016● Established Global Asset Owners’ Forum● Joined the 30% Club in the U.K. andthe Thirty Percent Coalition in the U.S.
● Started conducting a survey of listed companies
regarding stewardship activities of institutional investors● Published Stewardship Principles andProxy Voting Principles

2017● Selected ESG indices for Japanese equities andstarted investment tracking those indices● Revised the Investment Principles● Started a joint research with the World Bank Group
regarding ESG integration in fixed income investment● Started RFP for global environmental stock indices5

Revision of the Investment Principles
GPIF established the Investment Principles in 2015

conducting a joint research with the World Bank

with the aim of disclosing our basic investment

Group as described later.

policies to the public. GPIF partially revised the

GPIF is also expanding investments in alternative

Investment Principles in October 2017 to expand

assets (infrastructure, private equity, and real

the scope of stewardship activities from equities toestate) for the efficient management of portfolio. In

all asset classes, and added descriptions on ESG

selecting external asset managers, GPIF screens

as an example of its stewardship activities.

asset managers based on criteria, such as invest-

Regarding ESG activities for equity investment,

ment strategies, investment performance and risk

GPIF selected ESG indices as described later, andmanagement

is working on ESG integration in evaluating andactivities of external asset managers and investee

selecting external asset managers. Regarding ESG

companies are evaluated.

framework,through

which

ESG

activities for fixed income investment, GPIF is

Investment Principles

1
2

Our overarching goal should be to achieve the investment returns required for the
public pension system with minimal risks, solely for the benefit of pension recipientsfrom a long-term perspective, thereby contributing to the stability of the system.
Our primary investment strategy should be diversification by asset class, region, andtimeframe. While acknowledging fluctuations of market prices in the short term, we shallachieve investment returns in a more stable and efficient manner by taking full advantage
of our long-term investment horizon. At the same time, we shall secure sufficient liquidity
to pay pension benefits.

3
4

We formulate the policy asset mix and manage and control risks at the levels of the overall
asset portfolio, each asset class, and each investment manager. We employ both passive
and active investments to attain benchmark returns (i.e., average market returns) set foreach asset class, while seeking untapped profitable investment opportunities.

By fulfilling our stewardship responsibilities (including the consideration of ESG (Environmental, Social, and Governance) factors), we shall continue to maximize medium- tolong-term investment returns for the benefit of pension recipients.

6

C h a pte r 1

G PI F’s I n it i a t i ve s

Adoption of ESG Indices and
RFP for Global Environmental Stock Indices

Selection of ESG indices for Japanese equities
GPIF selected and announced three ESG indices forsuch an index can boost the Japanese equity market by

Japanese equities in July 2017, with the expectation of

improving ESG evaluations. Specifically, screening wasincreasing risk-adjusted returns over the long term bycarried out by emphasizing that: (1) the ESG evaluations

improving ESG evaluations and responses by Japanese

should be based on public information, in order tocompanies to support their long-term corporate value

encourage information disclosure by companies, (2)enhancement. GPIF commenced passive investment“positive screening should mainly be adopted” intracking those indices with a portfolio value of approxi-

determing constituent companies based on their ESG

mately 1 trillion yen which accounts for 3% of Japanese

evaluations and (3) opportunities for adoption are open

equity portfolio.

to a wide range of companies. We expect that utilization

GPIF received proposals of 27 indices by 14 companies.

of selected ESG indices will further incentivize JapaneseIn the selection process, we screened applicants based

companies to promote responses to ESG issues, whichon criteria, including economic rationality, such as

will increase their corporate value over the long term.

investment risks and returns, and whether adoption of[List of adopted ESG indices]
Thematic indices

RFP forGlobal Environmental
Stock Indices (*)

MSCI Japan Empowering
Women Index (WIN)

N/A

Environmental

SocialGovernanceIntegrated indices

FTSE Blossom
Japan Index

MSCI Japan ESG
Select Leaders Index* GPIF publicly announced that it has selected global environmental stock indices in September 2018.

7

GPIF believes that in order to encourage companies

ESG evaluation and index development. To promote

to be proactive in addressing ESG issues andsuch understanding, GPIF requests for index provid-

disclosing information, it is important to help themers to publicly disclose how they conduct ESG evalu-

deepen their understanding of the methodologies ofation and how they develop indices.

RFP for Global Environmental Stock Indices
An environmental issue, including climate change, isrations to seek solutions to environmental issues,

one of the most important ESG issues for GPIF as arather than uniformly excluding companies inuniversal owner and super long-term investor. In

specific industries or types of business. The RFP

November 2017, following the selection of three

was closed at the end of January 2018. We received

ESG indices in July, GPIF started calling for applica-

proposals from 11 companies (groups)(*).

tions for the environmental index for global equities.

GPIF aims to expand ESG investments, including

Considering that environmental issues including

the use of other ESG indices and active invest-

climate change constitute cross-border global

ments, while examining the impacts of ESG invest-

challenges, applicants should propose two indicesments in the medium and long term.

based on the same concept, one for (i) global
equities (excluding Japanese equities) and one for(ii) Japanese equities. In addition, the index should
be based on the concept that it encourages corpo-* GPIF publicly announced that it has selected global environmental stock
indices in September 2018.

[Positive cycle brought about by the expanding ESG investments]

Expansion of ESG
investments (investment
opportunities at low cost)

Improving the soundnessof pension finance

Increasing incentives toenhance the response
to ESG by companies

Building
sustainable society
Improvement of the ESG
evaluations of companies
Improvement ofrisk-adjusted returns

8C h a pte r 1

G PI F’s I n it i a t i ve s

Collaboration with the World Bank Group
regarding ESG in Fixed Income Investments

Research and implementation of ESG considerations insocial bonds and is practicing integration of ESG

investment are making progress in the field of equity

factors in the process of investment and loan toinvestment, but they have just started in the field ofgovernments and companies around the world.

fixed income investment. In order to explore the

In conducting research work, we carried out asignificance and possibilities of integrating ESG into

comprehensive study of past academic research work,

fixed income investment, for which the concept of ESG

as well as interviews with officials of the world’s major

integration is relatively new, GPIF has decided to

public pension funds, asset managers and credit rating

conduct a joint research to incorporate ESG factors inagencies. The World Bank Group released a research

fixed income investment with the World Bank Group,

report based on our joint research at Spring Meetings

which is the world’s leading issuer of green bonds andheld in April 2018.

Overview of the report
While integration of ESG factors into the investment

investing in funds that track ESG indices, adopting

decision process for fixed income investment has

active ESG asset managers and integrating ESG

spread rapidly for corporate bonds and suprana-

factors into the entire investment process.

tional bonds, there are many issues to be worked

Some investors are not only seeing ESG factors as

out for ESG integration in the investment processsources of risk control and investment returns, but

for government bonds, asset-backed securities,

also are integrating ESG and impact investing, using

and private placement bonds.

methods such as measuring the impacts of portfolio

There are various ways to integrate ESG for fixedon specific events in the environment and society

income investors, such as purchasing green bonds,

and going further to link such impacts with thesocial bonds and sustainable bonds that meet theUnited Nations Sustainable Development Goals

criteria, establishing ESG or Socially Responsible(SDGs).

Investment (SRI) funds or investing in such funds,9

* For details, please see the website of GPIF or the World Bank Group.

Many investors still face issues related to ESG

the roles of ESG in credit ratings and bond indices,integration, particularly in fixed income investment.

and shortage of bond indices and investment

There is no established standard definition for ESG

products compared to those for equity investment.

yet. In particular, there are different views on the

Furthermore, the green bond market has the issuesocial (S) factor. The accuracy of published data isof excess demand over supply. As regards concep-

improving and information sources have become

tual analyses of ESG and fixed income investments,

diverse. However, sufficient information has nota task going forward is to take the analysis one step

becomeemerging

further, going from an analysis of the relationshipmarkets. In particular, fixed income investment have

between ESG and credit risks alone to an analysis of

issues, such as difficulty of promoting engagement

the relationships between ESG and liquidity risks(constructive

and other market risks.

availableyet,dialogues)

especially

with

in

issuers(notably,

governments issuing sovereign bonds), ambiguity of10

C h a p t er 1

G PI F’s I n it i a t i ve s

GPIF’s ESG-themed Engagement Activities

Engagement with external asset managers
GPIF proactively conducts dialogues with various

was on monitoring external asset managers bystakeholders, with the aim of making its ESG activi-

GPIF, but the focus has largely shifted to engage-ties more effective. The main dialogues is the one

ment activities since 2017. In this context, GPIF haswith external asset managers. GPIF is not allowed

proactively held dialogues with external asset

to invest directly in equities, and the management ofmanagers on matters such as exercise of proxyits entire equity portfolio is outsourced to externalvoting rights, using case studies to understand theasset managers. Accordingly, GPIF proactively

background of their proxy actions. As a result ofholds dialogues with external asset managers onsuch efforts, mutual understanding between GPIF

topics, such as which ESG themes they have identi-

and external asset managers has deepened, and we

fied as important, how they link such themes withevaluate that external asset managers on the whole

their investment behaviors and issues they haveare exercising proxy voting rights in compliance withdiscussed in the course of dialogues with investee

GPIF Proxy Voting Principles by integrating ESG

companies (*). Previously, the focus of dialogues

factors into the investment process.

[Various engagement activities on ESG issues]

PRI, various
groups, etc.

Asset Owners●PRI Board Meeting●The 30% Club in the U.K.
●The Thirty Percent
Coalition in the U.S., etc.

●Global Asset Owners’
Forum

Dialogues

Companies●Survey of listedcompanies●Business andAsset Owners’ Forum

Dialogues

Dialogues

External asset
managers/
ESG evaluators(index providers)●ESG evaluators
feedback meeting●Continuous engagement* For material ESG issues recognized by external asset managers to whom GPIF outsources investment, please see page 37 of ANNUAL REPORT FISCAL YEAR 2017.

11

Engagement with index providers and ESG evaluatorsand gain their understanding, in order to promote
information disclosure by companies. In April 2018,
we received feedback for fiscal 2017 from MSCIand FTSE on dialogues between ESG evaluatorsand companies. They reported that dialogues
between ESG evaluators and companies had
increased significantly since GPIF’s adoption of
ESG indices. Dialogues between MSCI and companies conducted in the process of ESG evaluations
increased sharply in Japan in 2017 as shown
ESG evaluators and index providers, as well as
external asset managers, play an important role in
GPIF’s investment. In GPIF’s equity investments,
passive investment tracking indices account for

below. Although some critical feedback wasreceived from companies, we evaluate that suchdialogues have contributed to improving the qualityof ESG evaluations.

about 90% of the equity portfolio. While there may
seem to be not much difference in investment
performance between indices, index selection is a
key factor that affects the investment performanceof GPIF’s portfolio as a whole, given the large size
and the proportion of the passive investments.
In the case of ESG indices, especially, constituent[Proportion of companies that had dialogues withMSCI in the process of conducting ESG evaluations]stocks and their weights are determined based on■ 2 016

ESG evaluations, so the responsibility of ESG
evaluators is particularly important. Considering
this, in selecting ESG indices for domestic equities,
GPIF conducts due diligence to evaluate the governance structures of index providers and ESG

51%

Germany
24%

Japan

41%

Australia

53%transparency and neutrality of evaluation and index
selection.
In addition, GPIF has been continuing proactive
dialogues with ESG evaluators since ESG indiceswere selected. Unlike credit ratings for bonds, the39%

Switzerland
31%

Franceresults of ESG evaluations vary widely among ESG
evaluators. GPIF supposes that the possible

49%

47%

38%

U.K.

63%

60%

evaluators, as with the case of selecting external
asset managers, with the aim of confirming the■ 2 01747%

causes are: (i) ESG evaluation methods are still in
the course of development and (ii) there is room for
improvement in ESG disclosures by companies. In
order to improve ESG evaluation methods, it isnecessary to listen to the views of companies, notto mention investors. In addition, steady andcontinuous efforts are required to widely disseminate ESG evaluation methods among companies

34%

Canada
26%

U.S.

0

10

20

46%

42%
30

40

50

60

70 (%)

Note: Survey subjects are constituents of MSCI ACWI.
Source: ©2018 MSCI ESG Research LLC. Reproduced by permission

12

C h a pte r 1

G PI F’s I n it i a t i ve s

Survey of listed companies
GPIF has been conducting a survey of listed

Meanwhile, regarding issues about ESG evalua-

companies

investors’tions, some companies offered comments includ-stewardship activities every year since 2016, in an

ing: “Companies that are relatively small haveeffort to grasp the actual status of institutional

limited opportunities for being included in the three

investors’ stewardship activities, including the

ESG indices” and “Evaluation factors of each index

status of dialogues on ESG issues. From the third

are not clear.” GPIF considers that it is an import-

survey conducted in 2018, we expanded the cover-ant issue to enhance ESG evaluations of relatively

age of the survey to all companies listed on the firstsmall companies, in order to boost and improve thesection of the Tokyo Stock Exchange and received

sustainability of the capital market. We are encour-

responses from 619 companies. We also signifi-

aging ESG evaluators to expand the coverage ofcantly expanded questions on topics, including

companies subject to evaluation, and the number

ESG-related dialogues with external asset manag-of companies evaluated has been increasingers and the three ESG indices for domestic equities

gradually.

adopted by GPIF.

This survey also asked respondents about GPIF’s

According to the survey results, those ESG indicesstewardship activities, including ESG activities,

are very well recognized among companies, andand approximately three-quarters of companies

many companies highly appreciate GPIF’s initiative

either “Highly appreciate” or “Appreciate” ourof selecting ESG indices, with critical comments

commitment. GPIF will make efforts to grasp thereceived from very few companies. Some replied

actual status and issues of the stewardship activi-

with the comments including: “GPIF’s selection ofties of institutional investors including ESG activi-

ESG indices has led to a change in our attitudeties, by regularly conducting the survey.

regardinginstitutional

toward ESG” and “Our efforts for ESG have developed into cross-departmental actions.”

13

[Summary of the survey of listed companies]

Recognition of the three ESG
indices selected by GPIFNo response
0.5%

Evaluation of the three ESG
indices selected by GPIFNo response
6.0%

Highlyappreciate
15.2%

No
14.9%

Yes
84.7%

Not sure
27.1%

Do notappreciate at all
1.1%

Appreciate
46.5%

Do notappreciate much
4.0%

Evaluation of GPIF’s overall
stewardship initiatives(%)

No response
5.2%
Do notappreciate at all
0.2%

Changes in awareness of ESG,
internal discussions, organizational structures,
and activities within company
since the selection of ESG indices100

Not sure
19.5%

Highlyappreciate
16.6%

90

Appreciate
57.5%

38.9%

70
60

76.7%

50
40

Do notappreciate much
1.0%

21.8%

80

78.2%

58.8%

30
20

19.6%

10
0

Large
caps

■Yes

Medium
caps

■No

Small
caps

■No response

Note: The survey was conducted by GPIF from January 10 until February 23, 2018, and responses were received from 619 companies (response rate: 30.2%).
Large caps in the graph are TOPIX 100 companies; medium caps are TOPIX 500 companies (excluding TOPIX 100 companies); and, small caps are other companies.

14

C h a pte r 1

G PI F’s I n it i a t i ve s

Announcement of excellent integrated reports
GPIF encourages external asset managers tointegrated reports of up to 10 companies, and aproactively utilize integrated reports as a valuable

total of 70 and 68 companies were selected for

information source in their investment decision andhaving created excellent integrated reports andengagement activities. As part of such efforts, wemost-improved integrated reports, respectively.

requested 16 external asset managers of domestic

The following companies were those most nomi-

equity investment to nominate “excellent integrated

nated by respondents as publishers of excellent

reports” and “most-improved integrated reports,”

integrated reports and most-improved integrated

and the results were announced in January 2018.

reports.

In this survey, each asset manager nominated[Companies most nominated by external asset managers for an excellent integrated report]

Ajinomoto Co., Inc.

ITOCHU Corporation

KONICA MINOLTA, INC.

MARUI GROUP CO., LTD.

OMRON Corporation[Companies most nominated by external asset managers for a most-improved integrated report]

Daiwa House Industry Co., Ltd.

OMRON Corporation

SUMITOMO METAL MINING CO., LTD.

Sumitomo Corporation

Note: For the list of companies nominated for an excellent integrated report and a most-improved integrated report, please see GPIF’s website.

15

At the third meeting of the Global Asset Owners’ Forum

Two Forums
Aiming to further stimulate the investment chain

pants discussed topics, including ESG disclosures

where pension beneficiaries entrust reserve fundand SDGs and exchanged opinions on issues

management to asset owners who outsource

faced by participating companies.

investments to asset managers to make actual

At the second meeting of the Global Assetdecisions on investee companies, GPIF, jointly

Owners’ Forum convened in the U.S. in May 2017,withRetirement

discussions were held on topics including ESG

System (CalPERS) and California State Teachers’

integration and divestment from companies that

Retirement System (CALSTRS), which are two U.S.

emit large greenhouse gases. On the topic ofpublic pension funds acting as co-organizers,

divestment, opinions expressed included that

established

California

PublicEmployees’adivestment may deprive asset owners of theirplatform for exchanging ideas and opinions among

potential to effectively engage the company on

global asset owners, in 2016. GPIF also set up

issues of concern.

Business and Asset Owners’ Forum, a platform for

At the third meeting of the Global Asset Owners’

gathering opinions from companies. At these two

Forum convened in Japan in November 2017,

forums, discussions are held mainly on themes

discussions were held on topics, such as measur-

related to ESG issues, and are very fruitful ining carbon footprints and collaborative engage-taking GPIF’s ESG-related initiatives to a higher

ment with external asset managers and index

level.

providers.

GlobalAsset

Owners’Forum,At two meetings of the Business and Asset
Owners’ Forum convened in fiscal 2017, partici-[Member companies of the Business and Asset Owners’ Forum <participants (in alphabetical order)>][Organizers]

Nippon Telegraph and Telephone Corporation

Eisai Co., Ltd.

Shiseido Company, Limited

NISSAN MOTOR CORPORATIONTOTO Ltd.

OMRON Corporation[Asset owners][Member companies]

Federation of National Public Service Personnel Mutual Aid Associations

Asahi Group Holdings, Ltd.

Government Pension Investment Fund (GPIF)

Hitachi, Ltd.

National Federation of Mutual Aid Associations for Municipal Personnel

JFE Holdings, Inc.

Pension Fund Association for Local Government Officials

Mitsubishi Chemical Holdings Corporation

Promotion and Mutual Aid Corporation for Private Schools of Japan16

E xe c u t i ve M a n a g i n g D i r e c t o r M r. M i z u n o a t t e n d i n g a n i n t e r n a t i o n a l c o n f e r e n c e( Wo r l d B a n k 2 018 S p r i n g M e e t i n g s)( M A R K E T F O R C ES AT WO R K )Column: Global Trends in ESG
Sustainabilit y and inclusivenessInterest in the concepts of sustainability andinclusiveness has become a recent global trend.
Sustainability has become a topic of discussion
on various themes ranging from industry andeducation to fiscal issue. This trend is spreading
also in the financial industry. PRI, advocated by
the United Nations in 2006, are designed todevelop a more sustainable global financial
system by incorporating ESG factors into theinvestment decision-making process. In thewake of the financial crisis, there have been
growing regrets about only pursuing short-term
profit. As a result, more than 2,000 organizations
have signed the PRI and aggregate assets undermanagement by PRI signatories have reached
USD19.1 trillion (*).
The number of Japanese signatories to PRI has
increased from 33 in September 2015, when
GPIF signed up to the Principles, to 62 (*). In
addition, an increasing number of external asset
managers have established a Responsible
Investment department or an ESG Research
department. The concept of ESG investment* As of June 201817

seems to be compatible with Japanese businesspractices. In Japan, there is a traditionalmerchant principle called “Good for threeparties” meaning good for seller, buyer andsociety. Businesses in the current era may berequired to aim for “Good for six parties,” aprinciple in which benefitting shareholders,
employees and environment is added to theconcept of “Good for three parties.”
It has been 12 years since the PRI was established, and it has become a common practice inthe financial industry to consider ESG as a risk
factor. Nowadays, the markets are paying
attention to how we capture investment opportunities, as well as manage risks. In addition,
discussions are underway on how to utilize theSDGs toward 2030, adopted by the United
Nations in 2015. Companies are taking actions towork on the SDGs. According to the survey ofcompanies conducted by GPIF, 24% of respondents have started working on the SDGs and
40% of respondents are considering working on
the SDGs.

Climate change
Since the Paris Agreement came into effect, various
moves have been underway in response to climatechange issues. In 2015, the Financial Stability Board(FSB) established the Task Force on Climate-related
Financial Disclosures (TCFD), comprising experts fromthe private sector, at the request of the G20, with the aimof considering how the financial sector should manage
climate change risks. In 2017, the TCFD publishedrecommendations for voluntary climate-related financial
disclosures by companies. In line with this trend, there
are different moves underway in individual countries
responding to climate change risks. In the U.S., theSustainability Accounting Standards Board (SASB) isdeveloping disclosure standards, and in France,
mandatory climate-related disclosures have been
introduced. Since many Japanese companies haveexcellent environmental technologies, they are required

Global green bond issuance shareto communicate their environmental initiatives toinstitutional investors through information disclosures.
Previously, the main focus of ESG investments wasequity investments, but ESG investments have also
expanded to other asset classes these days. In line withthis trend, green bonds, which are fixed income
investments that raise capital to support projects andactivities with climate or environmental sustainability
goals, are being issued increasingly to meet demand
from institutional investors. Since the first green bonds
were issued by the World Bank in 2008, the primarymarket for green bonds has been expanding (see thechart below). Europe was initially the main market forgreen bonds. However, issuances of green bonds havesubsequently grown in the U.S. and China, with China
becoming the largest green bond market in the world.

Changes in total issue amount and number(numberof issues of green bonds globallyof issues)(billion dollars)
140
Others:18%

Japan: 1%

Internationalorganizations:17%

China:
20%
France:12%Germany:
9%US:
7%

Mexico: 2%
Canada: 2%
Spain: 4%
Netherlands: 4% Sweden: 4%

Note: From January 2008 to March 2018 aggregated
Source: Prepared by GPIF based on data from various sources.

120
100

420

Total issue amount (left axis)
Number of issues (right axis)

360
300

80

240

60

180

40

120

20

60

0

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (year)

Source: Prepared by GPIF based on data from various sources.

Diversit yDiversity initiatives are typical examples ofinclusiveness initiatives. In the wake of the global
financial crisis, interest in diversity management
has grown among institutional investors basedon the idea that “Group Think” contributed to thecrisis. Diversity in thinking and experience isessential for conducting constructive discussions from a broad perspective. Organizations
with diversity as a core value are resilient tochange and have an aptitude for innovation.
Looking overseas, the 30% Club was launched in
the U.K. and the Thirty Percent Coalition wasestablished in the U.S. as networks of members
seeking to increase the proportion of female
board members in listed companies to 30%, andsome institutional investors are requiring investee
companies through these networks to takeactions toward this end.
Japan is seen as falling behind other countries ingender diversity. On the other hand, it can besaid that Japan has the potential for rapid
improvement in this field with the future
implementation of initiatives. In Japan, where alabor shortage has become an issue and theworking-age population is expected to decline in
the medium to long term, it is a critical issue tobuild organizations that allow diverse people,
including women, to play active roles, in order toachieve corporate sustainability. In this context,
Japanese companies are also expected to takeinitiatives for sustainability and inclusiveness,and to make progress.

18

C h a pte r 2

Measuring the Impacts of ESG Activities

Approach to Measuring the Impacts of ESG Activities
The impacts of GPIF’s ESG investments should be evaluated with a different perspectivefrom the common evaluation measure of how much investment returns are generated overa certain period of time for the following reasons:❶ It takes a long time for ESG investments to produce results; and❷ GPIF seeks to improve the sustainability of the whole financial markets
and encourage their growth.
GPIF’s objectives for ESG investments are not to

GPIF does not have much experience with ESG

seek short-term investment returns, but to increase

initiatives yet: its experience with ESG initiatives

long-term returns for its portfolio and improve theonly began with the signing in 2015 of the PRI,

sustainability of the whole financial markets bywhich was advocated by the United Nations, andminimizing the negative externalities of corporate

our more direct involvement with ESG investments

activities, such as environmental and social issues.

has just started since the selection of ESG indices

Regarding the impacts on investments expected

for domestic equities and the start of passive invest-

from integrating ESG factors into the investment

ment tracking those indices in 2017. In this ESG

process, GPIF considers that as the investment

Report, we mainly analyze whether ESG invest-

horizon becomes longer, the expected impact ofments have contributed to improving ESG evalua-improving risk-adjusted investment returns willtions

increase (For fiscal 2017 investment performance of

responses by companies.

the three ESG indices of domestic equities adopted

GPIF’s ESG initiatives are also unique in that theyby GPIF, please see page 31).

are designed to improve the sustainability of whole

The problem is that it takes a long time for ESG

financial markets and encourage their growth. The

investments to produce results in improving thecommon measure for evaluating investments is how

sustainability of the financial markets and in increas-much they outperform the market average (bench-

ing risk-adjusted returns. Meanwhile, if we leavemarks, such as TOPIX and MSCI ACWI) andinvestments unchecked without measuring theircompetitors. Meanwhile, GPIF’s ESG investments

impacts, we may end up continuing to take theneed to be evaluated from multiple perspectives. In

wrong actions for a long time. In order to appropri-

the case of passive investments based on ESG

ately implement the so-called Plan-Do-Check-Act

indices, for instance, if many companies are(PDCA) cycle, the important thing is to accurately

conscious of the ESG indices adopted by GPIF andevaluate: 1) whether ESG investments have led toseek to be included in those indices, there is a good

an improvement of ESG evaluations and a strength-chance that the ESG evaluations will be improved

ening of ESG responses by companies as expected

more for the group of companies not included in the(see A in the illustration on page 20) ; and 2) wheth-indices than otherwise. In fact, that is exactly what

er companies improving ESG evaluations and

GPIF expects. In this ESG Report, therefore, GPIF

strengthening ESG responses have led to improving

analyzes ESG evaluations of listed companies as a

the sustainability of financial markets and increasing

whole (TOPIX companies for domestic equities andrisk-adjusted returns (see B in the illustration on

MSCIpage 20).

companies) for foreign equities), in addition toofcompanies

ACWI

and

companies

strengthening(excluding

Japanesecompanies included in the three ESG indices.

19

ESG

[Concept of the cycle of ESG investments and their impacts]

A

ESG investment

Promoting ESG
activities andimproving evaluation

B

Improving the sustainabilityof financial markets
and risk-adjusted returns

20

C h a pte r 2

Measuring the Impacts of ESG Activities

Measuring the Impacts of ESG Activities

Changes in ESG evaluations of the portfolio
GPIF started by measuring changes in ESG evalua-

based on FTSE’s ESG ratings (*1), and thentions of its portfolio. To measure changes in ESG

compared the value as of March 2017, which isevaluations, we calculated the weighted average

before GPIF’s adoption of ESG indices for domes-(excluding missing values) according to the market

tic equities, and as of March 2018.

capitalization of GPIF’s assets under management[FTSE ESG ratings]
Domestic equities(ESG ratings)

Foreign equities
March 2017

5.00

March 2018

2.44

2.62

2.61

March 2018

2.00

1.00

1.00

GPIF’s portfolio(For reference) TOPIX

3.03

3.00

2.00

0.00

March 2017

5.00

4.00

4.00

3.00

(ESG ratings)

0.00

3.18

3.17

GPIF’s portfolio(For reference)
MSCI ACWI(excluding Japan)

Note: FTSE’s ESG scores are on a five-point scale.
Source: Prepared by GPIF based on data obtained from the following.
FTSE International Limited (“FTSE”) ©FTSE 2018

As a result, we confirmed that ESG ratings ofassets are mainly allocated to passive investment

GPIF’s portfolio by FTSE have improved for both

funds and that GPIF has not withdrawn invest-

domestic and foreign equities.

ments (divestment) from companies with large

We also looked into ESG ratings of TOPIX andgreenhouse gas emissions (*2). GPIF, as a univer-

MSCI ACWI (excluding Japan) as the markets’

sal owner, aims to increase risk-adjusted return ofrepresentative portfolios by calculating weighted

its portfolio and improve the sustainability of whole

average according to the market capitalization offinancial markets and encourage their growth byconstituent stocks and comparing the values tointegratingthat of GPIF’s portfolio, but there was very little

process.

difference. Possible reasons for this are that GPIF’s* 1: For reasons to use FTSE ESG ratings, please see page 30 of this report.
* 2: Due to legal restrictions, GPIF is not allowed to carry out divestments.

21

ESG

factors

into

its

investment

Rankings of ESG ratings by country and their changes
Then, GPIF created a ranking of the average ESG

ESG ratings, the ratings of all companies surveyed

ratings of companies included in FTSE Global

in the major countries, including Japanese compa-

Equity Index by country in nine major countries/re-nies, have improved. Looking at the distribution ofgions,

ESG ratings of Japanese companies, the distribu-

andcomparedchangesinrankings

between March 2017 and March 2018.

tion has shifted to the right (indicating an improve-

According to the results of the analysis, thement). GPIF hopes that ESG evaluations of Japa-

average ESG ratings of Japanese companies havenese companies will improve further throughremained lower than those of European compa-

enhanced responses to ESG issues and promotion

nies in France and the U.K. In terms of changes inof ESG disclosure.

[Ranking of FTSE ESG ratings by country]

Ranking

1st

2nd

3rd

4th

5th

ESG ratings

France
3.55

U.K.

3.41

Canada
2.83

U.S.

2.68

FranceU.K.

CanadaU.S.

(March 2018)
ESG ratings(March 2017)

3.39

3.29

2.72

2.53

7th

8th

9th

India Japan

Hong
Kong
2.12

South
Korea
1.90

China

India Japan

Hong
Kong
1.92

South
Korea
1.75

China

2.52

2.31

[Rate of improvement in FTSE
ESG ratings by country (*)]

(Rate of improvement)
0.25

0.22

6th
2.20

2.00

1.36

1.17

[Distribution of ESG ratings ofJapanese companies by FTSE](Number of companies)
120

March 2017
March 2018

100

0.20

80

0.15

60
0.10

40

0.05
0.00

20

Japan Hong India China US France South UK Canada
Kong
Korea

0

0-0.4 0.5-0.9 1-1.4 1.5-1.9 2-2.4 2.5-2.9 3-3.4 3.5-3.9 4-4.4 4.5-5(ESG ratings)* Changes between March 2017 and March 2018. A comparison was madeof companies assigned ESG ratings at each time point. The rate ofi m p r ove m e n t d o e s n o t i n d i c a t e a s i m p l e d i f fe r e n c e i n ESG r a t i n g s bycountr y as of each time point. For details, please see “Remaining Issues
in ESG evaluations” on page 29-30.
Note: FTSE’s ESG scores are on a five-point scale. Figures show the rate of improvement in the simple average of ESG ratings companies included in the
F TSE Developed Index and the F TSE Emerging Index and with ESG ratings assigned. The char t shows figures for the major c ountries that have many
companies with ESG ratings assigned.
Source: Prepared by GPIF based on data obtained from the following.
FTSE International Limited (“FTSE”) ©FTSE 201822

C h a pte r 2

Measuring the Impacts of ESG Activities

Correlation of different ESG ratings
In its press release that announced the selection ofcorrelation charts as of March 2017 and MarchESG indices for Japanese equities (“ESG Indices2018 shows that the correlation between ESG

Selected,” published on July 3, 2017), GPIF pointed

ratings of the two evaluators has increased. Whileout that ESG ratings varied widely among ESG

the correlation of ESG ratings of the two ESG

evaluators. GPIF posits that possible causes of theevaluators for domestic equities is not high and islarge differences in ESG ratings are: (i) ESG evalua-significantly lower than that for foreign equities, it istion methods are still in the course of development

increasing. The convergence of evaluation ratingsand (ii) there is room for improving ESG disclosures

to a certain degree that occurs with improvementsby companies. In addition, GPIF conducted anin the accuracy of ESG evaluations is deemed toanalysis of changes in correlations of ESG evalua-have a positive impact on investment performance.

tions among evaluators for this ESG Report.

The increase in the correlation between ESG

We created correlation charts of ESG evaluations

ratings of the two ESG evaluators may be a signof Japanese companies with FTSE ESG ratings

that various ESG-focused dialogues (between GPIF

plotted on the vertical axis and MSCI ESG ratingsand ESG evaluators and between ESG evaluatorson the horizontal axis, which shows ESG evalua-and companies) are reflected in the results.

tions of the same company by the two ESG evaluators on a single correlation chart. A comparison of[Correlation charts of FTSE and MSCI ESG ratings]
Domestic equities (March 2017)
F TSE rat i n g s
y = 0.168x + 1.122
5
R² = 0.123

Domestic equities (March 2018)
F TSE rat i n g s
5

4

4

3

3

2

2

1

1

0

MSCI ratings
0

2

4

6

8

10

0

y = 0.196x + 1.090
R² = 0.172

MSCI ratings
0

2

4

6

8

10

Regression analysis of FTSE and MSCI ESG ratings: Coefficient of determination (R 2) and slope (β)

R2March 2017 March 2018

βMarch 2017 March 2018

Domestic equities

0.123

0.172

Domestic equities

0.168

0.196

Foreign equities

0.249

0.256

Foreign equities

0.208

0.213

Note: FTSE’s ESG scores are on a five-point scale and MSCI’s ESG scores are on a 10-point scale. The targets of the analysis are companies whose stocks
are held by GPIF as of each time point and with ESG evaluation scores assigned by both FTSE and MSCI.
Source: Prepared by GPIF based on data obtained from the following.
FTSE International Limited (“FTSE”) ©FTSE 2018©2018 MSCI ESG Research LLC. Reproduction by permission23

E (Environment): Data on carbon footprint
Institutional investors are trying to measure theassume that this is possibly caused by the samecarbon footprint of their overall portfolios in theirreasons for little difference in ESG ratings between

asset

carbonour portfolio and benchmarks as mentioned above.

footprint of investee companies according to theOn the other hand, there is a large difference inownership ratio of those companies. For thiscarbon footprint between GPIF’s portfolio compa-

report, we measured carbon footprint of GPIF’s

nies for domestic equities and foreign equities. The

overall portfolio and checked the deviation from thepossible reasons for this are: (i) There is a signifi-

benchmark. We aggregated carbon footprint bycant difference between GPIF’s ownership ratio (oninvestee companies (excluding missing values)

the basis of shares outstanding) of Japaneseusing data provided by Trucost and taking into

equities and that of foreign equities and (ii) Manu-

account our ownership ratio of those companies,

facturing sector attaches a relatively high weight toand compared the value to market portfoli-

Japanese stocks, while giant IT companies, which

os—TOPIX for domestic equities and MSCI ACWI

have small carbon footprint and extremely large(excluding Japan) for foreign equities. As a result,market capitalization, are included in the portfolio

we found little difference in carbon footprintof foreign equities.

management

betweenourbyportfolio

aggregating

andbenchmarks.

We[Carbon footprint of the portfolio (*1)](million t-CO 2 )140
120

G PI F p o r t f o l i o
125

B e n c h m a r k ( * 2)

121

100
80
56

60

60

40
20
0

Domestic equities

Foreign equities* 1: For carbon footprint, data from Fiscal 2016 was used. GPIF portfolio data is as of the end of March 2018.
* 2: Benchmarks used for the comparison are TOPIX for domestic equities and MSCI ACWI (excluding Japan) for foreign equities.
Source: Prepared by GPIF based on data obtained from the following: S&P Trucost Limited ©Trucost 201824

C h a pt er 2

Measuring the Impacts of ESG Activities

S (Society): Data on gender diversity
MSCI Japan Empowering Women Index (the “WIN

Index, companies disclosing information on all fiveIndex”), which is a thematic index focusing on social

items accounted for less than 50%. While all 500

factors (S) adopted by GPIF, selects constituents based

companies disclose information on (v) % women on

on five evaluation items ((i) % women in new hires, (ii) %board, only 60-70% of the companies disclose informa-

women in the workforce, (iii) difference in years

tion on other items, leaving significant room for

employed by the company: men vs. women, (iv) %improvement.

women in senior management, and (v) % women on

Regarding the performance results (median value) ofboard), which are among the disclosure items required

the five evaluation items of the WIN Index, the results

for companies under the “Act on Promotion of Women’s

improved from the previous year for three items ((i) %Participation and Advancement in the Workplace” inwomen in new hires, (ii) % women in the workforce, (iv)

Japan.

% women in senior management, while (iii) difference in

Looking at the status of information disclosure on theseyears employed by the company and (v) % women on

five items as of the end of March 2018 by the 500

board remained the same.

companies (*) included in the parent index of the WIN[Status of disclosure for evaluation items of the WIN Index](v) % women on board

100%(iv) % women in senior management

72%(iii) Difference in years employedby the company: men vs. women

62%(ii) % women in the workforce

68%(i) % women in new hires

61%
0

20

40

60

80

Disclosed
Not disclosed

100（%）[Composition of companies by number of disclosure items]
Only one item

21%

Two items

6%

48%

Three items
Four items

9%

All five items

16%[Performance results (median value) for evaluation items of the WIN Index]
（%）
30
20
10
0
-10
-20

25% 28%2017

17% 19%4%-17% -17%(i) % womenin new hires(ii) % womenin the workforce(iii) Difference in years
employed by the company:
men vs. women

5%(iv) % women insenior management* Survey targets are the top 500 companies by market capitalization in MSCI Japan IMI Index.
Source: Prepared by GPIF using data from ©2018 MSCI ESG Research LLC. Reproduced by permission
A partial excerpt from MSCI (2018) GENDER DIVERSITY IN JAPAN: PROGRESS REPORT 2018

25

2018

10% 10%(v) % women on board

[Changes in the proportions of female board
directors and female executive officers]
The changes in the proportions of female board
directors and female exective officers of Japanesecompanies show that both proportions have been
increasing.
The Japanese government and business organizations are encouraging companies to strengthen theirefforts for promoting women’s participation andadvancement in the workplace and enhancing
information

disclosure.

Considering

this,

the

improvements of these ratios are not necessarily a

（%）
5.0

Proportion of female board directors

4.0

Proportion of female
executive officers

3.0
2.0

and initiatives of Japanese companies.

1.6%

1.0
0.0

direct result of introducing the WIN Index. Even so,
we believe that it is important to monitor the efforts

4.1%

2013

2014

2015

2017 (Fiscal
Year)

2016

Note: The proportions show the average proportions of companies extracted
from the universe of companies included in TOPIX as of March 2018 and forwhich relevant data are available for all preceding five fiscal years.
Source: Prepared by GPIF based on various sources.

G (Governance): Data on outside board directors
It appears that corporate governance (G) practices

principles, GPIF endorsed the revised Japan’sof Japanese companies started to progress on a

Stewardship Code and published the Policies tofull scale with the formulation and publication of

Fulfill Stewardship Responsibilities in August 2017.

Japan’s Stewardship Code in February 2014 and

The ESG indices selected by GPIF evaluate Gover-

the application of the Corporate Governance Codenance (G) factors, such as composition and evalua-

to listed companies in June 2015. These two codestion of the board of directors, remuneration, risk

serve as two wheels of a cart for improving themanagement, protection of minority shareholders

corporate

Japanese(presence or absence of cross-shareholdings andcompanies toward achieving enhanced medium- to

takeover defense measures), preventing corruption

long-term corporate value and increased invest-

and transparency of tax disclosures. To take anment returns. With the aim of achieving further

example, the proportion of outside board directors

improvements from a pro-forma improvement to aof companies has changed as follows.

governancepracticesofsubstantive improvement, Japan’s Stewardship
Code was revised in May 2017 and the revised
Corporate Governance Code was published inJune 2018.
Since signing up to Japan’s Stewardship Code in
May 2014, GPIF has commenced activities to fulfill
its stewardship activities on a full scale. In June
2017, GPIF formulated the Stewardship Principles
and the Proxy Voting Principles, clarifying therequirements for its external asset managers toqualify. In the Proxy Voting Principles, GPIF urges
its external asset managers to give consideration
to the interests of minority shareholders and ESG
issues and to publicly disclose all voting records,[Proportion of independent outside board directorsof companies listed on the TSE 1st section]（%）
100

One-third or more

80

88.0%

Two or more

60
40

27.2%

20
0

2010

2011

2012

2013

2014

2015

2016

2017 (Year)with the aim of contributing to maximizing shareholders’ long-term interests. Based on these two

Source: Prepared by GPIF based on data from the Tokyo Stock Exchange, Inc.

26

Column: ESG Evaluation and AI
Launch of ESG evaluation using AI
With increasing interests in ESG investment, new
ESG evaluation methods that use Artificial
Intelligence (AI) technologies have beendeveloped. TruValue Labs was established in San
Francisco in 2013, starting from the developmentof a tool for analyzing information on intangible
assets and measuring them. TruValue Labs
calculates the ESG scores of companies bycollecting and analyzing unstructured information and texts through Big Data and natural

language processing.
Arabesque Asset Management, was also established in 2013 and headquartered in London,
conducts asset management activities based on
ESG evaluations of companies performed using
machine learning, from a perspective that nonfinancial information including ESG contributes
to improvement of investment performance. The
application of AI to ESG evaluation is steadily
spreading.

Characteristics of ESG evaluations
perfor med by humans
ESG evaluations are currently performed mainly
by leading index providers, ESG evaluators andresearch firms specialized in the environmental
field. In many of these organizations, ESG evaluations of companies are done by analysts looking
into ESG-related items using methods similar to
those applied to financial analysis and credit
ratings of companies. Such human analysis is27

subject to restrictions in terms of speed andvolume of analysis. With human analysis, forinstance, the more subjects of analysis become,the less frequently ESG evaluations would be
updated. Even when subjects are expanded, itwould take more time to educate or recruit new
analysts, because examining ESG items requires
atypical and wide-ranging analysis.

Characteristics of ESG evaluations
perfor med by AI
In contrast to analysis done by humans, AI iscapable of regularly gathering enormousvolumes of information on companies andconducting consistent analysis based on various
frameworks. For instance, TruValue Labs
constantly analyzes data on about 8,000 companies using more than 75,000 information sources, including media reports, announcements by
NGOs and information from government
agencies. Accordingly, the ESG evaluations ofcompanies by TruValue Labs are more frequently
updated than those of conventional ESG evaluation methodologies (the left chart below). In
addition, TruValue Labs has provided a newframework of ESG evaluations by becoming thefirst to conduct an analysis of ESG factors
according to materiality for each industry definedby the Sustainability Accounting Standard Board(SASB).
Arabesque Asset Management conducts 600
types of ESG evaluation on about 7,000 companies, using data from more than 50,000 information sources in 15 languages. The company
issues ESG ratings in accordance with the United
Nations Global Compact. The current expansionof ESG investments and increasing need for ESG
evaluations of companies are creating a situation
where the strengths of AI in consistently analyzing vast amounts of information from various
aspects could be exploited.

Issues in analysis using AI
It is unlikely that the results of ESG evaluations
and analysis using AI will completely replacethose performed by analysts, due to limits on
information sources. ESG evaluations of companies are performed through analyses that arelargely classified into: (i) analysis conductedusing information published by companies and(ii) analysis conducted only using information not
published from companies, but obtained fromthe media and other sources. TruValue Labs,
which we cover in this column, conducts analysis
that fall under the category listed in (ii) above,and so faces the issue that it cannot evaluate acompany unless it is covered by the media.
Therefore, evaluations of small companies, which
tend to be covered less by the media, are carriedout using less information than large companies,
even if the use of AI makes it technically possible
to analyze large quantities of data (the right chart
below). In addition, the results of analysis should
be used with caution. Evaluation scores arecalculated using AI through a complex process,so it is not easy to interpret different levels ofscores. Therefore, scores are only used todetermine if an ESG evaluation of a company has
improved or deteriorated. Some market experts
say that practical use of AI to perform a moreexhaustive ESG evaluations combines humanevaluations with AI analysis: applying humanevaluations for assessing long-term score levels
and complementarily using AI for analyzing
short-term fluctuations.

ESG score of a certain company (example)

Distribution of ESG information by size of company(Score)(Information quantity)
50
65↑ESG evaluation score is high/Information quantity is large
60↓ESG evaluation score is low/Information quantity is small

55

40

80
70
60

20

40

40

10

20

35

0

0

45

2017

2018

Information quantity (right axis)

Pulse score

Insight score

Market cap Large

90

30

50

Small

(%)

100

50
30
10
Less than
USD 5 bn

Less than Less than Less than Less than Less than USD 200
USD 10 bn USD 20 bn USD 50 bn USD 100 bn USD 200 bn bn or moreHigh frequency

Medium frequency

Low frequency

Note: Insight score shows average change in Pulse score which is updated with a high frequency.
Source: TruValue Labs ©TruValue Labs 2018.

28

C h a pte r 2

Measuring the Impacts of ESG Activities

Remaining Issues in ESG Evaluations
Besides the issues of differences in evaluation results among evaluators, GPIF faced various other issues in
preparing this first ESG Report. Four issues related to an overall ESG evaluation are described below. GPIF
will work with relevant parties to make improvements for issues where possible.

Issue of timing of ESG evaluations
Among the issues in ESG evaluations are differenc-

report) between August and November, and FTSE

es in the timing of updating ratings, and low

updates the ESG ratings of many companies infrequency of update. For instance, MSCI, which isJune of the following year.

covered in this report, updates ESG ratings based

Trucost updates data related to carbon footprint ofon the latest disclosed information on companies

companies, based on the data disclosed to CDP,

targeted for evaluation at a predetermined time

an international NGO that performs analysis of

without considering accounting period or timing of

CSR reports of companies and environmental

publishing annual reports and CSR reports. That isevaluations of companies. Therefore, the latest

to say, if it does not coincide with the timing of andata available as of June 10, 2018, for instance, areevaluation update and there is no significant

for fiscal 2016 for 87% of companies surveyed, andchange in governance structures or a serious

data for fiscal 2017 are available from only 7% of

scandal involving companies targeted for evalua-

companies surveyed.

tion, changes in their ESG ratings may not be

ESG factors are long-term factors, and there would

reflected until nearly one year after publication of

be a view that some differences in the timing of

their CSR reports.

updating evaluation ratings do not cause any prob-

On the other hand, FTSE updates ESG ratingslems. However, if the timing of updating evaluation

annually either in June or December every year,

ratings differs significantly among evaluators, it

depending on companies targeted for evaluation.

would be difficult to perform cross-comparisons of

For instance, companies whose accounting period

evaluation ratings. GPIF also considers that there

is from April to March usually publish information

is much room for improvement in the issue of low

subject to an ESG evaluation (annual report or CSR

frequency of updates of evaluation ratings.

Issue of revisions to ESG evaluation criteria
There is currently no standard ESG evaluation

inconsistent changes to criteria depending on

method, and further improvements to ESG evalua-countries and languages should be avoided. Iftion methods are needed, based on opinions ofchanges to rules create too many special factors

investors

this,that need to be considered, analysis of time-series

revisions to evaluation criteria made by ESG evalu-

data on ESG evaluation results will be of no use.

ators

Therefore, data users should pay attention to thisandcompanies.

themselves

shouldbeConsidering
welcomenews.

However, changing evaluation rules too rapidly and29

issue.

Issue arising in comparing ESG evaluation results on an aggregate basis
As economies of scale work for information disclo-constituent companies of FTSE Developed Indexsure, so too with ESG disclosure. Larger compa-

and FTSE Emerging Index, which comprise medi-nies tend to be evaluated better than smaller ones.

um-sized and large companies, in order to uniform

Therefore, careful consideration is needed forthe size of the companies to some extent. In the

cross-country comparison or the changes of it if"Rate of improvement in FTSE ESG ratings by

the size of companies differ among countries or if

country” on page 22, a comparison is made only

the average size changes over one year as the

between companies for which ESG evaluation

coverage is expanded.

scores are available as of both March 2017 andFor the “Ranking of FTSE ESG ratings by country”

March 2018, in order to eliminate the impacts ofon page 22, a comparison is made betweenchanges in constituent companies.

Issue arising from differences between absolute and relative evaluations
ESG ratings by MSCI and by FTSE, which aremethod, in which results obtained are not affected

mainly referenced in this report, were determinedby other companies, would be appropriate to getusing different evaluation methods: MSCI’s ESG

the picture of the changes in individual companies’

evaluation uses an intra-industry relative evaluation

efforts more accurately. The two methods havemethod and FTSE uses an absolute evaluation

both merits and demerits, and which method is

method. From the viewpoint that ESG issues forused should be determined according to thethe companies differ substantially from industry tointended use of data.

industry, it is desirable to use the intra-industry

For these reasons, we use FTSE’s evaluation

evaluation method for comparing ESG evaluations

method in this report for comparing the results ofof individual companies. On the other hand, whenmeasured impacts of ESG promotional activities

examining improvements of ESG initiatives ofwith past results and include MSCI’s evaluationindividual companies through comparisons withresults in Appendix in this report.

their past performance, the absolute evaluation

30

Chapter 3

Appendix

Data Page (Comparison of Returns and Supplemental Data)[Comparison of benchmark returns of the three ESG indices selected by GPIF]
Benchmark rate of return

Excess rate of return
Excess return Excess return
over the parent
over
index (a-b)
TOPIX (a-c)

ESG
Index (a)Parentindex (b)

TOPIX
(c)

(1) MSCI Japan ESG
Select Leaders Index

13 .74%

14. 9 4%

15. 87 %-1. 2 0 %-2 .13 %(2) MSCI Japan
Empowering Women Index

15. 2 9 %14. 9 4%

15. 87 %0. 3 5%- 0. 5 8 %(3) FTSE Blossom
Japan Index

14. 8 3 %15.13 %

15. 87 %- 0. 3 0 %-1.0 4%

Note: The period of benchmark rate of return is from April 2017 to March 2018, which does not correspond to GPIF’s commencement of investment tracking ESG
indices. The parent index (constituent universe) for (1) and (2) is the top 500 companies by market capitalization included in the MSCI Japan IMI Index. The parent
index (constituent universe) for (3) is FTSE Japan Index.
Source: Prepared by GPIF based on data obtained from the following.
FTSE International Limited (“FTSE”)©FTSE 2018©2018 MSCI ESG Research LLC, Reproduced by permission[ESG ratings by MSCI]
Domestic equities(ESG ratings)

March 2017

10.00

March 2018

March 2017

10.00

5.28

5.43

5.41

6.00

4.00

4.00

2.00

2.00

0.00

GPIF’s portfolio(For reference) TOPIX

Note: ESG scores provided by MSCI are on a 10-point scale.
Source: Prepared by GPIF based on data obtained from the following.
©2018 MSCI ESG Research LLC, Reproduced by permission

31(ESG ratings)

March 2018

8.00

8.00

6.00

Foreign equities

0.00

5.32

5.54

GPIF’s portfolio

5.55(For reference)
MSCI ACWI(excluding Japan)

[Ranking of MSCI ESG ratings by country]
Ranking

1st

2nd

ESG ratings

France
7.25

UK

6.81

Canada Japan

ESG ratings

FranceUK(March 2018)(March 2017)

7.08

6.56

3rd

4th

5th

6th

7th

8th

9th

5.16

US

4.72

India

Hong
Kong
3.76

South
Korea
3.64

China

Canada Japan

US

South
Korea
3.97

India

Hong
Kong
3.68

China

5.35

5.17

5.12

3.98

4.56

[Rate of improvementin the MSCI ESG ratings by country (*)]

(Number of companies)

0.40

70

0.30

60

March 2017
March 2018

50

0.20
0.10

-0.10

2.37

[Distribution of ESG ratingsof Japanese companies by MSCI](Rate of improvement)

0.00

3.77

2.69

40

0.04 South

Korea

China France Canada US Hong India
Kong

30

UK Japan

20
10

-0.20

0

-0.30

0-0.9

1-1.9

2-2.9

3-3.9

4-4.9

5-5.9

6-6.9

7-7.9

8-8.9 9-10
(ESG ratings)* Changes bet ween March 2017 and March 2018. Comparison was madebet ween companies assigned ESG ratings as of each time point. Rate of
improvement does not indicate a simple difference in ESG ratings by country asof each time point. For details, please see “Remaining Issues in ESG evaluations”
on page 29-30.
Note: MSCI’s ESG scores are on a 10-point scale. Figures show the rate of improvement as a simple average of evaluation ratings of companies included in MSCI ACWI
and with ESG ratings assigned. The chart shows figures for the major countries that have many companies with ESG ratings assigned.
Source: Prepared by GPIF based on data obtained from the following.
©2018 MSCI ESG Research LLC. Reproduced by permission[ESG indices for Japanese equities adopted by GPIF]FTSE Blossom
Japan Index

Index concept

・The index uses the ESG
assessment scheme that is
applied to the FTSE4Good Japan
Index Series which has one of thelongest track records globally for
ESG indices.
・The index is a broad ESG index
that selects stocks with highabsolute ESG scores and adjusts
industry weights to neutral.

Constituent universe(parent index)
Number of index
constituents
WeightingAssets undermanagement

MSCI JapanESG Select Leaders Index

MSCI Japan Empowering
Women Index (WIN)・The MSCI Japan ESG SelectLeaders Index is a broad ESG
index that integrates various ESG
risks into today’s portfolio. The
index is based on MSCI ESG
Research that more than 1,000
clients use globally.

・MSCI calculates the gender-diversity
scores based on various pieces of
information disclosed under “the Act
on Promotion of Women's
Participation and Advancement in the
Workplace” and selects companies
with higher gender diversity scoresfrom each sector.

・The index incorporates stocks
with relatively high ESG scores ineach industry.

・The first index designed to cover abroad range of factors related togender diversity.

FTSE Japan Index(509 stocks)

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

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

14 9

252

208

Market cap weighted(Industry neutral comparedwith the parent index to bringindustry weights in line)

Market cap weighted“Market cap” times“Composite score” (*)¥526.6 billion¥622.9 billion¥388.4 billion* “Sector-adjusted gender diversity score” times “Sector-adjusted quality score.”
Note: Number of index constituents and assets under management are as of March 31, 2018.

32

Announcement
GPIF publishes various information on a timely basis through annual reports, prepared and published as requiredby law, as well as through a website, SNS, and other means, from the viewpoint of ensuring transparency.
GPIF will continue to endeavor to make published documents easier to understand, and examine and improveways information is disclosed and PR activities targeting the public, in accordance with diversification, sophistication, and globalization of investment.

GPIF Homepage

GPIF YouTube channel

GPIF Twitter

Disclaimer
MSCI
Although GPIF’s information providers, including without limitation, MSCI ESG Research LLC and its affiliates (the “ESG
Parties”), obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees theoriginality, accuracy and/or completeness of any data herein. None of the ESG Parties makes any express or implied

warranties of any kind, and the ESG Parties hereby expressly disclaim all warranties of merchantability and fitness for aparticular purpose, with respect to any data herein. None of the ESG Parties shall have any liability for any errors oromissions in connection with any data herein. Further, without limiting any of the foregoing, in no event shall any of the ESG

Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost
profits) even if notified of the possibility of such damages.

FTSE
FTSE ® is a trade mark of the London Stock Exchange Group companies and is used by FTSE under licence. All rights in

the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability forany errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data ispermitted without FTSE’s express written consent. FTSE does not promote, sponsor or endorse the content of this communication.

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33

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