ESG REPORT 2018

For All Generations

Government Pension Investment Fund

CONTENTS

3

P.

introduction

P.3 What is ESG?
P.5 About GPIF
P.7 Ensuring the Stability of the Pension System

11

P.

Chapter 1

GPIF’s ESG Initiatives
P.11 Activity Highlights
P.13 ESG-Related Governance and Organizational Frameworks

P.9 Message from Our President

P.15 Global Environmental Stock Index Selection and ESG Index-Based Asset Management
P.17 ESG in External Equity and Fixed Income Management
P.19 Stewardship Activities and ESG Promotion
P.21 Engagement with Index Providers and ESG Evaluators
P.23 ESG in Alternative Asset Management
P.25 Collaboration with Overseas Public Pension Funds and Other Institutions
P.27 Support for TCFD and Climate-Related Information Disclosure

01

GPIF ESG REPORT 2018

P.29 Commissioned Study: ESG Information Disclosure Study

Investment Principles
GPIF is committed to fulfilling our fiduciary duty to secure1

Our overarchinggoal current
should be toandachievethe investment
returns required foradequate retirement funds
for bothfuturebeneficiaries.
the public pension system with minimal risks, solely for the benefit of pension

We believe that improving
the governance of the companies thatrecipients from a long-term perspective, thereby contributing to the stability ofthe system. negative environmental and social
we invest in while minimizing

externalities – that is, ESG (environment, social and governance)2

Our primary investment strategy should be diversification by asset class, region,

integration – is vital in
the acknowledging
profitabilityof theofportfolio
andensuring
timeframe. Whilefluctuations
market prices in the shortover the long term.

term, we shall achieve investment returns in a more stable and efficient mannerby taking full advantage of our long-term investment horizon. At the same time,
we shall secure sufficient liquidity to pay pension benefits.

3

31
4

P.

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 for each asset class, while seeking untapped
profitable investment opportunities.

Chapter 2
By fulfilling our stewardship responsibilities (including the consideration of ESG

Measuring the Impacts of ESG Activities(Environmental, Social, and Governance) factors), we shall continue to maximize

P.31 ESG Index Performance
Greenhouse
Gas recipients.
(“GHG”) Emission Analysis
medium- to long-term investment returns forP.45
thePortfolio
benefitof pension
P.33 Portfolio ESG Scoring

P.49 Portfolio Scenario Analysis –Transitioning towards a 2˚C target

P.35 ESG Score Ranking by Country

P.53 Current State of Corporate Disclosure

P.37 ESG Score Correlation

P.54 Column: Global Perspective on GPIF’s ESG Activities

P.39 Society (S) and Governance (G) Aspects of Japanese Companies
P.41 Column: Scandals and ESG Scoring
P.43 Portfolio Climate-Related Risk

P.55 Editor’s Note

GPIFESGESGREPORT2018 0258
GPIF
REPORT2018

Introduction :Why does GPIF focus on ESG?

What is ESG?
ESG is the acronym for Environmental, Social, and Governance. While investors have traditionally usedcash flows, profit margins and other quantitative financial data to value a company’s equity or othersecurities, “ESG investment” also takes non-financial ESG factors into consideration.

POINT

1 Examples of ESG-related factors

E

nvironment

Environment

Climate Change
Water resources

S
Diversity

Biodiversity, etc.

ocial

SocialSupply chain, etc.

Governance

Governance

Composition of the boardof directors
Protection of minority
shareholders, etc.

POINT

2 GPIF as a universal owner

A “universal owner” is a long-term investor with a substantial level ofthe sustainable, stable growth of the entire capital market is criticalassets under management that invests in securities spanning thefor GPIF, as a universal owner and cross-generational investor, toentire capital market, which is an accurate description of GPIF. The

achieve stable returns over the long term. Furthermore, sincefund is also described as a “cross-generational investor” because theenvironmental issues and social issues will inevitably impact thepension reserve managed by GPIF will be used to lessen the burden

capital market over the long term, it is essential that we reduce theof pension contributions made by future generations. As such,negative impact of these issues on the capital market to achievesustainable corporate value creation by each investee company andsustainable investment returns.

03

GPIF ESG REPORT 2018

POINT

3 PRI Signatory

The term “ESG” was first popularized in 2006, when then-Secretary-

Integrating ESG into investment is expected to improve risk-

General of the United Nations Kofi Annan proposed the Principles foradjusted returns over the long term. At GPIF, we are convinced that

Responsible Investment (PRI) – a new framework incorporating ESG

this method of investment allows us to fulfill our fiduciary duty and isinto the investment process – to institutional investors around thein line with our investment principles, which state, “Our overarching

globe. Criticism of the pursuit of short-term gain in capital markets

goal should be to achieve the investment returns required for thehas been growing in the wake of the 2008 global financial crisis, andpublic pension system with minimal risks, solely for the benefit ofthis has been reflected in the rising number of PRI signatories. GPIF

pension recipients from a long-term perspective, thereby contributing

signed on to the Principles in 2015.

to the stability of the system.”

Number and assets under management of PRI signatory asset owners

432signatories
20.1trillion dollars(trillion dollars)
25

Total assets under management (left axis)
Number of signatories (right axis)

20(signatories)
500

400

15

300

10

200

5

100

0

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

0
2019 (year)

Source: PRI Data as of the end of March for each year.

ColumnDivestment and GPIF
“Divestment” refers to a particular method of ESG investment inconsiderable negative ESG-related externalities to improve their

which a group of companies in a certain industry or categorybusiness processes. The opportunity for constructive dialogue

viewed as problematic from an ESG perspective is summarily

will be lost if we choose to no longer be a shareholder, andexcluded from the investment universe according to someselling off our stake could result in the transfer of shareholder

formalistic criteria.

rights from a responsible investor to an indifferent investor, as

We do not practice divestment at GPIF. If we were to exclude

pertaining to ESG issues.

a company with a significant environmental footprint from ourExternal asset managers are responsible for investing

portfolio, the value of our assets may eventually be damaged by

the majority of GPIF’s assets, and we proactively engage in

the negative impact generated by this company in the long run.

dialogue with companies with ESG issues through these

Rather, we view it as vital to encourage companies that haveasset managers.

GPIF ESG REPORT 201804

Introduction :Government Pension Investment Fund

About GPIF
Government Pension Investment Fund (GPIF) manages and invests Japan’s pension reserve fund, which isused to pay Employee Pension Insurance and National Pensions. Our goal is to contribute to the stability ofthe pension system by earning returns on our investments and distribute these to the government.

POINT

1

Pension system in JapanThe Japanese pension system adopts the “pay-as-you-go system,” in

GPIF grows this reserve by investing it in capital markets inwhich contributions from the current working generation are used toJapan and overseas. This means that we draw on growth in both the

pay the pensions of elder generations.

Japanese and global economies to expand the pool of funds available

As the birth rate declines and the population ages at a rapid pace

for future pensions. Both returns on the reserve and the reserve itself

in Japan, in order to avoid an unduly heavy burden from being placed

will be used to supplement pension payments to future generations

on future generations, pension contributions not immediately applied

as part of the 100 year pension fiscal plan. Reserves account for

to payment of benefits are accumulated as pension reserves.

approximately 10% of the total resources available for pension payouts.

Pay-as-you-go system

Role of the reserve

Secure funds
through investment
returns

Japan adopts a system where the current working
generation supports the lives of the elderly.

Pension contributions↑Payment↑
Futureworking
generation

Covers deficit

0％

Decline incurrent
working
generation

Pension contributions

Pension payments

Pension contributions

Current
working
generation

Pension contributions↑Payment↑

Covers deficit

100％

Pension contributions

Current
recipient
generation

SurplusPension payment sources

Pension payments

Reserve

Decline incurrent
working
generation

Paid bynational
treasury

Paid bynational
treasury

Paid bynational
treasury

Present

50 years later

100 years laterLong-term plan

Note: The above diagram is for illustrative purposes; please refer to the Ministry of Health, Labour and Welfare website for details on the public pension system.

05

GPIF ESG REPORT 2018

POINT

2

Long-term, diversified investment

GPIF manages the pension reserve in line withGPIF policy asset mix (breakdown of proportion of investment)

our investment principles, which state “Ourprimary investment strategy should bediversification by asset class, region, andtimeframe. We shall achieve investment

Foreign stocks

25％

returns in a more stable and efficient manner

35％

by taking full advantage of our long-term
investment horizon.”With assets under management of over
159 trillion yen as of March 31, 2019, weinvest in a broad, diverse range of assets

15％

Foreign bonds

across fixed income and equities in Japan andDomestic bonds

25％

Domestic stocks

overseas, holding 5,111 stocks and bonds
from 3,457 issuers.

GPIF invests in a variety of asset classes.

GPIF in numbers

Universal owner￥Super long-term investor

Assets undermanagement¥159

Investment time
horizontrillion

World’s largest pension fundNumbers of issuers
and GPIF-owned
stocks(Stocks)

5,111

100

years

Playing a role in pension
finance with aninvestment time horizonof over 100 years

GPIF’s ESG activities (investment)
Integrating ESG
factors based on our
Investment Principles¥159

trillion￥

Assets undermanagement tracking
ESG indices¥3.5

trillionstocks(Bonds)3,457

issuers

Rating by PRI(strategy and governance)A+

Note: Data as of the end of March 2019. Rating by PRI is for 2018.

GPIF ESG REPORT 201806

Introduction :GPIF’s Mission

Ensuring the Stabilityof the Pension System

Our mission

07

GPIF ESG REPORT 2018

Our mission at GPIF is to contribute to the stability of the national
pension system by managing and investing the pension reserves
entrusted to us by all of its beneficiaries.
We began managing assets as we are today in fiscal 2001.
Since then, we’ve recorded a cumulative return rate of +3.03%(annualized) and total returns of 65.8 trillion yen as of the end of
fiscal 2018.
Pension reserves managed by GPIF are used to prevent theburden on future generations from becoming too excessive.

Cumulative returns since fiscal 2001
（％）
35
30
25

Cumulative returns

3.03
Returns＋¥65.8
Assets under management159.2trillion％ (annualized)

Return rate＋

Quarterly return rate
(trillion yen)70

trillion (cumulative)

60
50

20

40

15

30

10

20

5

10

0

0

-5

-10

-10

-20
01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17

18 (ﬁscal year)

As of the end of March 2019

Our conviction

We firmly believe that enhancing the sustainability offinancial markets as a whole through ESG activities will
help stabilize the pension system to the ultimate interest of
all beneficiaries.
We are committed to continue promoting ESG in order toreduce the negative impact of environmental and social
problems on financial markets, and thus encourage sustainableeconomic growth and improve returns over the long run from all
the assets we manage.

GPIF ESG REPORT 201808

Message from Our President

We are committed tofulfilling our fiduciary duty topreserve the funds that future
generations of pension
beneficiaries need.

Government Pension Investment Fund, Japan
President

ESG, SDGs, and other sustainability-

09

Norihiro Takahashi

The shift towards ESG is happening

oriented movements gained further

not just among investors; but is also

momentum in fiscal 2018. According to a

spreading amongst corporations. Our

survey by the Global Sustainable Investment

annual survey covering companies listed

Alliance (GSIA), total global assets underon the first section of the Tokyo Stockmanagement classified as ESG investment

Exchange revealed that a steadily growing

hit 30.7 trillion dollars at the start of 2018, of

number of companies have preparedwhich Japan accounted for 2 trillion dollars:

integrated reports disclosing ESG-related

4.6 times the amount recorded during theand other non-financial information, andprevious survey in 2016. This makes Japan

showed that investors are putting thesethe fastest-growing country or region inreports to better use. In addition, more

ESG investment.

companies announced that they have

GPIF ESG REPORT 2018

launched SDG-related initiatives.
Since signing on to the Principles forand the financial industry is waking up to
the fact that climate change poses a

Responsible Investment (PRI) in 2015, wematerial risk to both the real economy andat GPIF have expanded our ESG initiatives

financial markets.

with the goal of preserving the funds thatIn 2015, the Financial Stability Board

future generations of pension beneficiaries(FSB) established the Task Force on

need. In fiscal 2018, we selected andClimate-related Financial Disclosuresbegan investing with new global(TCFD) at the request of the G20 toenvironmental stock indices. We also

address how the financial sector should

provided a clear definition of ESG

manage climate change risks. The TCFD

integration in equity and fixed income

published a set of recommendations inmanagement, and began a review of our2017, which GPIF endorsed at the end ofmanager evaluation criteria. In the fixed

2018. This is our first report sinceincome space, we revised our investment

announcing our support for the TCFD andguidelines to be able to invest in green

is the first time that we have disclosed

bonds issued by international institutions.

information in line with the TCFD’s

For alternative investments as well, we

recommendations, and we don’t expect

began to closely examine ESG initiatives

to get it right on the first try. We will,

during our selection of external asset

however, proactively address any potential

managers, drew up an ESG evaluation

deficiency in these disclosures toframework, and began monitoring

incrementally improve the report year

managers along these dimensions.

by year. We hope our efforts willAmong ESG-related issues, theprovide motivation for other asset

damage wrought around the world fromowners and asset managers torecord-breaking heat waves, torrential

disclose TCFD information.

flooding, uncontrollable forest fires and

ESG investments take a long time toother abnormal weather conditions in

produce results. We will continue toFY2018 prompted an even greater focus

regularly examine the impact of ouron climate change. Current research

activities in the ESG REPORT to confirm

indicates that climate change increases

that we are headed in the right direction

the frequency of heavy rain, heat waves,and will ultimately achieve the results thatand other abnormal weather conditions,

we are aiming for.

GPIF ESG REPORT 201810

Chapter 1 GPIF’s ESG Initiatives

Fiscal 2018

Activity Highlights
In fiscal 2018, GPIF continued to promote ESG in new areas. Here we present the highlightsof our ESG activities during the year.

▲

Global environmental stock index selection

Please refer to pages 15–16 for details.

In September 2018, GPIF announced that we will begin

industry, and also incorporate a mechanism to encourage better

benchmarking approximately 1.2 trillion yen of our foreign andcarbon disclosure by companies.

domestic equity portfolio to two newly-selected global
environmental stock indices. These indices help significantly
reduce the greenhouse gas (GHG) emissions of our portfolio by
overweighting the more carbon-efficient companies within each▲Endorsement of climate change-related initiatives

Please refer to pages 25–26 for details.

GPIF believes that asset owners must take the initiative in

relevant to our portfolio in accordance with thetackling climate change issues.

recommendations announced by the TCFD.

In December 2018, GPIF endorsed the TCFD, an

In addition, in October 2018, GPIF joined Climate Action

initiative to request companies to disclose climate change-

100+, an investor-led initiative to tackle climate change

related information.

issues, as a supporter.

In this report, we disclose climate-related information

Following up on a joint research initiative by GPIF and theWorld Bank Group entitled “Incorporating Environment, Socialand Governance (ESG) Factors into Fixed Income Investment,”
the International Bank for Reconstruction and Development(IBRD) and the International Finance Corporation (IFC) – both
members of the World Bank Group – drew up a new proposal
to provide GPIF’s external asset managers with an opportunity
to invest in Green, Social and Sustainability Bonds.

11

GPIF ESG REPORT 2018▲

Green bond investment

Please refer to page 18 for details.

Chapter 1 GPIF’s Initiatives on ESG

ESG in external equity and fixed income management▲

Please refer to pages 17–18 for details.

At GPIF, we invest in a broad range of equity and fixed-income
assets in Japan and overseas through external asset
management companies. When we conduct evaluations ofthese asset management companies, we look at how well they
integrate ESG into their investment processes. We established aclear definition of what comprises “ESG integration” in fiscal
2018, and are further exploring setting forth specific ESG

Integration

Collaboration

integration evaluation criteria in the future.
Engagement▲

ESG in alternative asset management

Please refer to pages 23–24 for details.

At GPIF, we also take ESG factors into consideration wheninvesting in alternative assets. We examine ESG initiatives in
the process of selecting asset management companies, andChapter 2 Measuring the Impacts of ESG Activities

monitor these managers after a mandate is awarded. In fiscal
2018, we revised ESG-related evaluation criteria for thesemanagers based on the PRI framework and input fromexternal consultants.

Commissioned research on ESG information disclosure▲

Please refer to pages 29–30 for details.

Enhancing the quantity and quality of ESG-related information
disclosure is critical in advancing ESG activities. In fiscal 2018,
GPIF commissioned Nissay Asset Management Co., Ltd. to
conduct a study of ESG information disclosure with the purposeof examining effective and efficient ESG information disclosure
approaches that contribute to the sustainability of theinvestment chain.

GPIF ESG REPORT 201812

Chapter 1 GPIF’s ESG Initiatives

ESG-Related Governance andOrganizational Frameworks
The Board of Governors discusses and oversees the promotion of ESG and approaches to ESG investment at
GPIF. The Executive Office promotes initiatives targeting ESG in coordination with the Investment Strategy
Department, Public Market Investment Department, Private Market Investment Department, and otherdepartments related to asset management, and reports relevant matters to the Board of Governors.

Deliberations by the Board of Governors
At GPIF, the Board of Governors, established in October 2017,
makes decisions concerning important matters such as theformulation of the policy asset mix and medium-term plans by
mutual consent, and oversees the execution of operations by
the Executive Office.
The Board of Governors discusses and oversees thepromotion of ESG and approaches to ESG investment at GPIF.
In fiscal 2018, the Board of Governors met 13 times (9th to
21st meetings), and ESG-related issues were discussed at sixof those meetings.

13

GPIF ESG REPORT 2018

ESG-related items discussed and reported on at
Board of Governor meetings
Meetingdate
10th
meeting

May 2018

Agenda item
ReportedmatterSummary Report of the 3rd Survey of Listed Companies
Regarding Institutional Investors’ Stewardship Activities

Reportedmatter

ESG REPORT

ReportedmatterGlobal environmental stock indices

13th
meetingJuly

15th
meeting

October

ReportedmatterParticipation in Climate Action 100+17th
meeting

December

ReportedmatterEndorsement of TCFD

18th
meeting

January2019

ReportedmatterPreparation of ESG REPORT for next fiscal year

21st
meeting

MarchResolution Plan for fiscal 2019 (draft)
ReportedmatterReport on stewardship activities in 2018

Chapter 1 GPIF’s Initiatives on ESG

ESG-related executive structure
The Executive Office implements ESG initiatives in coordination

ESG-related initiatives and other asset management-relatedwith the Investment Strategy Department, Public Market

issues, and particularly important matters are reported to theInvestment Department, Private Market Investment

Board of Governors. Preparation of the ESG Report is also

Department, and other asset management-relateddeliberated on by the Investment Committee before being

departments. The Investment Committee, chaired by the Chiefreported to the Board of Governors.

Investment Officer (CIO), deliberates and makes decisions on
Key departments responsible for ESG

Investment Strategy Department
Main Responsibilities

Develop investment strategy,
including rebalancing strategy andinvestment methods, etc.

Public Market Investment Department

Investment Strategy &ESG

This department develops GPIF’s ESG
investment strategy, such as with the selectionof ESG indices, researches ESG investment
and other new investment methods, andcoordinates cross-asset business operations
such as preparation of the ESG Report.

Public Market Investment

This section examines ESG integration as part ofthe external asset manager evaluation process.

Stewardship & ESG

This section evaluates ESG and other stewardship
activities at external asset managers.

Chapter 2 Measuring the Impacts of ESG Activities

Main Responsibilities

Selection and evaluation of
investment managers for equity
and fixed income, etc.

Private Market Investment Department
Main Responsibilities

Selection and evaluation of
investment managers foralternative assets, etc.

This department integrates ESG into its
selection and evaluation of external asset
managers for alternative assets.

Column
Women’s participation at GPIF
GPIF understands that enhancing diversity is an important part ofcreating a more sustainable organization. The table on the rightincludes data for GPIF for the five items that companies are
required to disclose under the Act on Promotion of Women’sParticipation and Advancement in the Workplace. These are also
quantitative evaluation metrics used in the MSCI Japan Empowering
Women Index (WIN). We will continue to work towards enhancing
diversity, including promoting active participation by women.

(i) % women in new hires

33.3％(ii) % women in the workforce

29.7％(iii) Difference in years employed by the company: men vs. women*−21.7％(iv) % women in senior management

13.0％(v) % women on board**

20.0％

Note: Data for (i) as of fiscal 2018; other data as of the end of March 2019.
Difference in years employed by the company: men vs. women* = (average years employed for
women – average years employed for men) / average years employed for men. As GPIF has asmall number of employees, this difference is easily affected by the status of hiring and retirement
and therefore fluctuates significantly depending on the fiscal year.
At GPIF, % women on board** refers to the percentage of women on the Board of Governors, with
Governors (including the President) appointed by the Minister of Health, Labour and Welfare.

GPIF ESG REPORT 201814

Chapter 1 GPIF’s ESG Initiatives

Global Environmental Stock Index Selection
and ESG Index-Based Asset Management
In fiscal 2017, we began benchmarking a portion of our domestic portfolio to ESG indices,
and in fiscal 2018, we selected new global environmental stock indices to manage foreign
investments against.

Selection of global environmental stock indicesWith climate change increasingly becoming an

related to the portfolio. This is achieved byimportant investment theme, GPIF announced that it

overweighting those companies within a given

was accepting applications for new global

industry that are carbon-efficient (i.e. companies

environmental stock indices in November 2017. Inwith low greenhouse gas emissions per unit ofSeptember 2018, we selected the S&P/JPX Carbon

revenue), rather than by excluding industries with a

Efficient Index as a benchmark for domestic stocks

significant environmental impact (divestment). In

and the S&P Global Ex-Japan LargeMid Carbon

addition, these indices are open to relatively small

Efficient Index as a benchmark for foreign stocks

listed companies that were excluded from the– both proposed by S&P Dow Jones Indices. In

eligible universe for previous ESG indices. In thistandem with this, we announced that we would begin

respect, the indices are in line with GPIF’s intention

investing approximately 1.2 trillion yen worth of

to enhance and bolster the sustainability of thedomestic and foreign assets in line with these indices.

market as a whole. Moreover, these indices have a

The carbon efficient indices will lead to a15

mechanism that overweights companies thatconsiderable reduction in greenhouse gas emissions

disclose greenhouse gas emissions information,

coming from and mitigate climate change risk

which we expect to help boost such disclosure.

GPIF ESG REPORT 2018

Chapter 1 GPIF’s Initiatives on ESG

Integration

Main characteristics of the Carbon Efficient Index series

1
2
3

Status of disclosure related to greenhouse gas emissions（％）

Within a given industry, increase exposure to carbonefficient companies and companies that disclose
information related to carbon dioxide and other greenhousegas emissions.

98.9

U.K.

94.0
89.6

FranceSouth Africa

For each industry, adjust the range of potential investment
weights for item 1 above according to the extent of theenvironmental impact of that industry. (Industries with a larger
environmental impact will have a greater incentive to improvetheir carbon efficiency and disclose relevant information).

Australia

86.4

Germany

83.7

Sweden81.6

Brazil80.9
75.3

Canada

66.8

U.S.

59.3

Japan

55.6

Hong Kong

53.6

South Korea

The investible universe of the S&P/JPX Carbon Efficient Index
is comprised of all companies listed on the first section of theTokyo Stock Exchange (with certain liquidity screening
requirements), which is a much broader scope than general
ESG indices.

41.3

Thailand

36.6

TaiwanChina

26.2

Note: Constituents of S&P Global Ex-Japan LargeMid Index; data as of the end of August
2018. Whether a subject does or does not provide disclosure is based on assessment
by Trucost.
Source: S&P Trucost Limited © Trucost 2019

In July 2017, GPIF announced the selection of three ESG

resulted in total investment in global environmental and otherindices for domestic stocks and began to link approximately 1

ESG indices growing to approximately 3.5 trillion yen by the end

trillion yen worth of passive investment to these. In fiscal 2018,of fiscal 2018. Please refer to “ESG Indices Performance” on

we continued expanding investment in these ESG indices inpages 31–32 to see the performance of each ESG index.

Chapter 2 Measuring the Impacts of ESG Activities

Characteristics of ESG indices and investment status

phases, and this increase coupled with a rise in stock prices

Main characteristics of ESG indices adopted by GPIFFTSE Blossom
Japan Index● The index uses the ESG

Index concept

assessment scheme used in
the FTSE4Good Japan IndexSeries, which has one of thelongest track records globallyfor ESG indexes.
● The index is a broad ESG

index that selects stocks withhigh absolute ESG scores
and adjusts industry weights
to neutral.

MSCI Japan ESG SelectLeaders Index

MSCI Japan Empowering
Women Index (WIN)● The MSCI Japan ESG Select● MSCI calculates theLeaders Index is a broad ESG
index that integrates various
ESG risks into today’s portfolio.
The index is based on MSCIESG Research used globally bymore than 1,000 clients.
● The index is comprised ofstocks with relatively high ESG
scores in each industry.

gender-diversity scores basedon information disclosed under“the Act on Promotion of
Women’s Participation andAdvancement in the Workplace”
and selects companies withhigher gender diversity scoresfrom each sector.

S&P/JPX Carbon
Efficient Index

S&P Global Ex-Japan
LargeMidCap Carbon
Efficient Index● Based on carbon data provided by Trucost, one of the pioneers ofenvironmental research companies. S&P Dow Jones Indices, a leading
independent provider, develops the index methodologies.
● The indices are designed to increase index weights of the companies

which have low Carbon to Revenue Footprints (annual greenhouse gas(GHG) emissions divided by annual revenues) and actively disclose
carbon emission information.

● The first index designed tocover a broad range of factors
related to gender diversity.

Subject ofInvestment

Domestic Equity

Domestic Equity

Domestic Equity

Domestic Equity

Foreign Equity

Parent index(number of stocks)

FTSE JAPAN INDEX(513 stocks)

MSCI JAPAN IMI TOP 700(694 stocks)

MSCI JAPAN IMI TOP 500(498 stocks)

TOPIX(2,124 stocks)

S&P Global ex-Japan LargeMid Index(2,556 stocks)

Number of index
constituents

152

268

213

1,738

2,199

Assets undermanagement(billion yen)

642.8

804.3

474.6

387.8

1,205.2

Note: Data as of the end of March 2019.
Source: Prepared by GPIF based on data from each index provider. FTSE Russell, data as in 2019 ©2019 MSCI ESG Research LLC. Reproduced by permission. S&P Trucost Limited © Trucost 2019

GPIF ESG REPORT 201816

Chapter 1 GPIF’s ESG Initiatives

Equity and Fixed Income

ESG in External Equity and Fixed
Income Management
GPIF invests in a broad range of equity and fixed-income assets in Japan and overseas
through external asset management companies. From the standpoint of a universal ownerand cross-generational investor, GPIF requires that these asset management companies
integrate ESG throughout the investment process.

ESG integration in asset manager evaluations
GPIF invests in a broad range of assets, holding

comprehensive evaluation.

2,380 domestic stocks, domestic bonds from 511

As a PRI signatory, we defined ESG integration

issuers, 2,731 foreign stocks, and foreign bonds

in fiscal 2018 as follows, based on the PRI definition:from 2,946 issuers (Note). Most of these assets aremanaged externally by asset managementcompanies in Japan and overseas, who are selected

The explicit and systematic inclusion of ESG factors into
investment analysis and investment decisions

and evaluated by the Public Market Investment
Department. This department evaluates managers’

A part of GPIF’s evaluation criteria for asset

investment policies, asset management processes,

management companies already reflects ESG

personnel, and other business processes, andfactors, and we are considering establishing specificexamines ESG integration as a part of thisclear evaluation criteria related to ESG integration.

Note: Data as of the end of March 2019.

17

GPIF ESG REPORT 2018

Engagement

Chapter 1 GPIF’s Initiatives on ESG

Integration

Evaluation of stewardship activities
Stewardship Principles
Government Pension Investment Fund (GPIF) requires

As asset managers are the channel through which GPIF buys andsells stocks and exercises proxy voting rights, we promote

its external asset managers (“asset managers”) for domes-

constructive dialogue (engagement) between asset management

tic and foreign equity investments to comply with the fol-companies and investee companies. Engagement activities arelowing principles. If an asset manager should decide not to

aimed at enhancing medium- to long-term corporate value, withcomply with any of the principles, it is required to explain
the rationale for the non-compliance to GPIF.

ESG being a central theme.

In order to fulfill its own stewardship responsibilities,

In 2017, the Stewardship & ESG Section of the Public

GPIF continuously monitors the stewardship activities ofMarket Investment Department formulated the GPIF’s

asset managers, including the exercise of voting rights, andStewardship Principles (shown on the right), and from thisproactively conducts dialogue (engagement) with them.

aspect evaluates asset manager stewardship and otherengagement activities.
equity investment by GPIF. The medium- to long-term growth ofthe market as a whole is essential to increasing returns fromthis portfolio, and as such, our evaluation of passive managers
is based on whether or not they contribute to improving thequality of the entire market. On the other hand, our evaluationof active managers is based on whether or not their efforts are
conducive to enhancing long-term share value. Stewardship
activities account for 30% of passive manager evaluation

1
2
3
4
5

Corporate governance structure ofasset managers
Management of conflicts of interestby asset managers
Policy for stewardship activities,
including engagement
ESG integration into theinvestment process
Chapter 2 Measuring the Impacts of ESG Activities

Passive investment accounts for approximately 90% of

Exercise of voting rights

scores and 10% for active managers.

GPIF and World Bank Group launch new initiative to promote
Green, Social and Sustainability Bonds
Government Pension Investment Fund (GPIF) and the WorldInternational Finance Corporation (IFC) – both members of the

Bank Group have worked together to promote sustainable

World Bank Group – drew up a new proposal to provide GPIF’s

investment. In April 2018, they published a joint research paper

external asset managers with an opportunity to invest in Green,

entitled “Incorporating Environment, Social and GovernanceSocial and Sustainability Bonds. GPIF is committed to promoting(ESG) Factors into Fixed Income Investment” at the 2018 World

ESG-based investing to limit negative environmental and social

Bank Spring Meeting. Following up on this, the International

externalities and enhance the long-term return of the portfolio

Bank for Reconstruction and Development (IBRD) and theacross all asset classes.

Investment framework

GPIF

Investment
discretion

Asset
Managers

Investment
decisions

World Bank Group
IBRD
IFC

FinanceGreen andSocialProject

GPIF ESG REPORT 201818

Chapter 1 GPIF’s ESG Initiatives

Equities and Fixed Income

Stewardship Activities
and ESG Promotion
GPIF has conducted an annual survey of listed companies since 2016 inorder to assess asset manager stewardship activities and understand how
engagement is actually being conducted.

Survey of listed companies
Outline of the Survey

Purpose and Results

1. Purpose

2. Subjects● Assess asset manager stewardship activities and● 2,129 companies listed on the First Section of the Tokyo Stockunderstand how “purposeful constructive dialogues”(engagement) are actually being conducted, while keeping
updated on any changes seen over the year since theprevious survey was conducted.

Exchange (TSE) (as of December 20, 2018)● Number of respondent companies: 604 (previous survey: 619)

Response rate: 28.4%, Survey period: From January 10 to
February 20, 2019

Response rate

Response rate by company size

604
companies

Large
-cap

28%
■Response■No response

33%

67%

1,525
companies

72%

84.0％

Medium
-cap

62.5％

Small
-cap

16.6％

(Note) Inner circle: based on number of companies
Outer circle: based on market cap

19

GPIF conducted the fourth survey of listed companies in 2019

Companies’ awareness of SDGs (United Nations’from January to February. Results showed a further increase

Sustainable Development Goals) also continued to grow, within the number of companies publishing integrated reports and96.7% indicating that they “have knowledge of SDGs,”

holding information sessions focused on ESG issues compared

compared to just over 80% in the previous survey. The ratio ofwith the previous year.

companies that have taken some type of action on SDGs wasAmong those companies that publish integrated reports,

44.7%, up substantially from 24% in the previous survey.

39.4% indicated that institutional investors make better use of

As for major themes in ESG activities by companies, asthese reports than before – a significant jump from 17.5% inwith the previous survey, the most cited theme was “corporate

the previous survey. More companies also stated thatgovernance,” with 71.2% responding that this was the mostinstitutional investors are highly interested in the information

significant theme (up 3.8 percentage points from the previous

sessions they held on ESG issues. These results show thatyear). Meanwhile, the theme with the most significant change

companies are seeing positive changes with regard towas “climate change,” with 45.5% of companies indicating

institutional investors’ interest and utilization of ESG and otherthis as the major theme – up 9.2 percentage points from thenon-financial information.

previous year.

GPIF ESG REPORT 2018

Engagement

Chapter 1 GPIF’s Initiatives on ESG

Integration

Announcement of excellent integrated reports and governance reports
GPIF requested external asset managers given a mandate to

up to 10 companies for integrated reports and up to 5

manage Japanese equities to submit nominations forcompanies for governance reports. A total of 67, 87 and 41“excellent integrated reports,” “most-improved integrated

companies were selected for excellent integrated reports,

reports” and “excellent corporate governance reports.” In fiscal

most-improved integrated reports and excellent corporate

2018, 17 asset managers were each requested to nominate

governance reports, respectively.

Reports cited as excellent from multiple asset managers (among listed companies)
Excellent integrated reports
ITOCHU Corporation Nominated by 8 companies

KONICA MINOLTA, INC. Nominated by 4 companies

MARUI GROUP CO., LTD. Nominated by 7 companies

Recruit Holdings Co., Ltd. Nominated by 4 companies

Daiwa House Industry Co., Ltd. Nominated by 6 companies

NSK Ltd. Nominated by 4 companies

Ajinomoto Co., Inc. Nominated by 6 companies

Mitsubishi UFJ Financial Group, Inc Nominated by 4 companies

OMRON Corporation Nominated by 5 companies

CAPCOM CO., LTD. Nominated by 4 companies

Most-improved integrated reports

Excellent corporate governance reports

J. FRONT RETAILING Co., Ltd. Nominated by 4 companies

Kao Corporation Nominated by 7 companies

MinebeaMitsumi Inc. Nominated by 4 companies

Kagome Co., Ltd. Nominated by 6 companies

SHIMADZU CORPORATION Nominated by 4 companies

EBARA CORPORATION Nominated by 6 companies

Mitsubishi UFJ Financial Group, Inc Nominated by 4 companies

Mizuho Financial Group, Inc Nominated by 5 companies

Chapter 2 Measuring the Impacts of ESG Activities

Mitsubishi Chemical Holdings Corporation Nominated by 4 companies

Material ESG issues recognized by asset managers
GPIF has identified those ESG issues that external equity

managers of foreign equities also said “climate change” wasasset managers consider to be material. Among passivea material ESG issue, while managers of Japanese equities

managers, regardless of whether they managed Japanese or

mentioned “composition and evaluation of the board offoreign equities, all managers listed “climate change” as adirectors.” With this, we saw that active managers ofmaterial ESG issue. Additionally, an increasing number ofJapanese equities recognize G (governance) as a material

companies cited “climate change” as a principal theme ofissue, and that they are focusing on a wider range of themes,

their ESG activities in the survey for listed companies, whichsuch as “supply chains” and “labor standards,” as comparedmeans both companies and investors are attachingwith the previous year.

importance to this topic. On the active management side,

Material ESG issues listed by all asset managers under each investment management method

Domestic
equities
Foreignequities

Passive

ActiveClimate change, supply chains, misconduct

Board structure and self evaluation

Climate change, diversity,
water stress/water security

Climate change

GPIF ESG REPORT 201820

Chapter 1 GPIF’s ESG Initiatives

Equities and Fixed Income

Engagement with Index
Providers and ESG Evaluators
Index providers and ESG evaluators play an
absolutely vital role in GPIF’s investments. GPIF
engages in dialogue with index providers and
ESG evaluators to improve the sustainability ofthe market.

Importance of dialogue with index providers and ESG evaluators
In addition to external asset managers, index providers andproviders and ESG evaluators when selecting ESG indices by

ESG evaluators play an absolutely vital role in GPIF’s

assessing their governance structures and other business

investments. Passive investments tracking indices accountprocesses in order to ensure the transparency and neutrality

for approximately 90% of our equity portfolio. Since theof evaluation and index selection.

stocks we invest in and the weights of these investments are
determined by indices calculated by index providers, theseproviders and ESG evaluators after the ESG index selection

providers arguably play a critical role in determining theprocess, and also proactively participate in consultations thatsuccess or failure of our investments.

these companies conduct when they consider making

Especially in the case of ESG indices, constituent stocks

changes to their ESG evaluation methods and/or index

and their weights vary greatly depending on ESG evaluations,construction rules. Through this engagement, GPIF supports

so the companies that conduct these evaluations have athe efforts these companies make to improve ESG

particularly great responsibility. As such, similar to external

evaluations and the quality of indices.

asset managers, GPIF conducts due diligence of index

21

We’ve continued to have proactive dialogues with index

GPIF ESG REPORT 2018

Engagement

Chapter 1 GPIF’s Initiatives on ESG

Integration

Dialogues in fiscal 2018
As in the previous fiscal year, in fiscal 2018, GPIF met with the
ESG evaluators that it employs to discuss inquiries andopinions received from various companies. More and more
firms are consulting with these evaluators when they conduct
their own ESG evaluations, and according to MSCI, more
Japanese firms consulted with them than any country in theworld A . The percentage of companies that consult with FTSE
during the ESG evaluation process is also rising B .
Particularly, more companies receiving an ESG rating falling in
the middle range – who may potentially be candidates for the
FTSE Blossom Japan Index in the future – are consulting with
FTSE. These trends may be evidence that these companies are

Japanese equities, we can already see that dialogue between

consciously taking action to be included in ESG indices. Whilethe companies and index providers has become more active

this is just the second year since GPIF adopted ESG indices forsince the previous fiscal year.

A Percentage of companies consulting with

B

Japan
Germany
France

71

U.K.

69

Switzerland

67

U.S.
Canada

78

100

76

80

61
57

2018-192017-1860
4065

Australia

Proportion of companies that had contact
with FTSE in the ESG evaluation process（％）

Chapter 2 Measuring the Impacts of ESG Activities

MSCI in the ESG evaluation process（％）

20
2018
2017
2016

Note: Only includes constituents of MSCI ACWI as of the end of 2018.
Source: ©2019 MSCI ESG Research LLC. Reproduced by permission.

0

1.0 1.0- 1.2- 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 2.6- 2.8- 3.0- 3.2- 3.4- 3.6- 3.8- 4.0
and underand over

ESG rating

Note: Only includes constituents of the FTSE JAPAN INDEX as of the end of 2018. ESG rating is
as of the end of 2018.
Source: Prepared by GPIF based on data from FTSE International Limited (“FTSE”) ©FTSE 2019

Expectation for improvement in ESG scores
As can be seen on pages 35–36, Japanese companies’ ESG

methods and the dialogue they have with index providers andscores have recently been improving at a relatively slower

ESG evaluators by including these topics in a survey that wepace than those at overseas companies. As more Japanese

conduct of listed companies (page 19). Active dialogues

companies take a greater interest in ESG scoring, however, weamong the major players within the investment chain –expect the pace in improvement to accelerate in the future.

investee companies, index providers and ESG evaluators, asset

Also, to prevent bias towards the views and opinions of index

managers, and asset owners – serve not only to improve ESG

providers and ESG evaluators, GPIF provides an opportunity forevaluations and increase their accuracy, but are essential inlisted companies to express their perspective on ESG scoring

improving the sustainability of the market.

GPIF ESG REPORT 201822

Chapter 1 GPIF’s ESG Initiatives

Alternative Assets

ESG in Alternative Asset Management
In October 2017, GPIF expanded the scope of ESG-oriented initiatives and otherstewardship activities to all asset classes in our portfolio. This means that we focus on
integrating ESG into investments in alternative assets as well.

ESG in alternative assets
The holding period for alternative assets (infrastructure, real

23

asset managers in recent years.

estate, and private equity) is generally quite long, and in

We use the general phrase “alternative asset

some cases, the asset manager itself is involved in the

management,” but in fact, material ESG factors differ

corporate management and business operations of thedepending on the individual characteristics of the asset

investee. As a result, more asset managers are integrating

and/or business in question, and the asset manager’s

ESG factors in their investment process in order to identify

individual investment strategies also make a difference inand understand the risks encountered during the holding

the ESG initiatives they engage in. With an understanding

period and, conversely, find opportunities for sustainableof these differences, GPIF as an asset owner monitors how

asset value growth and improvement of corporate value. This

alternative assets are managed and have constructive

trend has become particularly prominent among overseas

dialogues with managers.

GPIF ESG REPORT 2018

Engagement

Integrating ESG factors in real estate investment

Integrating ESG factors in infrastructure investment

ESG integration for investment and development of real

Renewable energy projects such as wind and solar

estate includes reducing hazardous materials, promoting

power now account for approximately 30% of the totalenergy efficiency measures, bolstering environmental risk

investment value of the global infrastructure market. A

monitoring capacity, and ensuring the convenience andsignificant number of infrastructure funds have signed

comfort of tenants. In the domestic real estate market,

on to the Principles for Responsible Investment (PRI),

environmentally friendly properties are referred to as “green

consider ESG factors when conducting due diligence,buildings” and are recognized as properties that canand have established processes for investigating andpotentially add significant value.

evaluating ESG factors when deciding on an investment.

Example of investment in wind power

Chapter 2 Measuring the Impacts of ESG Activities

Example of investment in green buildings

Chapter 1 GPIF’s Initiatives on ESG

Integration

Integrating ESG into asset manager evaluations(1) ESG evaluations when selecting asset managers

approach to ESG and the ESG elements of the funds inSince introducing an alternative asset manager selection

which they invest to establish a diversified portfolio. In

process that adopts a multi-manager strategy in April

addition to requesting that each asset manager provide a

2017, GPIF has added an examination of prospective asset

report detailing the status of their ESG initiatives, we makemanagers’ approaches to ESG to our screening criteria.

certain to actively engage and keep up to date on theseScreenings are conducted from many different aspects,

issues through regular dialogue with them.

including through due diligence questionnaires, interviews
with ESG staff, and evaluations by third-party consultants.

(3) Establishing and reviewing evaluation criteria

We look at the manager’s company-wide ESG policies, how

As the alternative asset management industry starts paying

they incorporate ESG factors into their investment

more attention to ESG elements, methods for evaluation

decisions, their oversight systems and how they report toand monitoring are also gradually evolving. In fiscal 2018,

investors after an investment is made, among other things.

we revised ESG-related asset manager evaluation criteria
based on the PRI framework and input from external(2) Post-investment monitoring

consultants, and will continue to pursue best practices

GPIF monitors asset managers in areas such as their

while continuing our dialogues with them.

GPIF ESG REPORT 201824

Chapter 1 GPIF’s ESG Initiatives

Signed in September 2015
GPIF has been stepping up its ESG activities since we signed
the PRI in September 2015. Every year, we report our ESG
activities to the PRI and receive a full assessment on how
we’re doing. We received an A+ rating on strategy andgovernance in our 2018 assessment. GPIF’s Chief Investment
Officer (CIO) and Executive Managing Director Mizuno has
served as a Managing Director of PRI since January 2017.

Collaboration
with Overseas
Public Pension
Funds and
Other Institutions
Declared support in December 2018
GPIF declared our support for the Task Forceon Climate-related Financial Disclosures(TCFD) in December 2018 (See pages 27–28
for more information).

Convening the Global Asset Owners’ ForumGPIF established the Global Asset Owners’ Forum
together with overseas public pension funds in 2016as a platform where we can share knowledge on
stewardship activities and other issues on a regularbasis. The Forum is co-organized by GPIF, CalPERS
and CALSTRS. The fourth meeting of the Global
Asset Owners’ Forum convened in Tokyo in October
2018, and the fifth meeting convened in Washington,
D.C. in March 2019. CEOs, CIOs and other members
discussed the concerns and issues they had
throughout the entire investment chain.

25

GPIF ESG REPORT 2018

Chapter 1 GPIF’s Initiatives on ESG

Collaboration

Participated from November 2016
Both the Thirty Percent Coalition in the U.S.
and the 30% Club in the U.K. are initiatives
that seek diversity in listed company boards
by increasing the proportion of female board
members to 30%. GPIF has participated inthese initiatives as an observer sinceNovember 2016.

GPIF collaborates with a wide rangeof domestic and foreign institutions.
In fiscal 2018, we participated in
Climate Action 100+ and declared our
support for the TCFD. GPIF has also
continuously convened the Global
Asset Owners’ Forum.
Participated from October 2018
Chapter 2 Measuring the Impacts of ESG Activities

Climate Action 100+ is an investor-led climate change initiative launchedin September 2017. Members of this initiative hold constructive dialogues
with companies that have a significant impact on the resolution of climatechange issues. Participants discuss improving climate change-related
governance, making efforts to reduce greenhouse gas emissions, andenhancing information disclosure. Currently, 359 investors participate in
the initiative*, including pension funds and other asset owners as well as
asset managers. GPIF has participated in Climate Action 100+ as asupporter since October 2018.
*As of July 2019

Participating in lectures and government meetings
GPIF participates in government meetings on ESG and conducts
lectures at conferences both in Japan and overseas. President
Takahashi has served as a member of the “SDGs Promotion
Roundtable Meetings” established under the leadership of the
Sustainable Development Goals (SDGs) Promotion Headquarters of
the Japanese government. Executive Managing Director Mizuno
also served as a member of the “Meeting on a Long-Term Strategy
under the Paris Agreement as Growth Strategy” established under
the Prime Minister of Japan. GPIF will continue to seek
opportunities to spread understanding of ESG investment amongst
the general public.
GPIF ESG REPORT 2018

26

Chapter 1 GPIF’s ESG Initiatives

Support for TCFD and
Climate-Related Information Disclosure
GPIF declared our support for the TCFD, an initiative established to promote thedisclosure of information related to climate change, in December 2018. GPIF hasdisclosed our climate-related information in this report in accordance with therecommendations published by the TCFD.

Climate-related information disclosure consistent with TCFD recommendations
Climate change initiatives have been spreading

Although the potential impact may vary in size,

throughout financial markets, and with growing

global warming risks and other climate changeinterest in the impact of climate change on financial

issues exist across all companies and asset classes

systems, the G20 Summit in 2015 called on thesimultaneously, and such risks cannot be

Financial Stability Board (FSB) to investigate howcompletely eliminated simply through diversification.

the financial sector should account for the risks

These risks are also highly likely to manifest at least

presented by climate change. In response, the FSB

over the long-term, and we therefore believe that

established the Task Force on Climate-related

they should be tackled proactively by asset owners.

Financial Disclosures (TCFD) in December of that

At GPIF, we’ve taken actions such as linking ayear, and in June 2017, the TCFD released their

portion of our passive equity portfolio torecommendations on how companies can better

environmental stock indices and investing in green

disclose information related to climate change risks

bonds, in addition to announcing our support forand opportunities.

the TCFD and Climate Action 100+.

Currently, the recommendations of the TCFD are

Other than climate change-focused investments

endorsed by 792 organizations* around the world,

and activities, the issue is regarded as one of thefrom pension funds, asset owners, asset managers,

most important themes for ESG activities in general.

banks and other financial institutions to companies

Accordingly, the “disclosures recommended by theand national governments. We declared our support

TCFD” (on the following page) include not only

for the TCFD in December 2018.

initiatives that focus on climate change, but the

The recommendations published by the TCFD

content of ESG activities in general.

outline a series of information disclosure practices

While these kinds of efforts have only justfor companies and other organizations in the fields

begun, GPIF will work to improve the sustainabilityof (1) governance, (2) strategy, (3) riskof the entire market by promoting climate-related

management, and (4) metrics and targets, ininformation disclosure and ESG in general.

relation to climate change.
* As of June 201927

GPIF ESG REPORT 2018

Chapter 1 GPIF’s Initiatives on ESG

Collaboration

Disclosures recommended by the TCFD and GPIF’s response
Disclosures recommended by the TCFD

GPIF’s disclosure information and page number● GPIF proactively integrates ESG in investments according to ourinvestment and other principles (page 58).

Governance

Disclose theorganization’s
governance aroundclimate-related risks
and opportunities.

● The Board of Governors, which oversees the Executive Office, receives

reports on ESG from the Executive Office as necessary (page 13).
● The Executive Office, which consists of officers and employees under

the President, convenes Investment Committee meetings to makedecisions on climate change and other ESG-related initiatives. The
Office also develops an organizational framework for implementing
these initiatives (page 14).

● As a universal owner, GPIF stresses sustainable enhancement of thecorporate value of each investee company, which is realized throughminimizing the impact of environmental and social issues and fostering
the long-term sustainability of society as a whole (page 3).
● GPIF proactively integrates ESG over all asset classes. In equity

investment, we incorporate external asset managers’ ESG activities into
their evaluations (page 17), and in fixed income investment, we provide
external asset managers with investment opportunities in sustainability
bonds (social bonds and green bonds) (page 18). We also promote ESG
integration in our alternative investments (pages 23–24).

Chapter 2 Measuring the Impacts of ESG Activities

Strategy

Disclose the actualand potential impactsof climate-related risks
and opportunities on
the organization’s
businesses, strategy,
and financial planningwhere suchinformation is material.

● In relation to environment (E) in particular, we use indices for equity

investment that focus on each company’s carbon efficiency (pages
15–16) and invest in green bonds through fixed-income investment(page 18).
● We conduct scenario analysis on the impact that climate change-related

and other policy changes have on GPIF’s portfolio, and consider how todeal with this impact (pages 49–52).

Risk
management

Metrics andtargets

Disclose how theorganization identifies,
assesses, andmanages climaterelated risks.

Disclose the metrics
and targets used toassess and manage
relevant climate-relatedrisks and opportunities
where such information
is material.

● GPIF is preparing an organizational framework for monitoring the GHG

emissions (carbon footprint and carbon intensity) of its entire portfolio as
well as for each fund for which management has been outsourced.
● GPIF confirms each external asset manager’s support for the TCFD andtheir policies for the future. We also promote ESG integration throughour evaluations of external asset managers (page 17).

● GPIF is preparing an organizational framework for monitoring the GHG

emissions (carbon footprint and carbon intensity) of its entire portfolio as
well as for each fund for which management has been outsourced. We
also perform a time-series analysis of GHG emissions (pages 45–48).

GPIF ESG REPORT 201828

Commissioned StudyESG Information Disclosure Study
Enhancing the quantity and quality of ESG-related disclosure information is vital toadvancing a wide range of ESG initiatives. At GPIF, we researched effective and efficient
ESG information disclosure approaches that are conducive to enhancing the sustainability ofthe entire investment chain with a particular focus on corporate disclosure methods.

Study background and issue awarenessWe believe that enhancing the quantity and quality of ESG-

catalyst behind this trend is that front line staff responsible forrelated disclosure information is vital in advancing a wide

ESG disclosure may be bewildered by an array of different ESG

range of ESG initiatives. In fiscal 2018, GPIF commissioned

disclosure standards, frameworks, and guidelines sprouting up

Nissay Asset Management Co., Ltd. to create the “Study of

one after another both within and outside Japan. The study

ESG Information Disclosure.”

also considers how to enhance the sustainability of the

One motivation for this study is that while increased

investment chain as a whole through effective and efficientawareness about the financial materiality of ESG information

ESG information disclosure by examining the way asset

has promoted better disclosure, there is currently a yawning

managers and asset owners (pension funds, etc.) should

gap between disclosure leaders and laggards. A possible

disclose ESG information as well.

Key findings and recommendations for companies (investor relations)This study investigates the background of the major Japanese

ESG information to meet a wide range of investor needs, but

and global ESG information disclosure frameworks andrealistically, company resources are limited. For efficient,

standards, and maps them across two axes: 1) whether theeffective IR, companies would be well advised to first identify

framework “emphasizes information on company-driven

and focus on the “common parts” of each information disclosure

economic, environmental and/or social impact, or emphasizes

framework/standard, then strategically broaden the scope of

information on financial impact for the company,” and 2)

information they disclose based on an understanding of thewhether the framework “emphasizes information specific tovarious (ESG) investment strategies. After sorting out theeach company, or emphasizes normalization, quantification andindividual disclosure items and indicators of the major ESG

comparability.” This approach revealed that the globally

information disclosure frameworks/standards, it became clear

recognized “International Integrated Reporting Frameworkthat the SASB Standards have considerable overlap with all the(established by IIRC),” “GRI Standards,” and “SASB Standards”

other standards. Over the course of the study, however, we also

regard completely different information as material. The chart on

found that there were subtle differences in the description of

the right illustrates these differences by detailing the key

different disclosure items and indicators for each ESG

information required for each investment strategy and how each

information disclosure framework/standard, which made it

framework relates to each.

difficult to strictly identify features as “common” or “notIdeally, corporate IR departments should disclose enough

29

GPIF ESG REPORT 2018

common” in many cases. This is one cause of confusion forcommon parts and differences in ESG information disclosure

problem, several of the major ESG information disclosure

frameworks/standards and improving consistency in theorganizations have collaborated to launch the Better Alignment

overlapping areas.

Chapter 1 GPIF’s Initiatives on ESG

companies when disclosing ESG information. To resolve thisProject in November 2018, with the purpose of clarifying

Recommendations for asset owners
Additionally, the study includes a survey of major global

report further recommends that, similar to other major global

pension funds about the significance and purpose of ESG

asset owners, GPIF should consider disclosing the ESG

information disclosure for asset owners and disclosure about

issues that it considers material in investment management,

ESG issues that they put particular emphasis on (materiality).

which would provide a useful point of reference for

The interviews conducted revealed that in addition tocompanies unsure about what kind of ESG information they“accountability” and “transparency,” asset owners, who areshould disclose amidst the sea of ESG information disclosure

universal owners, also emphasize “influence,” where theyframeworks/standards.

strive to create an impact on the investment behavior of

The full text of the Study of ESG Information Disclosure isasset managers and the disclosure practices of investee

available on our website.

companies. As GPIF is prohibited to directly engage withdisclosure be actively utilized as a tool for engagement. The

Chapter 2 Measuring the Impacts of ESG Activities

https://www.gpif.go.jp/
en/investment/esg.html

companies, this report recommends that ESG information

ESG investment strategies and information needs
Classification

Nature of information primarily
required (Note)

ESG Investment Strategies

Major example of relevant
framework/standard

Judgmental

Fundamental analysis approach

ESG related engagement in traditional active investment
International
Integrated Reporting Framework

Adjustment of revenue forecasts based on ESG analysis
Adjustment of operating margin and/or
cost forecasts based on ESG analysis
Adjustment of book value and/or
depreciation forecasts on ESG analysis
Adjustment of capital expenditure forecasts based on
ESG analysis

ESG related
engagement (e.g.
conducted as a partof fundamentals
analysis)

Specifically tailored ESG
Information useful for
Fundamental analysis /corporate valuation

Adjustment of terminal value of valuation model based on
ESG Analysis
Adjustment of beta/discount rates ofvaluation model based on ESG Analysis
Adjustment of portfolio weight based on ESG analysis

Systematic

Smart beta/quantitative strategies utilizing ESG factors
ESG indices

ESG related
engagement (e.g.
targets and/or
themes are
systematicallyselected)

Normalized, easy to quantify
and compare ESG
information relevant forcompanies’ financial
performance

SASB Standards

Passive
ESG related engagement in traditional passive investment
Impact Investment(*Consideration of impact besides/instead of risk/return)

Others

ESG related engagement
Socially Responsible Investment/Ethical Investment

Information about
economic, environmental,
and/or social impacts(positive or negative) driven
by company

GRI Standards(*Utilization of ethical/faith-based lenses)

Note: The figure indicates only ESG information that is considered particularly important for each strategy, and does not imply that ESG information not mentioned is not useful.
Source: Prepared by Nissay Asset Management Co., Ltd. on the basis of CFA Institute & PRI (2018) “Guidance and case studies for ESG integration: equities and fixed income” and other various data.

GPIF ESG REPORT 201830

Chapter 2 Measuring the Impacts of ESG Activities

ESG Index Performance
While the ESG indices selected by GPIF mostly outperformed market averages for the
past two years, we believe that a true assessment of ESG index performance can only
be made over the long term.

Attribution analysis of ESG index performance
Four out of five ESG indices selected by GPIF

price of the TOPIX. Between April 2017 andoutperformed their parent indices and market

March 2018, the relative price of the TOPIX 100 to

averages (TOPIX for Japanese equities and MSCI

the TOPIX fell below one, meaning small cap

ACWI (excluding Japan) for foreign equities)

stocks outperformed the overall market. Thisduring the two years from April 2017 to Marchrebounded to around one, however, between April

2019

A , but these are only short-term results.

For ESG investments, the longer the timeframe,cap stocks outperformed the overall market overthe higher risk-adjusted returns are expected tothis time.

materialize, so we believe that these types ofThis market environment resulted in both (1)investments can only be accurately assessed

the MSCI Japan ESG Select Leaders Index andover the long-term.

(2) the MSCI Japan Empowering Women Index

Among the ESG indices selected by GPIF,

underperforming the market average (TOPIX) overthose that we have been investing in since 2017

one year beginning April 2017, but outperforming– (1) MSCI Japan ESG Select Leaders Index, (2)the same benchmark over two years beginning on

MSCI Japan Empowering Women Index, and (3)the same date.

FTSE Blossom Japan Index – have a large cap bias

The performance of ESG indices can be signifi-

and are mainly composed of medium and large cap

cantly affected by factors unrelated to ESG, suchstocks due to research coverage issues in ESG

as the small cap effect. The number of stocks

evaluators. On the other hand, the TOPIX includes

included in (1) the MSCI Japan ESG Select Leaders

many small cap stocks and thus benefits from theIndex increased from 500 to 700 as coverage ofso-called small cap effect (stocks with small market

ESG evaluation expanded for the parent index

caps tend to have relatively higher returns than(constituent universe) in December 2018. As thelarge cap stocks).

scope of ESG scoring expands to small cap

B31

2018 and March 2019, which meant that large

on the right compares the performance ofstocks, ESG index performance will be able tothe above three ESG indices and the large cap

benefit more from the small cap effect and smaller

index (TOPIX 100) relative to the market averagecompanies will have an incentive to improve their(TOPIX) by dividing the price of each index by the

ESG scores.

GPIF ESG REPORT 2018

Chapter 1 GPIF’s Initiatives on ESG

A Benchmark returns of five ESG indices selected by GPIF
Domestic equities
Benchmark return

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

ESG Index(a)Parent index
(b)

TOPIX
c)

(1) MSCI Japan ESG Select Leaders Index

5.17%

5.14%

4.90%

0.04%

0.28%

(2) MSCI Japan Empowering Women Index

5.55%

5.15%

4.90%

0.40%

0.65%

(3) FTSE Blossom Japan Index

3.90%

5.05%

4.90%

-1.15%-0.99%(4) S&P/JPX Carbon Efficient Index

5.10%

4.90%

4.90%

0.21%

0.21%

Foreign equities
Benchmark return

S&P Global Ex-Japan LargeMid Carbon
Efficient Index

ESG Index(a)Parent index(b)

MSCI ACWI ex J
(c)

9.16%

9.11%

8.95%

Excess return
Excess return over
Excess return overparent index
MSCI ACWI ex J
(a-c)
(a-b)
0.05%

0.21%

(Note 1) Benchmark returns are from April 2017 to March 2019 (inclusive of dividends; annualized basis) GPIF actually began investment tracking ESG indices at a different time.
(Note 2) The parent index (constituent universe) for (1) is comprised of the top 700 companies by market capitalization included in the MSCI Japan IMI Index (increased from the top 500 companies in December 2018).
The parent index (constituent universe) for (2) is comprised of the top 500 companies by market capitalization included in the MSCI Japan IMI Index.
The parent index (constituent universe) for (3) is the FTSE JAPAN INDEX.
The parent index (constituent universe) for (4) is the TOPIX.
The parent index (constituent universe) for (5) is the S&P Ex-Japan LargeMid Index.

Chapter 2 Measuring the Impacts of ESG Activities(Source) Prepared by GPIF based on data from each index provider. FTSE Russell data is as of 2019 ©2019 MSCI ESG Research LLC. Reproduced with permission.
S&P Trucost Limited © Trucost 2019

B ESG indices (1) to (3) and small cap (size) effectMultiple
1.03
MSCI Japan ESG Select Leaders Index/TOPIX
MSCI Japan Empowering Women Index/TOPIXFTSE Blossom Japan Index/TOPIX
1.02

1.01

1.00

0.99

0.98

0.97

TOPIX 100 / TOPIX

March 2017

September 2017

March 2018

September 2018

March 2019

(Note) Relative prices are normalized to one as of March 31, 2017.
(Source) Prepared by GPIF based on data provided by each index provider. FTSE Russell data is as of 2019 ©2019 MSCI ESG Research LLC. Reproduced with permission.
S&P Trucost Limited © Trucost 2019

GPIF ESG REPORT 201832

Chapter 2 Measuring the Impacts of ESG Activities

Portfolio ESG Scoring
GPIF invests in a broad range of equity and fixed-income assets in Japan andoverseas through external asset management companies. The results of an ESG
evaluation we conducted on our equity portfolio indicated that both domestic andforeign equities continued to improve.

Analysis of Portfolio ESG Scoring
Through the asset managers to which we consign

the whole market by calculating the ESG scores

investment management, GPIF invests in a broad(market cap weighted average) of market-

range of equity and fixed-income assets both

representative indices, using TOPIX in the case ofwithin Japan and abroad, with about 2,380

domestic equities and the MSCI ACWI (excluding

domestic equities and 2,731 foreign equities

Japan) in the case of foreign equities. Results

currently in our portfolio. Similar to last year, in thisshowed that, similar to last year, there was little

year’s report we once again measured the ESG

difference between the ESG scores of the index

score of our equity portfolio as below.

portfolios and those of the GPIF holdings for both

Using ESG ratings by FTSE and MSCI, we
calculated the weighted average (excluding

MSCI A to D .

missing values) ESG scores for each according to

These results were most likely mainly due tothe market capitalization weight of each issue inthe fact that GPIF’s assets are largely allocated to

GPIF’s portfolio. We observed the change over thepassive investment funds, whose performance

two years from 2017 to 2018.

tracks the performance of their benchmarks.

Results showed that our equity portfolio’s ESG

GPIF, as a universal owner, aims to boost thescore (market cap weighted averages) for bothrisk-adjusted return of its portfolio while

FTSE and MSCI continued to improve for bothenhancing the sustainability of financial markets

domestic and foreign equities

as a whole by integrating ESG factors into theA

to D .

Next, we compared these scores to those for33

domestic and foreign equities for both FTSE andGPIF ESG REPORT 2018

investment process.

FTSE ESG ratings, domestic equities (ESG scores)

2.44

March 2017

2.62

2.63

2.61

March 2018

March 2019

March 2019

GPIF portfolio

B

Chapter 1 GPIF’s Initiatives on ESG

A

FTSE ESG ratings, foreign equities (ESG scores)

3.03

3.17

3.34

3.35

March 2017

March 2018

March 2019

March 2019

(Reference) TOPIX

GPIF portfolio(Reference) MSCI ACWI
(excluding Japan)(Note) GPIF holdings: Among the stocks held by GPIF, we analyzed those subject to ESG evaluations by FTSE.
(Source) Prepared by GPIF based on data provided by FTSE. FTSE Russell data is as of 2019MSCI ESG ratings, domestic equities (ESG scores)

5.28

March 2017

5.43

5.48

March 2018

March 2019

GPIF portfolio

D

MSCI ESG ratings, foreign equities (ESG scores)

5.46

5.32

March 2019

March 2017

(Reference) TOPIX

5.54

5.73

March 2018

March 2019

GPIF portfolio

5.70

Chapter 2 Measuring the Impacts of ESG Activities

C

March 2019

(Reference) MSCI ACWI
(excluding Japan)(Note) GPIF holdings: Among the stocks held by GPIF, we analyzed those subject to ESG evaluations by MSCI.
(Source) Prepared by GPIF based on data provided by MSCI. ©2019 MSCI ESG Research LLC. Reproduced with permission.

ColumnWhat is a market cap-weighted ESG score?
GPIF calculates the “market cap-weighted average” of theGenerally speaking, large companies tend to perform

ESG scores of its portfolio stocks in this report. While abetter in ESG information disclosure and thus receive higher

simple average treats all elements equally, a weighted

ESG scores. As such, a market cap-weighted average ESG

average assigns a weight to each element according to its

score is likely to be higher than a simple average.

importance. Using the ESG scores of GPIF’s portfolio

For example, FTSE’s market cap-weighted average ESG

companies as an example, the simple average is calculated

score for Japan’s TOPIX stock benchmark is 2.61, while

by dividing the sum of the ESG score of all companies

page 36 of this report shows that the simple average ESG

surveyed by the number of such companies, and the market

score for domestic equities is 2.18. The difference in values

cap-weighted average weights each surveyed company’s

is mainly attributable to the difference between weighted

ESG score by the relative market capitalization of that

average and simple average calculation methods.

company within the portfolio.

GPIF ESG REPORT 201834

Chapter 2 Measuring the Impacts of ESG Activities

ESG Score Ranking by Country
GPIF keeps track of the average ESG score and rate of improvement for major index
component companies from each country in order to gauge the level and changes in
ESG scoring for Japanese companies. Although the ESG scores of Japanese firms are
improving, companies in other countries are improving at a faster rate.

ESG score ranking by country
GPIF calculated the simple average ESG score ofcountry/region.
Analysis results are shown in A . Companies insurveyed companies for each of the nine leading
countries/regions included in the major FTSE and MSCI

western countries such as France, the U.K., andindices as of March 2017, March 2018, and March

Canada are ranked highly by both FTSE and MSCI.

2019. We then created a ranking of ESG scores byRate of improvement in ESG scores by country
Next, GPIF examined the rate of improvement in ESG

terms of the absolute level of ESG scores, Hong Kongscores by country for the companies covered in theand Indian companies have been improving at aanalysis above. The results, shown in B and C ,particularly fast pace. This is probably due to newreveal that the pace of improvement at Japanese

government and/or stock exchange mandates forcompanies has lagged that of other countries for both

listed companies to disclose ESG information and theFTSE and MSCI ESG scores.

requisite corporate response.

While Asian companies generally rank low in

ESG score distribution for Japanese companies
Although we calculated the country-level average ESG

35

Japanese companies rank at the top among major

score for all surveyed companies, ESG scores actuallycountries in terms of the percentage of companies

vary widely among companies within the same

contacting MSCI over the course of the index

country. Below, we focused on the distribution of ESG

provider’s ESG scoring process (page 22), whichscores for Japanese companies included in the above

illustrates a heightened interest among theseanalysis.

companies with respect to ESG scores. They are

The results of this analysis are shown in D and

expected to further improve their handling of ESG

E . We observe that in both charts, the distribution ofissues and information disclosure going forward,

ESG scores are shifting to the right (i.e. they are improving).

which will help elevate their ESG scores even higher.

GPIF ESG REPORT 2018

FTSE
March 2017

B

Chapter 1 GPIF’s Initiatives on ESG

ESG score ranking by country

March 2018MSCIMarch 2019 (latest value)

March 2017

March 2018

3.64

7.19

3.63

6.93

3.15

5.67

2.87

5.19

2.83

4.95

2.49

3.99

2.18

3.96

1.85

3.42

1.54

2.69

Rate of improvement in FTSE ESG scores bycountry (two years) March 2017 to March 2019

C

Rate of improvement in MSCI ESG scores bycountry (two years) March 2017 to March 20190.51 0.46
0.45 0.44

0.59 0.57
0.41 0.39 0.39
0.36
0.26

March 2019 (latest value)

0.37
0.18 0.14

0.23

0.05

Chapter 2 Measuring the Impacts of ESG Activities

A

0.14
-0.40

India Hong Canada U.S. China
Kong

U.K. France Japan South
Korea

China Canada Hong
Kong

U.S.

U.K.

India France Japan South
Korea(Note) The analysis focused on companies whose ESG score data was available both at the end of March 2017 and the end of March 2019, and had changed during the two years from the end of March2017 to the end of March 2019.

D

FTSE ESG score distribution for JapanesecompaniesE(number of companies)
120
100(number of companies)
March 2017
March 2019

70
60

March 2017
March 2019

50

80

40

60

30

40

20

20
0

MSCI ESG score distribution for Japanesecompanies

100-0.4 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
Low (ESG score) High00-0.9 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
Low (ESG score) High

(Note 1) Among the companies included in FTSE’s “FTSE Developed Index” and “FTSE Emerging Index” and MSCI’s “MSCI All Country World Index,” the analysis focused on those that had an ESG score.
(Note 2) Ranking by country and rate of improvement by country includes Hong Kong.
(Source) Prepared by GPIF based on data from FTSE and MSCI. FTSE Russell data is as of 2019 ©2019 MSCI ESG Research LLC. Reproduced with permission.

GPIF ESG REPORT 2018

36

Chapter 2 Measuring the Impacts of ESG Activities

ESG Score Correlation
Unlike financial analysis, ESG scoring has a short history and no definitive standard
has been established. This means that scores vary widely from evaluator to evaluator.
This year, the correlation of ESG scores was higher for foreign companies than theprevious year but remained flat for Japanese companies.

Analysis of ESG score correlation
Unlike financial analysis, ESG scoring has a short

The results show that the correlation became

history and there is currently no definitive standard

stronger from March 2017 A to March 2018 (B),for scoring methodology. Within GPIF’s 2017

but largely remained flat from March 2018 B topress release announcing the selection of ESG

March 2019 C .

indices for Japanese equities, we pointed out that

Similar to Japanese companies, GPIF also

ESG scores vary widely among ESG evaluators.

selected foreign companies that had been scored

We estimate that the large discrepancy may beby both FTSE and MSCI in March 2017, March

attributable to the fact that: (i) ESG scoring

2018, and March 2019, and analyzed themethods are still evolving and (ii) there is still room

correlation between the two ESG evaluators’

for improvement in corporate ESG disclosure.

scores for identical companies.

Accordingly, we began to examine changes in

The results show that the correlation for

ESG score correlation among evaluators in lastforeign companies continued to get stronger fromyear’s ESG Report.

March 2017 to March 2018, and from March 2018

In this year’s report, GPIF selected Japanese

to March 2019 D . Scores will likely converge to acompanies that had been scored by both FTSE

certain extent as ESG scoring accuracy improves

and MSCI in March 2017, March 2018, and Marchthrough better ESG disclosure and more

2019, and analyzed the correlation between thedeveloped scoring methodologies, and we believe

two ESG evaluators’ scores for identical companies

this will eventually lead to corporate value creationA

to C .

as companies begin to appreciate ESG scores

The next page provides a series of scatterbased on better methodologies and start

charts showing the two evaluators’ ESG scores for
identical companies in March 2017 A , March 201837

behaving accordingly.
Although ESG score convergence for Japanese

B , and March 2019 C . FTSE ESG scores arecompanies appears to have stalled, dialogues

plotted on the vertical axis and MSCI ESG scores

between GPIF and ESG evaluators and between

are plotted on the horizontal axis. We then verified

ESG evaluators and companies about ESG scoring

the correlation between the two sets of ESG scores

are increasing, and we hope that this leads to moreat each point in time.

convergence down the line.

GPIF ESG REPORT 2018

Chapter 1 GPIF’s Initiatives on ESG

FTSE and MSCI ESG score correlation charts
A

Domestic equities (end of March 2017)

B

Domestic equities (end of March 2018)

FTSE scores
5

FTSE scores
5

4

4

3

3

2

2

1

1

y = 0.168 x + 1.122
R² = 0.123

0

0

C

2

4

y = 0.196 x + 1.090
R² = 0.172

6

8

10
MSCI scores

0

0

2

4

6

8

10
MSCI scores

Domestic equities (end of March 2019)

FTSE scores
5(Source) Prepared by GPIF based on data from FTSE and MSCI. FTSE Russell data is as of 2019©2019 MSCI ESG Research LLC. Reproduced with permission.

y = 0.189 x + 1.089
R² = 0.169

Chapter 2 Measuring the Impacts of ESG Activities

4

3

2

1

0

0

D

2

4

6

8

10
MSCI scores

Regression analysis of FTSE and MSCI ESG scores: Coefficient of determination (R²) and slope (β)
R2March 2017

March 2018

March 2019βMarch 2017

March 2018

March 2019

Domestic
equities

0.123

0.172

0.169

Domestic
equities

0.168

0.196

0.189

Foreignequities

0.249

0.256

0.299

Foreignequities

0.208

0.213

0.231

(Source) Prepared by GPIF based on data from FTSE and MSCI. FTSE Russell data is as of 2019 ©2019 MSCI ESG Research LLC. Reproduced with permission.

GPIF ESG REPORT 2018

38

Chapter 2 Measuring the Impacts of ESG Activities

Society (S) and Governance (G) Aspectsof Japanese Companies
What progress has been made by Japanese companies in terms of ESG? Among thethree areas, here we provide an overview of Japanese companies’ initiatives withrespect to social (S) and governance (G) issues.

Social (S) — Women in the workplace at Japanese companies
GPIF has adopted the MSCI Japan Empowering Women Indexthese five categories.
The first thing we see is that disclosure has steadily(WIN) as a benchmark for social themes within the frameworkof ESG. Employment and advancement of women is a key

improved. Looking at the distribution of the number of items

factor in human resource diversity and a central element of

disclosed A , while the number of companies disclosing“S”. As with the last fiscal year, below we take a look at

information in only one category fell, more companies disclosed

progress made in the employment and advancement of

information in all five categories. The rate of disclosure for each

women at Japanese companies using data utilized in the WIN

scoring item B grew across the board except for (v), which has

index scoring methodology.

already reached 100%.

The WIN index covers, among other things, five items ((i) to

Turning to the actual values for each item scored C , (iii)(v) in B and C ) for which disclosure by companies is requiredand (v) show little change, while the others slightly increased.

under the Act on Promotion of Women’s Participation and

The indicators remain low for 2019 as well, however, with “(ii)Advancement in the Workplace. In this report, we reviewed how

proportion of women in the workforce” standing at 18.8% andcompanies have progressed in disclosing information under“(iv) the proportion of women in senior management” at 4.6%.

A

B

Distribution of number of items disclosed (% of companies)
48

5 items

16
15

4 items

C

68
75
62

21

70
72
78

(iv) % women insenior management

16

2018
2019

61
64

(i) % female new hires(iii) Difference in years
employed by the company:
men vs. women*

66

Only 1 item

2018
2019

(ii) % womenin the workforce

99

3 items
2 items

55

Rate of disclosure for each score item (% of companies)

100
100

(v) % women on board

Actual values for each score item (median, %)25.0 27.9 28.0

■2017

17.0 18.6 18.8
3.5

4.5

4.6

■ 2018■ 201910.0 10.0 10.0

-16.6 -16.5 -16.5(i) % women in new hires(ii) % women in the workforce(iii) Difference in years employedby the company: men vs. women*(iv) % women in senior management(v) % women on board

Note: Research covers the top 500 listed stocks included in the MSCI Japan IMI by market capitalization. (iii) Difference in years employed by the company: men vs. women* = (average years employed for women – average years employed for men) / average years employed for men.
(Source) Prepared by GPIF based on materials from MSCI. ©2019 MSCI ESG Research LLC. Reproduced with permission.

39

GPIF ESG REPORT 2018

corporate value over the mid- to long-term.
The table below lists those corporate

issues they consider material, and is aware that
active domestic equity managers view governancegovernance-related areas that are examined withinissues such as the composition and evaluation of thethe ESG indices selected by GPIF. While each ESG

board of directors as a pressing concern (page 20).

evaluator focuses on different aspects of corporate

Likewise, in a survey of listed companies conducted

governance, there are several commonalities amongby GPIF, corporate governance was the mostboth, including board of director composition andcommonly cited theme for ESG activities that theyevaluation, dealing with corruption, and tax

are engaged in (page 19). The Task Force ontransparency. In evaluating a company’s board of

Climate-related Financial Disclosures (TCFD), which

directors, both companies examine whether the

we endorse, requires not only recognition andboard is independent from the executive office,analysis of risks and opportunities arising fromwhether individual directors have the qualifications

climate change and related corporate strategies, but

and experience necessary to manage a business,

also calls for disclosure of the governancewhether the directors diligently attend board

framework used for carrying out thesemeetings, and whether or not directors are involved

responsibilities. In other words, strong corporate

in a scandal.

governance is crucial for companies to be able to

An increase in the number of independent

deal with long-term issues such as climate change

outside directors at companies listed on the Firstand other environmental and social issues. We see

Section of the Tokyo Stock Exchange D , and athat investors and companies have developed a

reduction in cross-shareholdings at major companies

common understanding that corporate governanceEencourages sustainable growth and improvement in

is improving.

MSCI

are encouraging signs that corporate governance
Chapter 2 Measuring the Impacts of ESG Activities

GPIF asks external equity managers about which ESG

Chapter 1 GPIF’s Initiatives on ESG

Governance (G) – Progress made by Japanese companies in governance issues

FTSE

Corporate Governance

Governance● Board● Pay● Corporate Governance● Ownership● Accounting● Anti-corruption● Risk management● Tax transparency

Corporate Behavior● Business Ethics● Financial System Instability● Corruption & Instability● Tax Transparency● Anti-Competitive Practices(Source) ©2019 MSCI ESG Research LLC. Reproduced with permission. FTSE Russell data is as of 2019

D
100
80
60

Proportion of Tokyo Stock Exchange First Section-listedcompanies appointing independent outside directors (%)

E

Reduction in cross-shareholdings held by major companies(cumulative) (number of companies in which stocks are held)

13,000

Ratio of companies at which independent outside directors
account for at least one-third of directors
Ratio of companies at which atleast two independent outside directors
have been appointed

12,50012,00011,50040

11,00020
010,500
2011

2012

2013

2014

2015

2016

2017

2018(Year)(Source) Prepared by GPIF based on the TSE Listed Companies White Paper on Corporate
Governance 2019 published by the Tokyo Stock Exchange

10,000

2013

2014

2015

2016

2017

2018(Year)(Note) Values are as of March 31 each year. Includes 100 leading companies on the Tokyo Stock Exchange (TOPIX 100) excluding financial institutions and one company with special attributes (86companies total).
(Source) Prepared by GPIF based on the TSE Listed Companies White Paper on Corporate Governance2019 published by the Tokyo Stock Exchange

GPIF ESG REPORT 201840

Column

Scandals and ESG Scoring
Even as their ESG ratings improve, a growing number of Japanese companies are finding
themselves embroiled in some type of serious scandal. Some research suggests thatstronger ESG measures provide a check on serious scandals in the long term. We at GPIF
pay acute attention to the relationship between ESG score and scandals.

Scandal assessment and difficulties in interpretation thereof
In recent years, many people have come under the impression

are fanned by the mass media for days on end. At the same

Japan is subject to an endless number of corporate scandals.

time, if the general level of public concern is low, then even

To be certain, there have been a multitude of incidents:

systematic organization-level scandals may not be seen as

suspect accounting by management, defects in apartment

serious in the absence of media exposure. There is also a

construction, and falsification of quality data — and these aretendency to focus more on scandals that happen in your own

only the scandals given daily coverage by the mass media.

country due to differences in the amount of information

Given this state, it is hardly surprising that critics areavailable. Furthermore, looking at individual cases —questioning whether the ethical standards of Japanese

automobile recalls, for example — it is quite difficult tocompanies have fallen, and whether their efforts atdetermine whether a car maker plagued by recalls is

strengthening ESG and corporate governance are all form andproducing a lot of defective products or if the manufacturer isno substance.

honest and does not conceal issues that mandate a recall. If

However, a more measured assessment reveals the

scandals that were long concealed in the past are coming to

extreme difficulty in evaluating scandals objectively. There islight as a result of stepped-up corporate governance andindeed a risk that people will develop an unduly negativeinternal controls, this may be viewed favorably as it is positive

impression when scandals are heavily colored by gossip andevidence that systems are working.

International comparison of scandal assessment
Based on data from RepRisk AG, where analysts use artificial

serious scandals, the number of such cases has increased inintelligence to evaluate scandals using harmonized global

recent years among Japanese companies, and the difference

assessment criteria, we tabulated the number of scandals

with foreign companies has disappeared. Based on this data,

involving constituents of the MSCI ACWI ex Japan Index andthe intuitive impression that the number of scandals is

MSCI Japan Index A . Looking at the number of scandals perincreasing is wrong in terms of the total number, but is true incompany, we find that (1) Japanese companies have fewer

terms of serious cases.

scandals than foreign companies, and (2) if we look only at

41

GPIF ESG REPORT 2018

5 (Left axis)(Right axis) 0.05

Number of scandals at foreign companies

Number of extremely serious scandals at foreign companies

Number of scandals at Japanese companies

Number of extremely serious scandals at Japanese companies

4

0.04

3

0.03

2

0.02

1

0.01

0

Chapter 1 GPIF’s Initiatives on ESG

A Number of scandals per company in Japan and overseas (no. of cases)

2012

2013

2014

2015

2016

2017

0.00

2018

(Note) Calculated based on total occurrence of scandals that occurred in MSCI World constituent companies and evaluated by RepRisk over a one-year period, divided by the total number of constituent companies.
(Source) Prepared by GPIF based on RepRisk data

We believe a large number of investors embrace ESG

companies sustaining at least a 95% loss in market

integration and engagement based on the idea that companies

capitalization over three years from each given month) thanwith high ESG scores and sound corporate governance face athose with low ESG scores B . Looking at very recent

diminished existential threat due to fewer scandals and/or adevelopments, however, we do not see a pattern similar tomore appropriate response thereto. In this regard, althoughthat observed in the research given the increase in serious

both ESG scoring and scandal assessment are in their infancy

scandals among Japanese companies despite improving ESG

and data and analysis is still insufficient, according to researchscores. Taking account of these factors, GPIF will continue tousing MSCI data, companies that have a high ESG score havefocus on the way ESG scores correlate with corporate

been shown to have lower existential risk (= total number ofgovernance and scandal risk.

Chapter 2 Measuring the Impacts of ESG Activities

Relationship between ESG score and scandal risk

B Number of companies sustaining at least a 95% loss in market capitalization over three years from each given month(by ESG score) (company)
7

Top 20% of companies by ESG rating
Bottom 20% of companies by ESG rating

6
5
4
3
2
1
0
January 2007

January 2008

January 2009

January 2010

January 2011

January 2012

January 2013

January 2014

(Note) MSCI World constituent stocks(Source) Giese, G., L. Lee, D. Melas, Z. Nagy, and L. Nishikawa. (2019). “Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance”.
The Journal of Portfolio Management. forthcoming.

GPIF ESG REPORT 2018

42

Chapter 2 Measuring the Impacts of ESG Activities

Portfolio Climate-Related Risk
An accurate assessment of portfolio climate-related risk requires an understanding of
portfolio asset classes and sector weightings.

Features of GPIF’s portfolio
The GPIF conducted a portfolio climate-change analysis in

influenced by the investment amount and sector weighting ofline with TCFD recommendations using data provided byeach asset class, it is important to understand these

Trucost Plc. The analysis looked at four asset classes incharacteristics prior to interpreting the results.
The GPIF portfolio is comprised of roughly half bonds

GPIF’s portfolio: domestic and foreign bonds and domestic
and foreign equities. At this time, we have not included

and half equities by overall market value A . On the fixedalternative assets such as infrastructure and real estate,

income side, domestic bonds accounted for 26.30% of allwhich account for a relatively small part of our overall

holdings while foreign bonds accounted for 16.95%. For

portfolio (0.26% of total market capitalization), and short-equities, domestic issues comprise 23.55% of the total

term assets (7.67%). Below are the results of an analysis of

portfolio and overseas issues 25.53%. The majority of bondgreenhouse gas emission volume (carbon footprint) andholdings, both Japanese and foreign, consist of government

scenario analysis relating to all four asset classes using databonds, followed by corporate bonds B .

as of March 31, 2019. Because analysis results are heavily

A

B

Breakdown of portfolio asset types(total for GPIF’s pension reserves)

Breakdown by category in GPIF bond portfolio (%)
(％)

90.2
Foreign equities

25.53％

Domestic bonds
Foreign bonds

84.1

As of March 31, 2019

Domestic bonds

26.30％

Foreign bonds

16.95％ Domestic equities
23.55％

Short-term
assets7.67％(Note) As of March 31, 2019
(Source) GPIF

43

GPIF ESG REPORT 2018

7.2 8.8
Government bonds,
government-related bonds

Corporate bonds(Note) “Other” includes securitized products(Source) GPIF

2.6

7.1

Other

healthcare companies, who have low emission volumes, isused for government and corporate bonds. The below analysis

also high. Overall, the environmental impact of foreign bondonly considers corporate bonds; an analysis of government

issuers is lower than that for domestic bond issuers.
Likewise, in the equities portfolio, we see a difference inbonds can be found on page 48.

the sector breakdown by market capitalization between

total market value, the largest sector for both domestic anddomestic and foreign equities D . The domestic equity

foreign bonds is financials C . Among domestic bonds, theportfolio has a higher proportion of industrials and consumer

proportion of utilities is higher than that for foreign bonds.

discretionary companies, which have a high level ofSince utilities includes electric power companies, this sector

greenhouse gas emission volumes, while the foreign equities

has relatively higher greenhouse gas emissions whenportfolio has a high proportion of financials and informationcompared with other sectors. In addition, we can see that thetechnology companies, which are sectors that have relatively

proportion of industrials, which also have relatively highlow emissions.

greenhouse gas emissions, is also higher for domestic bonds.

It is necessary to bear in mind these factors whenAmong foreign bonds, the proportion of energy andexamining the results of the analysis in the following pages.

materials companies, which have relatively high greenhouse

Around 90% of stock investments and 70% of bondgas emission volumes, is greater than that for domestic bonds.

investments by GPIF are passive investments, which means

On the other hand, the proportion of bonds issued by

our investment is virtually identical to the sector ratios ofinformation technology, communication services andeach benchmark.

C

D

Breakdown of GPIF bond portfolio by sector (%)%
25

Domestic bonds
Foreign bonds
As of March 31, 2019

Breakdown of GPIF equity portfolio by sector (%)
Domestic equities
Foreign equities
As of March 31, 2019

20

30

Chapter 2 Measuring the Impacts of ESG Activities

When we categorize corporate bonds by sector based on%
40

Chapter 1 GPIF’s Initiatives on ESG

For the analysis of climate-related risk, different methods are

15
20
10
10

(Note) Among domestic and foreign bonds, only corporate issues are analyzed(Source) GPIF

E

EnergyUtilities

Real Estate

Materials

Communication Services

Healthcare

Consumer Staples

Information Technology

Financials

Consumer Discretionary

Industrials

0EnergyHealthcare

Consumer Staples

Information Technology

Materials

Communication Services

Real Estate

Industrials

Consumer Discretionary

Utilities

Financials

05(Source) GPIF

Greenhouse Gases emissions per million yen of sales (CO2 equivalent tons)

tCO2e/mJPY

Communication Consumer Consumer
Services Discretionary Staples

EnergyInformation
Financials Healthcare Industrials Technology
Materials

Real
EstateUtilities

Domestic
equities

0.40

0.89

2.12

4.55

0.07

0.48

1.80

0.98

7.96

0.67

17.35

Foreignequities

0.43

0.81

1.78

6.21

0.35

0.37

1.72

0.71

10.28

1.25

19.33

Domestic
bonds

0.39

0.84

1.69

5.13

0.07

0.43

2.10

0.85

10.89

0.86

21.16

Foreign
bonds

0.35

0.94

2.04

7.72

0.14

0.52

1.59

0.55

9.71

0.73

25.82

(Note) In each asset class, the top three sectors by volume of greenhouse gases emitted are shaded. Among domestic and foreign bonds, only corporate issues are analyzed. Data are as of March 31, 2019.
(Source) GPIF

GPIF ESG REPORT 2018

44

Chapter 2 Measuring the Impacts of ESG Activities

Portfolio Greenhouse Gas(“GHG”) Emission Analysis
This analysis measures the GHG emissions of the companies held within GPIF’s
portfolio. Results indicate that GHG emissions for each asset class depend
significantly on the size and sector bias present within each class.

Carbon footprint (GHG emissions)
The scope of GHG emissions calculated includes eachbut foreign equities decreased in FY 2018. Total GHG

company’s direct carbon dioxide and other GHG emissions

emissions for a given asset class largely depend on the(Scope 1) in addition to CO2 emissions generated bycarbon efficiency of individual companies within that classpurchased electricity and the 1st tier of the supply chain– for example, the decrease in emissions from the domestic(scope 2 and 3). Looking at total emissions broken down bycorporate bond portfolio observed in FY 2017 resulted fromasset class, domestic equities were found to have theboth a decrease in the amount invested as well as ahighest level of emissions, followed by foreign equities,

decrease in GHG emissions from the energy companies

domestic corporate bonds, and foreign corporate bonds A .

within that asset class. On the other hand, the divergence inThis does not necessarily mean that domestic companies

emission trends between the foreign equity and foreign

are less carbon efficient than foreign companies, but rather

corporate bond portfolios in FY 2018 was due to the factreflects the relative size and sector holding bias of eachthat exposure to companies in the equity portfolio that had aasset class within GPIF’s portfolio.

high contribution to total emissions and the emissions fromAcross asset classes we see that significant emissions
are generated not only directly but also within the supply

amount invested in highly emitting companies within the

chain, which illustrates how important it is for companies tobond portfolio and these emissions themselves both

pay attention to both aspects when formulating their GHG

decreased. These examples illustrate that investment

reduction strategies. Looking at emission trends by asset

exposure and individual company efforts significantly impact

class B , from a base of 100 in FY 2016, we observed thattrends in total portfolio GHG emissions, and that accurately

total emissions increased across all asset classes other thanassessing these trends requires a holistic approach.

domestic corporate bonds in FY 2017, while emissions for all

45

these companies themselves both increased, while the

GPIF ESG REPORT 2018

Chapter 1 GPIF’s Initiatives on ESG

Carbon intensity
Carbon intensity is calculated by dividing GHG emissions byeven for an investor such as GPIF who holds assets acrossvalue added per unit or some other metric. While carbon

nearly the entire market, WACI for the domestic corporate

intensity can be calculated a variety of ways, we calculatebond portfolio can be expected to be higher than that for theweighted average carbon intensity (“WACI”), in line with TCFD

foreign corporate bond portfolio.

company’s carbon emissions to revenue (C/R) by the weight ofabsolute carbon emissions and carbon intensities did notthat company in the portfolio, then taking the sum of thosenecessarily trend in the same direction; domestic equities had

products to get the weighted average of carbon intensity.

higher total GHG emissions A but also turned out to be more

Out of the GPIF’s four portfolios, WACI was found to becarbon efficient in terms of WACI when compared with foreign

largest for domestic corporate bonds. This number was almost

equities C . One main reason domestic equities had higher

twice as high as that for foreign corporate bonds C . As

total GHG emissions was due to the size of manufacturing

previously explained in the “Portfolio Climate-Related Risk”

companies’ weight within the portfolio.

section (page 43), we infer that sector biases are the main

Similar results were seen when examining portfolio

drivers of these differences. Compared to foreign corporate

exposure to coal-related activities D . The domestic corporate

bonds, the domestic corporate bond portfolio includes

bond portfolio was found to have substantial exposure toissuances by many high GHG-emitting electric companies andcoal-related businesses due to investments in companies

other utilities, and since the ratio of utilities is relatively highengaged in coal-based power generation.

A

B

7

Greenhouse gas emissions by scope（tCO2e）

Non-Electricity First-TierSupply Chain Emissions(Scope 3)
Purchased Electricity(Scope 2)
Direct Emissions (Other)
Direct Emissions (Scope 1)

6
5
4

140

Greenhouse gas emission trends(2016FY＝100)

Foreign Bonds（Corporate）
Domestic Bonds（Corporate）
MSCI ACWI
ex-JP
Foreign Stocks
TOPIX
Domestic Stocks

130
120
110
100

3

Chapter 2 Measuring the Impacts of ESG Activities

When reviewing the equity portfolio, we found thatrecommendations. WACI is calculated by multiplying each

90

2

80

1

70

0

GPIF
TOPIX
GPIF
MSCI ACWI ex-JP Domestic Bonds Foreign Bonds
Portfolio （Reference） Portfolio （Reference） （Corporate） （Corporate）
Domestic Stocks
Foreign Stocks
Bonds

C

Weighted average carbon intensity (WACI) by asset class60

D（tCO2e）

2016FY

2017FY

2018FY

Exposure to coal-related companies（Share of Portfolio Exposure）

5

20

4

15

Coal Energy Only
Coal Extraction and Energy
Coal Extraction Only

3
10
2
5

1
0

Domestic
StocksForeign
StocksDomestic Bonds（Corporate）

Foreign Bonds（Corporate）

0

Domestic Stocks

Foreign Stocks

Domestic Bonds（Corporate）

Foreign Bonds（Corporate）

Note: In general, Trucost uses data disclosed by individual companies to determine GHG emissions. When such data is incorrect or incomplete, however, Trucost uses a proprietary model to estimate emissions.
(Source) S&P Trucost Limited © Trucost 2019

GPIF ESG REPORT 2018

46

Chapter 2 Measuring the Impacts of ESG Activities

Trucost Report
Trucost’s “GPIF Climate Related Portfolio
Risk Assessment (Summary)” report
Trucost, a UK-based consultancy, wascommissioned by GPIF to conduct the analysis for
TCFD-aligned climate-related disclosures. Portionsof this expansive, comprehensive analysis nothighlighted in this ESG report can be found in the“GPIF Climate Related Portfolio Risk Assessment(Summary)” report available separately.
About Trucost
Established in 2000, Trucost is a pioneer in the fieldof carbon data and reporting, and has compiled acomprehensive and growing dataset that includes
over 15,000 companies. Acquired by S&P Global in
October of 2016, Trucost is continuing to provide
not only environmental data, but also essential ESG
related data on a global scale.

Reference
Carbon intensity as an indicator
Carbon intensity, which is calculated by dividing

the investment weight for each company withincarbon emissions by some unit of businessthe entire portfolio’s market capitalization. TCFD

activity, is a specific type of carbon efficiency

guidelines for asset owners cite WACI as a

indicator that can be used to make comparisonspreferred disclosure metric. In this report, WACI

across sectors or individual companies. The unit

was calculated using C/R and the value invested

used in the denominator can be revenue, units

for each company in each GPIF portfolio.

produced, value invested, or some other metric.

In addition, the Carbon Efficient Index Series

The analysis conducted by Trucost examinedwhich are employed as benchmarks by GPIF alsocarbon emissions to total revenue (C/R) andconsider carbon efficiency (carbon intensity) –carbon emissions per value invested (C/V).

calculated by dividing GHG emissions by revenue

Investors should also analyze their portfolio’s
Weighted Average Carbon Intensity (“WACI”),
which indicates carbon intensity proportional to47

GPIF ESG REPORT 2018

– in determining the weight of each individual
constituent within the index.

Chapter 1 GPIF’s Initiatives on ESG

The bond portfolio climate risk analysis in this report untilthat country, then investing in the sovereign debt of countries

this point has been limited to only corporate bonds and hasthat have a higher level of debt will seemingly be more

not included sovereign bonds, because while conducting anefficient (i.e. lower climate change risk). As such, rather thananalysis across different types of assets using the same

simply taking the sum of the carbon footprints of each

evaluation criteria would be ideal, the inherent differences

country held in the sovereign bond portfolio, this analysis

between sovereign bonds and corporate bonds necessitate aadopts the same weighted average carbon intensity (WACI)

different approach. For this reason, we combine Japanese

calculation method used in evaluating corporate bonds.

Government Bonds and foreign sovereign bonds into aSpecifically, we multiply GHG emissions per dollar of GDP for

separate, independent category to measure and analyze theeach country within the GPIF’s sovereign bond portfolio by

carbon footprint of these particular assets.

that country’s weight in the portfolio, then add those values

There are broadly two ways to evaluate an investor’s

to get the weighted average. This value is then compared toscope of responsibility with regards to their sovereign bondthe benchmark (a combination of the amount invested in

portfolio: one is to consider only GHG emissions produced by

Japanese Government Bonds and the FTSE World

the government sector of the nation issuing the bond, while

Government Bond ex. Japan Index).

the other takes into account the entire sphere of influence ofSince GPIF invests in sovereign bonds in a primarily

the nation as a whole, including GHG emissions generated

passive manner, the results of the analysis showed that thefrom the activities of that country’s corporations andportfolio had a very similar WACI to the benchmark E . Next,

individuals. The analysis conducted for this report adopts theby examining the carbon intensity and the respective

latter viewpoint.

exposure for each major sovereign holding in the GPIF’s

There are several other issues in aggregating the data.

Chapter 2 Measuring the Impacts of ESG Activities

Sovereign bond climate change risk analysis

portfolio, Japanese Government Bonds and French sovereign

For example, if the weighted average carbon footprint isbonds appear to have the most positive impact with respectcalculated using the value of a given country’s debt held in

to improving the WACI of the overall portfolio F .

the portfolio divided by the total amount of debt issued by

4

5%

2

0%

0

Brazil10%

Indonesia

6Austria

15%

Australia

Note: As of the end of FY2017, due to usage of GDP data
(Source) S&P Trucost Limited © Trucost 2019

8

The Netherlands

Benchmark (Reference)20%

MexicoGPIF Holdings

10

Canada025

25%Belgium

160%

Germany

2

23.6
GPIF Portfolio
Net Greenhouse Gas Emissions（Right Axis）
Weighted-Average Net Greenhouse Gas Emissions（Right Axis）

United Kingdom

3(tCO2e/m JPY)

62.3%

Italy

4

65%

Spain

Imports (Indirect)
Imports (Direct)
Exports (Direct)
Domestic

Carbon intensity by country and weight in GPIF
sovereign bond portfolio

France(tCO2e/m JPY)

F

Japan

5

WACI of GPIF’s sovereign bond investments

United States

E

Note: As of the end of FY2017, due to usage of GDP data
(Source) S&P Trucost Limited © Trucost 2019

GPIF ESG REPORT 2018

48

Chapter 2 Measuring the Impacts of ESG Activities

Portfolio Scenario Analysis— Transitioning towards a 2˚C target —The GPIF conducted a scenario analysis of our portfolio to attain a better
understanding of our current alignment with 2˚C targets. The methodology employed a“transition pathway analysis.” According to the analysis, which was performed by
Trucost, GPIF’s current portfolio is not aligned to achieve 2˚C targets.

Transitioning to a 2˚C target
In the past, GHG emissions analyses have generally taken a

Exhibit B compares potential temperature increase

backward looking approach, but by using the data currently

scenarios by asset class. Out of all asset classes, only theavailable and setting some assumptions, a scenario analysis

scenario for domestic bonds (corporate bonds) is likely to

can provide insight into the impact that future emissions

meet the 2˚C target. As already explained in “Portfolio

may have.

Climate-Related Risk” (page 43), a large portion of domestic

Here, Trucost has conducted a transition pathway

bonds (corporate bonds) are attributed to the utilities sector.

analysis (page 50) which uses the GHG emissions for eachSome companies in this sector have been open to settingof the GPIF portfolio companies to analyze emission trends

reduction targets given their enormous levels of GHG

from 2012 through to 2023. One of the lines (solid) shown inemissions, and this has pushed down the temperature rise

Graph A is based on data such as publicly disclosed

scenario for domestic bonds (corporate bonds) below the 2˚Ccompany GHG emission reduction targets. The other line

target. In contrast, the scenarios for all other asset classes(dashed) shows the pathway when companies in the portfolio

predict temperature rises of 3˚C or above, pushing up theare successful in aligning their GHG emission reduction

scenario for the entire portfolio to 3˚C or above.

targets to a 2˚C target.
The pathway for 2˚C target alignment indicates that

portfolio GHG emissions with the 2˚C target throughwhile GPIF needed to achieve continuous GHG emission

divestment, but the GPIF is steadfast in its policy of

reductions in its portfolio since 2012, actual emission levels

addressing climate change and other ESG challenges byremained constant over the years. Meeting the 2˚C target byengaging in efforts to promote improvement at invested

2023 will require continuous reductions of portfolio GHG

companies rather than divesting and losing its position as aemissions collectively, and considering current individual

shareholder (see the column on page 4).

company GHG emission targets, achieving the portfolio
target will be difficult.

49

In theory, it is possible for an asset owner to align its

GPIF ESG REPORT 2018

6

GHG emissions pathway of
GPIF portfolio holdings (2012 to 2023)(10 million tCO2e)(projected)

B

4
3

Portfolio GHG emissions based ontargets, etc. published by companies
GHG emissions of 2˚C-compliant
portfolio

2>3℃

Foreign Equities>3℃

Domestic Bonds(Corporate)<2℃(Corporate)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

(Source) S&P Trucost Limited © Trucost 2019

(Note)>3℃

Domestic Equities

Foreign Bonds

10

Level of warming by asset classOverall Portfolio

5

Chapter 1 GPIF’s Initiatives on ESG

A>3℃“<2˚C” indicates that the portfolio is in line with a 2˚C target, while “>3˚C”indicates that theportfolio is consistent with a scenario in which average global temperatures rise by 3˚C ormore by the year 2100.

（Source）S&P Trucost Limited © Trucost 2019

Reference

A transition pathway analysis can be used toemissions Trucost uses both the Sectoral

examine alignment with the carbon budget, which

Decarbonization Approach (“SDA”) and theis the limit to GHG gas emissions required to keep

Greenhouse gas Emissions per unit of Value Added

global warming below a certain threshold. This(“GEVA”) approach. These are the methodologies

analysis examines whether emissions from portfolio

recommended by the Science Based Target

holdings are aligned with the 2˚C target set by theInitiative (“SBTi”).

Paris Agreement.
The analysis results show: 1) the model case, in

Chapter 2 Measuring the Impacts of ESG Activities

Overview of transition pathway analysis methodology

A key advantage of the transition pathway
approach is that it does not require limiting thewhich the trajectory of GHG emissions fromanalysis to certain sectors and business activities

portfolio holdings are in line a 2˚C target taking into

as would be the case for the Energy Transition

account each constituent’s portfolio weight, and 2)

assessment. As a result, investors can evaluate thethe current status, which shows the trajectory of

GHG gas emissions of their entire portfolio, and theemissions based on forward looking data such ascompanies themselves can also review their GHG

GHG emission reduction targets publicly disclosed

emissions targets and think about their future

by portfolio companies. We can get an idea of howtransition pathways. More than 500 companies

far off the portfolio may be from a 2˚C target byaround the world have either set verified targets

comparing the GHG emissions of portfoliowith SBTi, or have formally commited to setting

companies under these two cases.

targets in the future.

To estimate the companies’ GHG gas* ”2˚C target”
The 2˚C target is a framework set out in the Paris Agreement which outlined international goals on GHG emissions beyond 2020. It aims tolimit global temperature rise to below 2 degrees above pre-industrial levels by the end of the 21st century.

GPIF ESG REPORT 2018

50

Chapter 2 Measuring the Impacts of ESG Activities

Supplementary information related to transition pathway analysis
Data Used
Since the transition pathway analysis is conducted

and company activity levels is incorporated fromunder a medium-term time horizon, the analysis

the base year of 2012.
Forward-looking data sources are used to track

incorporates both historical performance as well as
forward looking indicators (targets and estimates).

likely future transition pathways from the mostThis avoids the uncertainties of using only forward-

recent year of disclosed data through to 2023, andlooking data, and the time horizon is sufficientlyis created based on the following hierarchy of data

long enough to dampen the effect of any year-on-

sources. The scope of GHG emissions is ayear volatility. Historical data on GHG emissions

combination of both Scope 1 and Scope 2.

C

Forward looking data creation flow
（1）GHG reduction targets disclosed by companies

When（1）is unavailable（2）Asset-level data from high GHG-emitting business activities indicating
future conversion
When（2）is unavailable（3）Past emissions trends of companies engaged in high-emitting,homogeneous business activities (Sectoral Decarbonization Approach (SDA))
When（3）is unavailable（4）Past emissions trends of companies with a wide variety of business activities(Greenhouse Gas Emissions per unit of Value Added (GEVA) Approach)When（4）is unavailable（5）Carbon intensity value from the most recent disclosure
year(Source) GPIF based on information from Trucost

Sectoral Decarbonization Approach (SDA)The SDA approach uses scenarios developed byare evaluated by comparing the emissions per

the International Energy Agency (IEA) andindustry unit consistent with a 2˚C target and theoutlined in Energy Technology Perspectives

actual reduction targets that companies have(“ETP”) 2017. The analysis applies to companies

publicly disclosed.

engaged in high-emitting, homogeneous
business activities, such as power generation,using this methodology, however. For example,

steel, cement, and airlines.

GHG emissions may naturally be different based on

The idea behind this approach is that

51

Other factors need to be considered when

an industry’s available technologies or costs ofcompanies in each industry must reduce their

mitigation, such as when the integration of“emissions per industry unit” (such as tCO2e per

renewable energy enables energy companies to

GWh, or tCO2e per tonne of steel) to a level

reduce emissions at a faster rate than, say, cement

consistent with a 2˚C target by 2050. Companies

companies. Even within a given industry, the pace

GPIF ESG REPORT 2018

2˚C targets. On the other hand, companies withcompany. Furthermore, companies with low basehigh emissions or high production growth mustyear emissions and low production growth may bemake faster reductions.

considered to be have a low GHG emission growth

Chapter 1 GPIF’s Initiatives on ESG

of emissions reduction depends on the individual

In the SDA assessment, companies arerate, and thus judged to be able to reduce theirassessed against parameters consistent withemissions at a more gradual rate in order to meet

1.75˚C, 2˚C, and 2.7˚C of warming.

Greenhouse Gas Emissions per unit of Value Added（GEVA）
Approach
The scenarios used in GEVA assessments are theresponsibility for this reduction to each company

Representative Concentration Pathway (RCP)

according to its size. In other words, eachscenarios use in the AR5 report from The

company is expected to reduce its GHG emissions

Intergovernmental Panel on Climate Change

per unit of production from the base year to the(IPCC). This approach is applied to companies withtargets necessary for a 2˚C scenario. Unlike therelatively low emissions and covers a broad array of

SDA approach, GEVA uses GHG emissions per

business activities, such as consumer discretionary

inflation-adjusted gross profit to measure total

and services, information technology, financials,

emissions intensity.
Using the GEVA approach, companies are

considers the GHG emission reduction target

assessed against parameters consistent with 2°, 3˚,required for the economy as a whole, then allocates

4˚, and 5˚C of warming.
Chapter 2 Measuring the Impacts of ESG Activities

capital goods/services, and energy. This approach

Science Based Target initiative (SBTi)
SBTi is a collaboration between non-governmental(“WWF”). Companies are recommended to set

organizations including the Carbon Disclsoure

GHG emission reduction targets according to

Project (“CDP”), the United Nations Global

current scientific understanding, and the initiative

Compact (“UNGC”), the World Resources Institutecertifies the targets that companies set.

(“WRI”) and the World Wide Fund for Nature

GPIF ESG REPORT 2018

52

Chapter 2 Measuring the Impacts of ESG Activities

Current State of Corporate
Disclosure
Better company disclosure is essential for better ESG evaluations and hence a deeper
understanding of the climate change-related risks associated with a given portfolio. In
addition to the direct benefit of having more transparent disclosure, the preparation
process itself allows companies to gain a better understanding internally of potential
issues that may not otherwise be discussed.

This analysis reviewed the level of disclosure by each

GHG generated produces a significantly higher disclosurecompany within the different asset classes held in the GPIF’s

rate for each asset class. This is likely due to the fact that

portfolio. In terms of the number of companies, the foreigncompanies with high emissions are more inclined to disclose

corporate bond portfolio had the highest rate of disclosure,climate-related information. Over 60 percent of companies inwith over 50 percent of companies disclosing GHG emissions,both the domestic and foreign corporate bond portfolio fully

followed by domestic corporate bonds, and then foreign

disclose GHG emissions, and over 80 percent at least

equities A . Within these asset classes, the percentage ofpartially disclose. Foreign equities also have comparable

companies that at least partially disclose emissions is arounddisclosure rates, but the partial disclosure rate for domestic

60–70%. On the other hand, only about 10% of companies inequities is slightly lower at 70%.
Enhancing both the breadth and depth of disclosed data

the domestic equity portfolio have fully disclosed, with just
20% of companies having at least partial disclosure.
In contrast, weighting disclosure rates by the share ofis essential for companies to better understand and manage
the climate-associated risks that they face.

Disclosure of GHG emissions (Scope 1) by companies
A

B

Disclosure rates by number of companies
Full Disclosure
Partial Disclosure
Model Estimation

Domestic
StocksDisclosure rates weighted by ghg emissions

Foreign
StocksForeign
StocksDomestic
Bonds(Corporate)

Domestic
Bonds(Corporate)

Foreign
Bonds(Corporate)

Foreign
Bonds(Corporate)

0%

20%

40%

60%

80%

100%

Full Disclosure
Partial Disclosure
Model Estimation

Domestic
Stocks

0%

20%

40%

60%

80%

100%

Note: In general, Trucost uses data disclosed by individual companies to determine GHG emissions. When such data is incorrect or incomplete, however, Trucost uses a proprietary model to estimate emissions.
(Source) S&P Trucost Limited © Trucost 2019

53

GPIF ESG REPORT 2018

Column

Chapter 1 GPIF’s Initiatives on ESG

Global Perspective on GPIF’s ESG Activities
GPIF’s ESG activities attract attention from all around the world. In fiscal 2018, Harvard Business
School cited GPIF’s ESG initiatives in a case study.

Harvard Business School case study
GPIF’s ESG activities were cited within a case study
used for teaching at Harvard Business Schooloverseas pension funds, and remaining challenges.
The case study was used as a teaching material
for the class “Reimagining Capitalism” taken by

Henderson, George Serafeim, Josh Lerner andabout 400 second year HBS students, and in April

another co-author published Should a Pension

2019, CIO Hiro Mizuno was invited by Professors

Fund Try to Change the World? Inside GPIF’s

Henderson and Serafeim to speak at HBS. There,

Embrace of ESG – a case study that uses a narrative

students, professors and Mizuno engaged in aformat to delve into the history and background of

lively discussion on topics such as whether the

GPIF’s ESG efforts, specific activities such as theconcept of “universal ownership” can apply to small

selection of ESG indices and engagement withpension funds, how the roles of active and passive

asset managers, changes occurring withinmanagers can be separated, and who should pay

Japanese investee companies, the response by

for the costs arising from ESG activities.
Chapter 2 Measuring the Impacts of ESG Activities(HBS). In January 2019, Professors Rebecca

GPIF ESG REPORT 201854

Editor’s Note

Impressions gained during
the compilation of the ESG Report

In last year’s ESG Report, “ ESG evaluation timing” and “revision of ESG evaluation criteria”
were both cited as issues that remain to be addressed with respect to ESG evaluations.
GPIF works towards progress in these areas by continuing to proactively engage in dialogue
with ESG evaluators and others. We faced many different challenges in compiling this report,
and by sharing our experiences, we hope to provide other asset owners and asset managers
with useful advice as they consider their own ESG initiatives and disclosures.

Information disclosure: Benefits and issues

A particularly challenging aspect of summarizing

transparency is a direct benefit, the very act of

ESG activities in this report was, as with many

compiling this report serves effectively as anentities, deciding what format should be used foropportunity for raising awareness of and sharing

TCFD-compliant reporting. In this report, we did

issues within GPIF. As a result of Trucost’s

not include targets related to climate change risk,

scenario analysis, we discovered that the current

and for the scenario analysis, we restricted

GPIF portfolio was found to be inconsistent withourselves to a trial analysis of compatibility withthe 2°C target in the Paris Agreement. Thisthe 2°C targets cited in in the Paris Agreement.

means that presently, our assets under

Additionally, there is no analysis in this reportmanagement would suffer greatly from, say,relating to physical risk due to climate change

stronger environmental regulations implemented(impact on the portfolio of severe weather eventsby governments to achieve the 2°C target.

and rising sea levels, etc.). GPIF is well aware that
this report is not perfect. We also expect to bewith no divestment, what we can do and what we

criticized for using analysis methods that have notshould do remain big issues for us. Hopefully, theyet been firmly established. Overall, however, we

information disclosed in this report will serve as a

judged that the benefits of disclosing thiscatalyst for broadened discussion on how asset

information outweighed the negatives.

owners who profess to be universal owners

While it goes without saying that increased55

As an investor that mainly invests passively

GPIF ESG REPORT 2018

should address climate change risk.

Chapter 1 GPIF’s Initiatives on ESG

We faced numerous hurdles in conducting cross-that company’s footprint. Adding up these figures

asset class evaluations for the purpose offor all companies in our portfolio enables us tomeasuring the ESG score and carbon-footprint of

measure the total carbon footprint of the GPIF

our portfolio.

portfolio. While this method enables us to assess

In last year’s ESG Report, we limited our ESG

Chapter 2 Measuring the Impacts of ESG Activities

Difficulties of cross-asset evaluation

the portfolio by considering both bonds andscore and carbon footprint analysis only to theequities, the fact that both asset classes areequity portfolio, and thus used GPIF’s share of theevaluated on an equal basis may raise questions

company’s total market capitalization of allamong those who believe that equity investments

outstanding shares for each portfolio company incarry a larger responsibility as they come withthese calculations.

shareholder voting rights.

This year, we expanded the scope of our

Government bonds are even harder tocarbon footprint analysis to the bond portfolio,

evaluate. As already touched on in the climate

which allowed us to measure the footprint on anchange risk analysis section for government bonds

Enterprise Value (EV) basis. EV is calculated by(page 48), it is extremely difficult to carry out anadding market capitalization to interest-bearing

analysis of ESG and climate change risk acrossdebt, and thus shows the share of total corporate

equities, corporate bonds and government bonds,

value – including liabilities – accounted for by

as these asset classes are completely different in

GPIF. Multiplying that figure by the target

nature. Going forward, we will continue to consider

company’s total carbon footprint, we can clarify

how to improve our evaluation methods andthe extent of GPIF’s responsibility with regard to

approaches to information disclosure.

GPIF ESG REPORT 201856

Announcement
Each year, GPIF publishes an annual report that provides amake every effort to further deepen public understanding

detailed explanation of portfolio developments during theand trust, and make our published documents easier toyear. We also disseminate information through our website,

understand. We also work to continuously enhance ourSNS, and other means.

information disclosure and PR activities in accordance with

With regard to fund management and operation, we

GPIF Homepage

diversified and sophisticated investment.

GPIF YouTube channel

GPIF Twitter

Disclaimer
MSCI
MSCI ESG Research LLC is a Registered Investment Adviser under the Investment Advisers Act of 1940.
MSCI ESG Research materials have not been submitted to, nor received approval from, the US SEC or any
other regulatory body. None of the materials constitute an offer to buy or sell, or a promotion or recommendation of, any security, financial instrument or product or trading strategy, nor should it be taken as an indication
or guarantee of any future performance, analysis, forecast or prediction. None of the information herein canbe used to determine which securities to buy or sell or when to buy or sell them. The MSCI ESG Researchdata is provided “as is” and the user of the Information assumes the entire risk of any use it may make or
permit to be made of the Information.
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the Data and/or Reports is permitted without Trucost’s express written consent.

57

GPIF ESG REPORT 2018

Investment Principles
GPIF is committed to fulfilling our fiduciary duty to secure1

Our overarchinggoal current
should be toandachievethe investment
returns required foradequate retirement funds
for bothfuturebeneficiaries.
the public pension system with minimal risks, solely for the benefit of pension

We believe that improving
the governance of the companies thatrecipients from a long-term perspective, thereby contributing to the stability ofthe system. negative environmental and social
we invest in while minimizing

externalities – that is, ESG (environment, social and governance)2

Our primary investment strategy should be diversification by asset class, region,

integration – is vital in
the acknowledging
profitabilityof theofportfolio
andensuring
timeframe. Whilefluctuations
market prices in the shortover the long term.

term, we shall achieve investment returns in a more stable and efficient mannerby taking full advantage of our long-term investment horizon. At the same time,
we shall secure sufficient liquidity to pay pension benefits.

3

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 for each asset class, while seeking untapped
profitable investment opportunities.

4

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

GPIFESGESGREPORT2018 0258
GPIF
REPORT2018

Inquiries:
Planning and Communication Division, Planning andCommunication Department
Government Pension Investment Fund
Toranomon Hills Mori Tower 7th Floor, 1-23-1 Toranomon,
Minato-ku, Tokyo 105-6377, Japan
TEL: +81-3-3502-2486 (direct dial)
FAX: +81-3-3503-7398
Website: https://www.gpif.go.jp/en/