Review of an Index for
ESG Passive EquityInvestment
March 2024
Government Pension Investment FundReview of Some Indexes for ESG Passive Equity Investment
Our Concerns and Improvement Measures
 MSCI Japan ESG Select Leaders Index, one of the domestic
equity ESG indexes which is adopted by GPIF, contains relativerisk (tracking error) to TOPIX, GPIF’s policy benchmark, due to 1)
REIT being included, and 2) its higher exposure to large-cap
stocks.* Based upon this concern, after many discussions withMSCI, they proposed the following updates to the constituent
selection criteria for the index.
 The proposed measures contain the following two points: 1)
REIT, which is not included in the policy benchmark, will be
excluded from the parent index; and 2) the constituent selection
criteria of stocks will be changed from selecting stocks with high
ESG evaluations until the sum of their market capitalization
reaches 50% in the same industry, to selecting stocks with high
ESG evaluations until the number of such stocks reaches 50% of
the same industry. There will be no changes to the ESG
evaluation methodology or other matters.
 Since the above-mentioned concerns 1) and 2) are expected tobe eliminated or reduced by the proposed improvement
measures, we have decided on and implemented a change inthe benchmark from MSCI Japan ESG Select Leaders Index, theformer index, to MSCI Nihonkabu ESG Select Leaders Index, theproposed index.

Averageof MSCI ESG scores by market
capitalization decile
時価総額分位別のMSCI
ESGスコアの平均値（スコア）(Score)
10.0
8.0
6.0
4.0
2.0
0.0

109（時価総額大）(Large-cap)

87654321（時価総額小）(Small-cap)*As for the ESG scores, higher evaluation can be observed for large-cap stocks with sufficient management
resources for information disclosure and other aspects, as seen in the upper right chart.
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Comparison of Methodologies of New/Former SelectLeaders Indexes• Differences from the former index: 1) REIT is excluded from the parent index; 2) stocks are selected from those withhigher ESG evaluations until the number of such stocks reaches 50%, rather than being selected until their marketcapitalization reaches 50% of the industry.
• Active risks have been reduced due to 1) above, since REIT is not included in TOPIX, the policy benchmark.
• Reflecting 2) above, the large-cap stock bias has been reduced due to an increase in stocks selected, which
contributes to the reduction of active risks as in 1) above.

Parent index

New Index(MSCI Nihonkabu ESG Select Leaders)

Former Index(MSCI Japan ESG Select Leaders)

MSCI Nihonkabu IMI*MSCI Japan IMIEligibility criteria

ESG rating: BB or higher (B or higher for the existing stocks)
Controversies score: 3 or higher (1 or higher for the existing stocks)

Stock ranking

Ranked in the order of ESG rating, ESG score and market capitalization

Stock selection

Top 50% in ranking of each sector in termsof the number of stocks

WeightingNumber of stocks
selected (as ofJanuary 31, 2024)

Top-ranked stocks in each sector covering 50% ofmarket capitalization of the parent index

Market capitalization

516

239

Note: MSCI Nihonkabu IMI is an index in which REIT is excluded from MSCI Japan IMI.
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Methodology of the New Index(MSCI Nihonkabu ESG Select Leaders Index)• The constituents of MSCI Nihonkabu ESG Select Leaders Index are selected from among those included in MSCI
Nihonkabu IMI Index.
• Of those above, stocks with high ESG ratings in each industry are selected.
• The stocks are selected from companies in the order of higher ESG ratings, and included in the index until thenumber of such companies accounts for 50% of each industry.

MSCI Nihonkabu IMI Index

1040 stocks

Stocks with ESG ratings that are lower thanBB or MSCI ESG Controversies Score thatare lower than three are excluded.
Stocks with higher ESG ratings
are selected from each industry
until the number of such stocks
reaches 50% of each industry.
MSCI Nihonkabu
ESG Select Leaders
Index

868 stocks

516 stocks
Note: As of the rebalancing in November 2023
Source: MSCI
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Methodology of New Index(MSCI Nihonkabu ESG Select Leaders Index)
Name

MSCI Nihonkabu IMI Index

Stockselection

Stocks with ESG ratings of lower than BB or MSCI ESG Controversies Score of lower than three are excluded.
Semi-annual review:
Stocks are selected from each industry in the order outlined below so the number of constituent stocks
accounts for 50% of each industry of MSCI Nihonkabu IMI Index.
◆Ranking1)
2)
3)
4)

Ranking of ESG ratingIf, 1) is the same, the existing included stocks will be ranked higher.
If, 1) and 2) are the same, the stock with the highest ESG score after industry adjustment will be ranked higher.
If, 1) to 3) are the same, the stock with the larger free float adjusted market capitalization will be ranked higher.

◆Selection
1. Stocks with higher ranking within the industry accounting for 35% in terms of the number of stocks
2. Stocks with AAA and AA ratings from the top 50% of the industry ranking in terms of the number of stocks
3. Existing constituent stocks out of the top 65% of stocks ranked within the industry in terms of the number of stocks
4. Remaining stocks in terms of the number of stocks

Quarterly review:• If the coverage ratio in the relevant industry is less than 45%, new stocks will be adopted until theratio reaches the target of 50%. However, the newly adopted stocks must be with ESG ratings ofBB or higher and the controversies score of three or higher.
• The constituent stocks with ESG ratings of CCC or controversies score of 0 shall be excluded.
WeightingMarket capitalization-weighted

Rebalancing

Semi-annual review (twice a year in May and November) and quarterly review
Source: MSCI
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Recent Initiatives for the Improvement of ESG Investment
GPIF’s Basic Approach to ESG Investment
 GPIF’s investments are conducted by taking ESG into consideration based on its belief that the sustainablegrowth of investee companies and the capital market as a whole are vital in enhancing long-term investment
returns.
 Continuously verify whether ESG investments are acting in accordance with the basic approach required forcorporate investment management.
Recent Initiatives for the Improvement of ESG Investment (FY2022 and thereafter)(1) Improvement of Index Methodology through Consultations⇒ Change in the constituent weighting method of the MSCI Japan Empowering Women Index (WIN)⇒ TCFD-based information disclosure is taken into consideration in the evaluation for the S&P Carbon Efficient Index series.

(2) Adoption of Gender Diversity Index⇒ Adoption of Morningstar Japan ex-REIT Gender Diversity Tilt Index (GenDi J)(3) Enhancement of Risk Management in ESG Passive Equity Portfolio (Review of Allocation ofAssets under Management)⇒ Funds equivalent to 500 billion yen were allocated to the GenDi J Index from the existing ESG Indexes.

(4) Shift to MSCI Nihonkabu ESG Select Leaders Index⇒ The large-cap stock bias, etc., was reduced from the former index without any change in ESG evaluation.

(5) Implementation of “Measurement of the Impacts of Stewardship Activities and ESG Investment”(Scheduled for FY2023-2024)

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