Why GPIF wants to look at your firm’s governance

Now everyone finally agrees that environmental, social and governance (ESG) factors are relevant risks for long-term investors, more global asset allocators are challenging investment managers’ approach to sustainability.

According to the latest report jointly published by the World Bank Group and Japan’s Government Pension Investment Fund (GPIF) on April 19, factoring ESG into fixed income investment strategies can strengthen risk management and contribute to more stable financial returns.

Hiro Mizuno, executive managing director and CIO of GPIF, told industry participants at the 71st CFA Institute Annual Conference held last week in Hong Kong that the pension fund is focusing on ‘solution-based’ investment strategies, such as ESG and impact investing to mitigate systematic risks.

“We have been focused on ESG as a risk factor, a contingent long-term risk factor,” said Mizuno. Every move the pension fund makes has an impact on global markets. “We cannot beat the market because we own the market,” he added.

In fact, the pension fund manages $1.4 trillion. It holds 10 percent of Japanese stock market shares, while also holding 1 percent of the global equities market as of the fiscal year 2017 (ending March 31).

On the corporate governance side, ESG principles can initiate better management of private assets, allowing transparency and proper alignment of interests.

Stephen Dowd, a partner at CBRE Caledon Capital Management, a Toronto-based investment management firm, told sister publication PDI that governance is already an important part of the asset management business, especially for private market investors.

“Not only the Japanese investors but all the global investors should be looking for very strong governance principles and actions out of their managers,” he said.

According to Dowd, his firm has created a board for a recently acquired asset to align all investors’ interests with the best result, creating a robust asset.

Dowd’s team created a board filled with members who had experience in some or all of the governance characteristics that investors’ factored in. “So we found one of the best experts in the region, in safety. Infrastructure businesses are all about safety,” he noted.

However, it is still a challenge for both asset owners and investment managers to include ESG factors in their investment cases.

The World Bank’s report, Incorporating Environment, Social and Governance (ESG) Factors Into Fixed Income Investments, also notes that many investors find implementing ESG difficult in practice.

For credit investors, aside from understanding the terminology and each component of ESG, additional concerns lie with profiles of borrowers, as well as liquidity and other market risks.

There is no public statement from GPIF on ESG factors in private credit investments. However, corporate governance is likely to be an important consideration for the pension fund when hiring a new fund-of-funds manager or a general partner.

“I need to have faith in an asset manager’s corporate governance,” Mizuno said, adding that GPIF’s performance-based fee pricing structure is also a way to challenge ‘short-termism’ to build sustainable long-term relationships with asset managers.

“At GPIF, we really are focused on promoting ESG, we are asking for collaboration among other asset owners,” he noted.

Although it is arguable whether ESG positively affects returns, with leading institutions committing to sustainable investments, more investment managers are likely to match their business needs to the demand from long-term investors.