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Former Japanese pension supremo urges ESG caution

29 Jul 2021

One of the world’s largest pension funds must stay focused on returns warns Eiji Hirano. Andrew Holt reports.

Environmental, social and governance (ESG) issues have come to dominate pension fund investment strategies, but there are voices challenging this orthodoxy.

One such voice, and a highly influential one at that, is Eiji Hirano, a former chair of Japan’s Government Pension Investment Fund (GPIF) – one of the world’s largest retirement schemes with £1.2trn of assets under management.

In an interview with Bloomberg he pointed to how pension funds should question their ESG investments and not forget their first principle is to focus on returns.

“The GPIF needs to go back to its roots and think about how to analyse if ESG is really profitable, as well as how to evaluate and standardize ESG,” Hirano said. According to the law under which GPIF operates, it must invest to benefit Japan’s citizens through the returns generated.

“It’s a little like an ESG bubble right now, and we should evaluate both the good and the bad,” Hirano said.

He argued that the fund should not be the vanguard for ESG investing but should instead examine the true returns from the constantly growing asset category.

Hirano pointed to other concerns about the ESG narrative, such as the lack of a common evaluation system and a tendency to stress environmental issues over governance.

He also feels uneasy about the large number of chief executives who emphasise the importance of ESG principles or the UN’s sustainable development goals. “The focus may be right, but delivery depends on the still unproven determination and perseverance of all those leaders,” he said.

These comments reflect worries that an excessive focus on ESG can add risk. Hirano’s comments do question the herd-like mentality that has become the norm when dealing with anything ESG related.

Hirano also questioned GPIF’s direction since the arrival of Eiji Ueda, a former Goldman Sachs bond trader, as chief investment officer in March 2020. He replaced Hiromichi Mizuno, whose period in charge is called the “Mizuno revolution” in some quarters as he shifted the once quiet GPIF into a global symbol of modern Japanese investment thinking.

His tenure corresponded with the arrival of Japan’s stewardship and governance codes, designed not only to propel changes in corporate Japan, but also to reinforce the idea that the country’s equity market was confronting some of the problems that had blackened its reputation among investors.

Mizuno is proud of popularising two new concepts to the vocabulary of ESG fund management: universal ownership and the cross-generational investor.

Hirano, who was chair of GPIF’s board of governors from 2017 until earlier this year, paradoxically presided over the fund becoming a leader in ESG investing.

So much so, that investments in ESG indexes reached a record ¥10.6trn (£70bn) for the fund at the end of March, an 86% rise in 12 months and was helped by the fund adding two foreign equity ESG indexes in December.

GPIF invested ¥1.1trn (£7.2bn) in green, sustainability and social bonds during the period, after forming several partnerships to promote such debt.

Asked about the near-doubling of the scheme’s ESG assets, GPIF president Masataka Miyazono re-stated, at a press conference earlier this month, the fund’s position of investing in ESG primarily for its returns, almost pre-empting Hirano’s criticism, but declined to say how much it would invest in future.

“We’re not going to rapidly increase our position, and nor are we going to be extremely cautious,” he said. “We invest over the long term, and I think you’ll see an impact over the long term.”

A solid picture of GPIF’s ESG exposures will be available for scrutiny later this summer when its annual ESG report is published.

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