World’s biggest pension fund puts impact investing on the agenda

[TOKYO] A decision by Japan’s US$1.8 trillion pension fund, the world’s biggest, to consider a shift into impact investing has triggered a wider adjustment among the country’s money managers.

The Government Pension Investment Fund (GPIF) opened the door to impact strategies in March and at least four other Japanese pension funds are updating or revising their investment policies, according to a review of the funds’ investment policies. At the same time, there’s evidence that asset managers pitching for pension mandates are now adjusting their approach to match growing demand for impact strategies.

The ripple effect through Japan’s US$5 trillion money management industry is backed by the government, which has identified the strategy as a way to help address some of the country’s real-world challenges. That’s as policymakers in Japan face a rapidly ageing society and one which ranked 118th last year in a gender-equality review of 146 countries.

GPIF president Kazuto Uchida has made clear he thinks that an investment approach targeting environmental and social goals “ultimately leads to” economic and capital markets growth.

Aniket Shah, managing director and global head of sustainability and transition strategy at Jefferies Financial Group, says the fact that investors can measure the real-world effect of impact investing gives it the potential to be more powerful than basic screening for ESG (environmental, social and governance) risk.

“It’s more durable because looking at impact as a driver of growth of companies is a financial discussion,” Shah said. “This is a real economic theme and driver today.”

In Japan, impact investing strategies are likely to centre around climate, health care, wellbeing and inclusivity, according to Masato Nakamura, head of GLIN Impact Capital, a Tokyo-based investment firm that participated in meetings with GPIF and other Japanese pensions about the strategy. The expectation is that GPIF will start applying the strategy to listed equities first, he said.

GPIF, which has not disclosed how much capital it may allocate to the strategy, said in March that it thinks impact investing offers a path to long-term returns. The pension fund said that it’s conducting research on investment strategies that consider environmental and social impacts. The studies include the measurement and reporting of impact metrics on existing investment projects and the relationship between impact and returns.

“Until this research study is completed, it is difficult to provide specific details such as investment amounts or timing,” GPIF said. “No decisions have been made regarding specific investment targets.”

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Impact investing is also gaining ground among institutional investors in Europe. ABP, Europe’s biggest pension fund, says it’s planning at least 30 billion euros (S$45.4 billion) of impact investments by the end of the decade. PGGM, which handles investments for pension fund PFZW, has reportedly overhauled its strategy to focus more on impact.

Worldwide, impact-related assets under management stand at almost US$1.6 trillion, the Global Impact Investing Network (Giin) estimated last year. In Japan, meanwhile, the strategy grew 150 per cent year-over-year to approximately US$117 billion, GSG Impact Japan National Partner said in a report published in March.

Private equity still accounts for the biggest proportion of impact investments under management, but asset classes and strategies are evolving, according to Amit Bouri, chief executive and co-founder of Giin.

“A lot of people, regardless of where they are at ideologically or politically, see the value in using private sector capital to address social and environmental needs,” said Bouri.

The Japanese government has committed to meeting the United Nations’ Sustainable Development Goals, and that “requires a kind of investment”, said Satoshi Ikeda, who until this summer was the sustainability officer at the Financial Services Agency (FSA), Japan’s financial regulator. The approach is a way to foster innovation, fund startups and appeal to a younger generation of investors, he said

Japan’s FSA released guidelines last year that emphasised the methodology allows investors to focus on issues that are not “supported by the existing ESG investment methods”. Promotion of the strategy “could carry profound implications, as it may contribute to solving social or environmental issues and improving business viability”, it said. BLOOMBERG