GPIF has announced a new environment index and begun investing 1.2 trillion yen. Investment is weighted to favor companies with high carbon efficiency and information transparency, hopefully stimulating others to follow suit.

The Government Pension Investment Fund (GPIF) of Japan is the world’s largest institutional investor, managing about 160 trillion yen in assets. On September 25 it announced a new environment index focused on global warming measures, and began ESG-driven investment to the tune of 1.2 trillion yen. The index was launched with 1694 domestic and 2162 foreign stocks.

GPIF began full-fledged ESG investment using the ESG indexes in July 2017, based on the FTSE Russell and MSCI indexes for Japanese firms with strong ESG practices and the MSCI Japan Empowering Women Index. The scale of investment for the three was 1.5 trillion yen. The new index is designed to promote stronger environmental protection initiatives.

A total of 17 indexes for environmental issues and global warming measures were considered, but GPIF decided to go with global warming alone, selecting the Carbon Efficient Index from S&P Dow Jones Indices. Indexes are available for Japanese and overseas stocks. The former covers 1694 of the 2103 Japanese TOPIX stocks listed, evaluating flexibility, information disclosure, and newsworthy incidents.

Stocks offering high carbon efficiency and disclosure of greenhouse gas emission information were overweighted. In addition, it was assumed that measures implemented in industries with high emission volumes would have more total effect, and firms in those industry were given additional overweighting. Carbon efficiency was rated by S&P subsidiary Trucost of the U.K, calculated from CDP data and proprietary models.

Not planning to divest

The environmental index covers an impressive number of companies: 1694 just for Japan alone. GPIF has included small-scale listed firms as well in an effort to boost recognition of carbon efficiency and information disclosure throughout the market. It does not plan to divest firms with significant environmental impact, such as in the coal industry, instead hoping to stimulate competition within the industry.

A comprehensive environment index was not adopted due to the complexity of evaluating diverse background factors. For an evaluation of a company producing “green” products, for example, GPIF explained it would be difficult to judge the relative level of the technology used.

There may also be trade-offs between global warming measures, recycling, and biodiversity. One ESG evaluation organization comments “With SDGs there are a lot of different initiatives interacting in very complex ways, and it has become extremely difficult to judge what is actually best for the environment.”

The appearance of an environment index will provide additional incentive for global warming measures and information disclosure, driving even greater pressure from investment managers.

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