Does a big pension fund improve a portfolio company’s value, due to the fund’s guidance? In Japan, it looks like it has. A large study conducted by Japan’s $1.53 trillion Government Pension Investment Fund found that engagement with its portfolio companies by its asset managers “contribute[s] to the sustainable growth of the market.”
The pension giant stated that it encourages its equity investment managers to actively engage in constructive dialogues “that contribute to the long-term enhancement of corporate value.”
The study used the records of 26,792 engagements (advice giving) and 48,077 themes (policies the fund pushed, such as adjusting to climate change) conducted by 21 of the pension fund’s domestic equity investment managers from fiscal 2017 through 2022.
“There have been no previous studies that comprehensively analyzed such a large number of funds and dialogues, which could be the first attempt in the world,” the GPIF stated.
The study also evaluated the effectiveness of the engagements by applying a method called the “Difference in Differences Method” to statistically estimate the positive changes that GPIF, through engaging with portfolio companies, had produced. According to the pension fund, the DID Method identifies and compares the differences between the “pretreatment and post-treatment status of an intervention group and a control group.” The intervention group in the study included companies with which the fund was engaged, while the control group consisted of companies with which it was not.
Per the GPIF’s report on the study, “it became clear” that engaged portfolio companies saw corporate value-related indicators, such as market cap and price-to-book ratio, and non-financial key performance indicators, such as reduced greenhouse gas emissions and increased diversity, improve more than non-engaged portfolio companies.
According to the report’s analysis, dialogues on climate change increased decarbonization targets and decreased carbon intensity scope among companies with which it engaged. Furthermore, the report found that dialogue concerning board structure led to an increase in the number of independent outside directors, along with improvements in investment return indicators such as market cap and total shareholder return.
The report also stated that engagements related to board structure and self-evaluation indicated that the market capitalization of the engaged companies increased by an average of 6% compared with the non-engaged companies.
“This Evaluation project has demonstrated the significant value of the engagements conducted by the asset managers to date,” the pension fund stated. “We will continue to strive, together with the asset managers, to achieve more effective engagement activities in the future.”
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Tags: board structure, Climate Change, DID Method, Difference in Differences Method, engagement, Government Pension Investment Fund, GPIF, investment managers, Japan, study