GPIF’s ESG Investments Outperform Tokyo Stock Index

Japan’s $1.45 trillion Government Pension Investment Fund’s environmental, social and governance index-based passive funds outperformed the Tokyo Stock Price Index by approximately 160 basis points over a six-year period, the pension giant announced in its annual ESG report.

According to the GPIF, the excess return of its passive funds tracking ESG indexes was 1.6% for domestic equities over the six-year period from June 2017, when it started ESG index-based passive investing, through March 2023.

In its report, the pension fund separated the excess return of its ESG investments into two parts, the “benchmark effect” and the “fund effect.” The benchmark effect is the difference in return between ESG indexes and the Tokyo Stock Price Index, also known as TOPIX, while the fund effect is the difference in return between the pension fund’s passive funds and ESG indexes.

The pension fund also calculated the risk-adjusted return of its ESG passive funds, known as the Sharpe ratio, as compared with the TOPIX since the launch of each fund. It reported the Sharpe ratio of its ESG funds was 0.39, which just edged out the TOPIX’s Sharpe ratio of 0.37. The report also noted that the Sharpe ratios of the ESG indexes it tracks have tended to exceed that of the TOPIX over a six-year period from April 2017 through March 2023.

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The GPIF stressed that because it is so large and invests in securities that cover the entire world’s capital markets, “sustainable corporate value creation by each investee company and the sustainable, stable growth of the entire capital market is critical” for it.

For example, the GPIF’s portfolio will be “significantly impaired” even if share prices of some portfolio companies increase because of or despite conducting business activities that do not consider ESG risks, because society and the economy, including other companies, are still negatively affected.

“In other words, reducing negative externalities to maintain a sustainable capital market and society is vital for maintaining profitability of the portfolio,” the GPIF report stated.

In its report, the GPIF acknowledged that in the U.S., there is an “increasingly radical movement against ESG,” as the investment strategy has become a hot-button political issue among some Republicans who criticize it as being part of so-called “woke” politics and contrary to fiduciary duties.

“We believe that ESG risks such as climate change are risks that GPIF must consider as a cross-generational investor with investments diversified across a wide spectrum of assets,” the pension fund report stated. “Our motivation is neither political nor moral, nor are we chasing a passing trend. These are simply risks that must be considered in order for investors to achieve long-term investment returns.”