Pension Fund That Mimicks World’s Largest Boosts ESG Stocks

(Bloomberg) -- A Japanese public pension fund that manages its portfolio in line with the world’s largest pension manager has boosted investments in ESG-related stocks by more than sixfold in its $62 billion domestic equity portfolio.

The Pension Fund Association for Local Government Officials, known as Chikyoren, has increased its exposure to environment, social and governance themes to about 820 billion yen ($7.8 billion), representing 13% of its Japanese equities portfolio, said Shigemune Sato, director-general of the fund management department of the public fund. That compares with about 130 billion yen in March last year.

“Taking account of performance over the recent years, stocks with high ESG evaluations have tended to have better performance,” Sato said in an interview. Increasing investments in ESG will help the fund “secure stable returns over a long period of time,” he said.

The public fund manages money for public entities including regional civil servants, teachers and police, and oversees 24 trillion yen. As the fund tracks the strategy of Japan’s $1.68 trillion Government Pension Investment Fund, the largest pension fund in the world, its allocation may give some insight into how the GPIF is looking at ESG investment.

The fund had a record-high 5.7 trillion yen in ESG indexes as of the end of March 2020, the most recent period for which data is available, though it doesn’t give further breakdown of its ESG investments citing the potential impact on the market. The GPIF in March raised its allocation to foreign debt and cut Japanese bonds in its portfolio review conducted once every five years.

Chikyoren has chosen the MSCI Japan ESG Select Leaders Index and S&P/JPX Carbon Efficient Index, the first time it has benchmarked returns of domestic stocks to ESG. It has increased to five the number of ESG-specific funds it actively manages, Sato said.

It is also slowly adding domestic green and social debt investments, he said, and considering eventually buying overseas ESG stocks and bonds.

Building Alternatives

Chikyoren’s portfolio is close to GPIF’s target and rebalancing faster than its original plan to direct funds in line with the larger fund’s objective of allocating 25% each to domestic and foreign equities, and domestic and foreign bonds.

“We wanted to be careful about selling domestic bonds and buying foreign bonds without affecting markets, but we were able to rebalance close to the target faster than we have originally expected,” Sato said.

Chikyoren has a long-term goal to increase holdings of alternative assets, including private equity and infrastructure, to 500 billion yen to diversify away from traditional assets, Sato said. It has appointed Legg Mason Asset Management (Japan) Co. to manage overseas real estate in the fund’s latest move in the asset class.

The public fund has already invested about 92 billion yen in alternatives and has about 272 billion yen of funds in the pipeline committed to the asset class, Sato said.

“We want to diversify into alternative assets to generate higher returns as it’s becoming tough to raise returns from bonds,” he said.

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