Former president of the world’s largest pension fund said there are signs of a “bubble” in investing in the environment, society and governance, and Japanese funds need to consider how ESG assets contribute to returns. Said.
Eiji Hirano, who was the chairman of the Japanese Government Pension Investment Fund from 2017 to the beginning of this year, presided over a turbulent era as he became a world leader in ESG investment. He said the fund now needs to reassess its approach to ESG.
“GPIF needs to go back to its roots and think about how to analyze whether ESGs are really beneficial and how to evaluate and standardize ESGs,” he said in an interview. “Now it’s a bit like an ESG bubble, so we need to evaluate both the good and the bad.”
The Board of Directors, established in 2017, has a supervisory role and is not a day-to-day operation of the fund, but it oversees matters such as asset allocation and compensation. The 178 trillion yen ($ 1.6 trillion) GPIF will report its results on Friday of the year ending March and announce record earnings.
In an interview last week, Mr. Hirano said the fund may need to revisit its weighting of domestic equities in its next portfolio review, the role of alternative assets, and the choices it faces over investing in China’s sovereign debt. Touched.
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GPIF is a pioneer in ESG investment and was welcomed as a fund that aims to “change the world” with a bold approach under former Chief Investment Officer Hiromichi Mizuno and former President Norihiro Takahashi.
The fund is relatively quiet about ESGs under new control. Mr Hirano said it was not so important for GPIF to be at the forefront of ESG cheerleading, and that funds need to consider true returns from fast-growing asset classes.
“Under the leadership of Takahashi and Mizuno, many bold steps have been taken against ESG,” Hirano said. “This is now part of the Corporate Governance Code, and the government is now beginning to flag issues such as climate change. This trend is established even if the GPIF is not in control. “
GPIF’s major portfolio reviews are held approximately every five years. In 2014, a drastic review moved many of the fund’s assets from fixed income to equities. Last year, we reduced our allocation to domestic debt and instead placed it in foreign bonds.
That is, the fund currently holds approximately 25% of its portfolio in foreign and domestic stocks and liabilities, respectively. The next major review is scheduled for 2025, and Mr. Hirano predicts that the focus will be on the allocation of Japanese equities.
“The weight of Japanese equities in the global market is about 6-7%. From an expert’s point of view, the current 25% weight of Japanese equities is too high,” he said. “It’s not uncommon to have’common things’, but this could be one of the areas of debate in the next medium-term plan to come into force in April 2025.”
“The more cautious about the future, the greater the risk we need to include in our portfolio. This is a paradoxical mechanism,” he added.
The main challenge facing the fund is to raise public understanding of its returns, says Hirano. He said the GPIF requires a return on investment of 1.7% above the rise in nominal wages, with the fund aiming for an overall target of about 3%.
“Japan’s interest rates are near zero and are declining globally, so it’s completely impossible to get 3% from the bond market,” Hirano said. “But there are so many Japanese who think investing in stocks is dangerous. It’s really hard to fill that gap.”
Mr Hirano laments that the public is focusing on short-term losses and profits. For a fund that invests over a 100-year period, “it’s nonsense to go back and forth between sadness and joy with quarterly results.”
Compared to his candid predecessor Mizuno, Eiji Ueda, the fund’s current chief investment officer, prefers to run in the background. Mr. Ueda has not spoken publicly yet, despite having been in office for over a year. Mr. Hirano revealed how Mr. Ueda, a former bond trader of the Goldman Sachs Group, likes the business.
“Ueda builds on the foundations of its predecessor system and goes one step further to build accurate risk management and elaborate rebalancing strategies,” he said, with Ueda’s main goal being GPIF management. It was how much we could exceed the combined benchmark.
GPIF faces a dilemma as to whether to fund China’s sovereign debt as FTSE Russell has been set to add China’s debt to its benchmark global bond index since October.
“This issue can have political implications,” he said. “The GPIF does not anticipate considering the political agenda, it only thinks about risk-weighted returns, but politics can impact the market. The GPIF faces difficult decisions.”
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