ESG investment in Japan has begun to penetrate beyond the well-known example of the Government Pension Investment Fund (GPIF). During 2018, Japan’s three major trust banks launched commingled funds tracking MSCI's ESG index for corporate pension funds.
Seiichiro Uchi, managing director at MSCI Japan, gave Investment Japan his thought about ESG investment and indexes in Japan.
We can safely say that ESG investing in Japan began in 2017 with the GPIF, which chose three ESG indexes as benchmarks for passive management of Japanese stocks. Two of the three were the MSCI Japan ESG Select Leaders Index and the MSCI Japan Empowering Women Index (WIN).*
By adding one more ESG benchmark index in 2018, GPIF seems to have nearly solidified its ESG investment style. More recently, the focus of ESG investment in Japan has moved beyond the GPIF. Contrary to expectations, other public pension funds have hesitated to make ESG investments, although I think they have made a deliberate study of how to integrate ESG into their portfolios.
* As of March of 2018, GPIF's portfolio assets under management (AUM) included approximately JPY 622 billion in the Select Leaders fund and approximately JPY 388 billion in the WIN fund.
In 2018 we saw positive development in the private sector. The three major trust banks and their affiliated asset managers launched several commingled funds tracking the MSCI Japan ESG Select Leaders Index for corporate pension funds. Total AUM of the funds managed by Asset Management One, Sumitomo Mitsui Trust Asset Management, and Mitsubishi UFJ Trust and Banking are presumed to be about JPY 10 billion, at least.
I have heard that managers of corporate pension funds have been encouraged by their sponsor companies to implement ESG-oriented investments, and that those managers have felt relieved to find ESG fund performance tracked the TOPIX market index fairly closely.
Unfortunately, ESG investment in the retail market has barely progressed in 2018, with the exception of Mitsubishi UFJ Kokusai Asset Management which launched a mutual fund tracking the ESG Select Leaders Index.
In my opinion, asset managers have found it difficult to sell customers on the importance of ESG in retail funds including ETFs. To date, few individual investors have been inclined to choose funds based on social benefit.
Market in 2019
My expectation for the 2019 market is that ESG investment in Japan will expand a bit further than in 2018, especially among corporate and public pension funds and other institutional investors. As a positive sign, I know that asset managers and asset owners are now actively considering how to integrate ESG investment into their asset management.
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