Japanese pension plans start using ESG benchmarks

Japanese pension plans have not tended to put much focus on environmental, social and governance (ESG) factors when making investment allocations, but that may be slowly changing.

The National Federation of Mutual Aid Associations for Municipal Personnel (NFMAAMP), with ¥8 trillion in AUM, has become the country’s first institutional investor to use the MSCI Japan ESG Index as a benchmark for a passive mandate. Between 7% and 17% of the Federation’s total AUM is allocated to domestic equities, and part of this will be used for the mandate.

NFMAAMP has already issued an RFP for the mandate. Managers must be signatories to the UN Principles for Responsible Investment, marking the first time this has been required by a public pension fund in Japan.

“We have chosen the MSCI Japan ESG Index for its global and sector-specific ESG research and analysis, and also because it closely tracks our current benchmark for our Japanese equity fund," explained Mr Okada, general fund manager of NFMAAMP.

The Federation is starting with a small percentage of the total portfolio with a view to trying out an ESG strategy, says Toshiaki Matsumae, executive director at MSCI in Tokyo. He adds that NFMAAMP tends to be more sophisticated than the typical large Japanese pension plan.

The index firm has not yet discussed with the Federation the possibility of using ESG indices with other underlyings, but Matsumae says he hopes this focus will extend beyond Japan.

MSCI has had tentative enquiries from other institutions following NFMAAMP’s move, he tells AsianInvestor, suggesting that they may want to see how this deal works out before doing something similar themselves. 

The bulk – as much as 80% – of Japanese pension plan’s public equity portfolios tend to be in passive mandates, says Matsumae, because their asset pools are so large that it’s questionable how effective an active strategy can be. They typically combine a very large portfolio of passive equity management with satellite active mandates.

So far, that ratio of active to passive has been pretty stable, he adds, even though many public pension plans are frustrated with active managers not being able to outperform.

When it comes to passive equity management, large Japanese institutions tend to outsource it to both active and passive fund managers, says Matsumae. They don’t tend to have the infrastructure to do this themselves, whereas they might manage bonds in-house, because they tend to buy and hold Japan government bonds.

Nor would pension plans use exchange-traded funds, says Matsumae, unlike some institutions, such as Japan Post or regional banks, which might do more in-house management and use ETFs.

If pension plans were to have in-house management capabilities, they could theoretically buy individual stocks and ETFs, but that would mean making investment decisions like asset managers. “Is that authority given by their trustees? Usually not.”