Japan’s Government Pension Investment Fund conducted in-depth research that found that the fund’s use of environmental, social and justice factors when making investments is “contributing to the improvement of corporate value and investment return.”
According to the $1.7 trillion sovereign wealth fund, results of its analysis showed that diversity-related key performance indicators, such as the percentage of female directors on a company’s board and of female new hires, “have a statistically significant positive impact on corporate value indicators,” the pension fund said in a statement. According to the fund, other key indicators, like performance-linked compensation and the percentage of independent outside directors, also have a “significant positive impact” on its return on equity.
“GPIF believes that the sustainable growth of investees and the overall market is essential for earning stable income over a long period on its managed assets, and therefore engages in sustainability investment,” the pension fund stated. “This effectiveness measurement quantitatively verified how the key performance indicators of our adopted ESG indices affect corporate financial information and corporate value indicators while we continue our ESG investment.”
According to the report on the results, the research analyzed changes in the impact of ESG index indicators and observed “a statistically significant positive change” in the return on equity from establishing nomination committees. Setting up a nomination committee can “enhance the transparency of corporate management and increase investor confidence,” as well as providing oversight of the officer selection and evaluation processes.
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“Increased investor confidence can positively affect the company’s stock price and contribute to the enhancement of corporate value,” the report stated. “On the other hand, the establishment of a nomination committee could complicate the decision-making process and potentially have negative effects, depending on the relationships with stakeholders.”
However, the report also stated that the research found some diversity-related indicators produced results that were “inconsistent” with the fund’s ESG goals regarding its equity-to-book ratio and return on equity.
Additionally, GPIF’s report cautioned that corporate takeover defense measures could present a double-edged sword for investors. The measures have the ability to protect companies from hostile takeovers. However, it also stated that if management and shareholder interests are not aligned, then it could negatively impact corporate governance and value creation opportunities.
“Through this project, we have demonstrated that some KPIs related to ESG indices showed both statistically significant positive impacts on corporate value indicators and results inconsistent with an ESG perspective,” the GPIF said. “GPIF will continue its multifaceted examination of sustainability investments, and shall undertake bold reviews [to determine] if the effects of investment anticipated at the start of [an] investment period are considered to be highly unlikely to be achieved as expected going forward.”
The research and analysis for the report was conducted by EY Strategy and Consulting in Japan.
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Tags: environment social and governance, ESG, Japan Government Pension Investment Fund (GPIF)
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