In a new case study, Harvard Business School professors Rebecca Henderson and George Serafeim discuss the efforts of Hiro Mizuno, CIO of GPIF, the Japanese Government Pension Investment Fund, one of the largest pools of capital in the world, to integrate Environmental, Social and Governance (ESG) issues into every aspect of GPIF’s portfolio. Mizuno believed the only way to meet his responsibilities to his beneficiaries was to improve the performance of the entire economy by improving corporate governance, increasing inclusion and gender diversity, and reducing environmental damage from climate change. But, would it be enough to change the world? Should a pension fund even try to change the world? Henderson and Serafeim discuss these questions and more in their case, “Should a Pension Fund Try to Change the World? Inside GPIF’s Embrace of ESG.”
From the case study:
Stock analysts were divided as to whether investment in ESG issues was correlated with superior performance for any individual stock, but Mizuno believed that as a “universal owner”—a pool of capital so large that GPIF was effectively forced to invest in the entire market—and a “cross- generational investor”—GPIF had a hundred year time horizon—he had a duty to promote the sustainable development of the entire capital market. He believed that GPIF’s focus on ESG integration could change the behavior of both asset managers and corporations in ways that would contribute to sustainable economic growth and reduce long term risks of its portfolio.
Three years on, the preliminary results of this decision were encouraging. GPIF had launched five new ESG indices that had attracted considerable attention. GPIF was legally prohibited from voting its own shares or directly engaging with companies, but Mizuno had moved his active managers to multi- year compensation contracts tied to performance and had instructed both his active and passive managers to “actively engage” with the companies in which they invested. A survey of listed companies in Japan suggested that there had been a notable change in asset manager behavior as a result.
At the same time, Mizuno was aware that much remained to be done. In 2018, only 10% of all publicly listed Japanese companies produced “integrated” financial reports— reports that combined ESG and financial data into a single document.1 Moreover, most of GPIF’s equity was passively managed by “passive managers”—asset managers whose mandate focused only on purchasing the securities included in a particular index. Historically passive managers had received extremely low fees and were rarely equipped with the capabilities required to engage effectively with companies. Mizuno had proposed increasing the fees that GPIF paid to those passive managers who proposed a new, compelling “business model” that could meet GPIF’s new expectations in the era of stewardship. But in the short term this appeared to have only caused confusion. Most fundamentally, while there was increasing agreement that paying attention to ESG was consistent with GPIF’s fiduciary duty, Mizuno still found himself fielding questions as to whether this was indeed the case. As he looked out over the mountains of California, Mizuno wondered what more he could do to drive change.
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I just finished reading Henderson’t Reimagining Capitalism in a World on Fire. In that book, she discusses Hiro Mizuno’s impact on GPIF. That portion of the book reminds me a lot of the work being done by Jon Lukomnik and others who emphasize driving beta, rather than seeking alpha. This one of several strategies for rewiring finance.
Henderson’s primary theme is that corporations should aim at creating value, not just making money at any price. She knows her history, cites a vast array of innovative case studies and points to several positive solutions as we attempt to move from authoritarian populism to more democratic economies. She’s definitely an important thought leader, as is Hiro Mizuno.