Summary

On April 21, the General Office of the State Council issued the “Opinions on Promoting the Development of Individual Pensions”. The improvement of the domestic pension system will also have a certain impact on the development of the capital market. For example, the characteristics of long-term investment of overseas pension funds and the attributes of social responsibility are highly compatible with ESG concepts. As the framework for individual pension systems is established, pension funds are expected to play a more important role in the ESG arena.

This paper selects 4 large overseas pension funds, analyzes their ESG investment applications in depth, and summarizes the experience of my country’s pension ESG investment.

Japan Government Pension Investment Fund (GPIF): GPIF is the world’s largest pension fund by assets, with assets under management of approximately US$1.7 trillion, requiring all actively managed fund managers to incorporate ESG into their investment processes and achieve 100% ESG integration. GPIF’s most distinctive approach is investing in ESG indices. Since 2017, GPIF has announced four times to increase its investment in ESG indices, including a total of 8 ESG indices under FTSE Russell, MSCI, S&P Global S&P, and Morningstar, with an investment of more than 11 trillion yen.

Canada Pension Plan (CPP): The ESG practice of the Canada Pension Plan Investment Board CPPIB has two highlights. One is direct investment in renewable energy, including wind power plants, solar energy projects, etc. As of FY2021, such investments amounted to C$7.67 billion. Second, CPP is the first pension fund in the world to issue green bonds and clearly stipulate the purpose of the raised funds. There have been seven green bond issuances since 2018, with a total outstanding value of over C$4.5 billion.

Norwegian Government Pension Fund (GPF): The Norwegian pension fund consists of two parts: GPFG and GPFN, of which GPFG is the main part, accounting for 97.4% of the assets. The Norwegian Ministry of Finance requires GPFG funds to have dedicated environmental investments. When choosing a public company, the GPFG requires companies to have at least 25% of their business derived from low-carbon energy and renewable fuels, energy efficiency, and natural resource management. GPFG reduces major ESG risks through timely divestment. From 2012 to 2021, GPFG excluded 366 companies based on ESG standards.

California Teachers’ Retirement Fund (CalSTRS): Beginning in 2004, CalSTRS incorporated climate considerations into investment policies and processes, and the 2021 CalSTRS committee committed to achieving a portfolio of “Net Zero” greenhouse gas emissions by 2050. CalSTRS released the Net-Zero Climate Action Plan, formulating specific action plans from three parts: risk, return, and impact, including fund “carbon footprint” measurement, climate risk analysis, expanding investment quotas for low-carbon solutions, and promoting investee companies to adopt climate action, etc.

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On April 21, the General Office of the State Council issued the “Opinions on Promoting the Development of Individual Pensions”. With the establishment of the domestic individual pension system framework, pension funds are expected to play a more important role in the ESG field. Judging from overseas experience, pension funds have the characteristics of long-term investment and social responsibility, which are highly compatible with ESG and sustainable development concepts. With the establishment of my country’s personal pension system framework, pension funds are expected to play a more important role in the ESG field, reaping sustainable long-term benefits while helping the whole society to transform into a low-carbon economy.

This paper selects 4 overseas pension funds with the highest asset scale: the Japanese government pension investment fund, the Norwegian government pension fund, the Canadian pension plan, and the California teacher pension fund, in-depth analysis of their ESG investment applications, and summarizes the ESG investment of pension funds in my country. Learn from experience.

1. The Japanese Government Pension Investment Fund (GPIF)

(1) Overview of Japanese GPIF

The Japanese Government Pension Investment Fund (GPIF) is the world’s largest pension fund with the largest asset size. It makes diversified investments around the world with the goal of achieving stable returns. The investment time dimension exceeds 100 years. pay” pension system and provide support for an aging society. As of FY2021 3Q (December 2021), the total size of GPIF’s assets under management is 199.25 trillion yen (approximately US$1.73 trillion). The GPIF yield in fiscal 2020 was 25.15%, and the average annualized yield from 2001 to 2020 was 3.61%. In terms of asset allocation, GPIF stipulates that the proportion of pension reserves invested in domestic bonds, overseas bonds, domestic equities, and overseas equities are 25%±7%, 25%±6%, 25%±8%, and 25%±6%, respectively. , reduce the risk of major losses by diversifying investments.

According to the “FY2020 ESG Report” released by GPIF in September 2021, as of March 31, 2021, GPIF’s total asset management scale was 186.16 trillion yen, 100% of which had achieved ESG integration, of which assets directly tracking ESG indexes were 10.6 trillion days. RMB 1.1 trillion in assets invested in green bonds ; rated A+ by the United Nations Principles for Responsible Investment (PRI). GPIF firmly believes that the sustainable growth of investee companies and the capital market as a whole can help improve the stability of pension systems, encourage sustainable economic growth, and improve long-term returns on assets under management.

(2) ESG investment case: Investing in ESG stock indices

In terms of ESG investing, GPIF’s most distinctive approach is passive investing that tracks ESG indices. Since 2017, the scale of ESG passive asset management has continued to grow, from an initial 1 trillion yen to 10.6 trillion yen by the end of fiscal 2020. A total of four times, the GPIF has announced increased investment in ESG indices.

In July 2017, GPIF first announced the selection of three ESG indices for investment, namely: FTSE Blossom Japan Index, MSCI Japan ESG Select Leaders Index, MSCI Japan Women Empowerment Index (MSCI Japan Empowering Women Index). The first two are ESG composite indices and the last is a social (S) themed index, both for the Japanese stock market. GPIF hopes to incentivize Japanese companies to strengthen ESG assessment and enhance corporate value from a long-term perspective by selecting ESG indices. GPIF’s initial capital is about 1 trillion yen, or about 3% of its total investment in the Japanese equity market.

In September 2018, GPIF announced to invest in two new environmental-themed stock indices : the S&P/JPX Carbon Efficient Index and the S&P Global (excluding Japan) Large and Mid-Cap Carbon Efficient Index ( S&P Global Ex-Japan LargeMid CarbonEfficient Index); for Japanese stock markets and foreign stock markets, respectively. These index constituents cause less harm to the environment, and GPIF hopes to promote companies to improve carbon efficiency and related information disclosure by increasing investment in environmental-themed stocks. GPIF made an initial investment of 1.2 trillion yen in the two indices.

In December 2020, GPIF announced the addition of two more ESG-themed foreign stock indices for investment : the MSCI ACWI ESG Universal Index and the Morningstar Gender Diversity Index; The initial investment amounts are 1 trillion yen and 300 billion yen respectively.

On March 30, 2022, GPIF increased its ESG index investment for the fourth time and chose the FTSE Blossom Japan Sector Relative Index, which screened constituent stocks by sector from three aspects: FTSE Russell ESG Scores, carbon intensity, climate risks and opportunities. GPIF made an initial investment of 760 billion yen.

GPIF is very cautious in its selection of ESG indices. In summary, the factors considered include: (1) the market performance of the index, including return and risk characteristics, turnover rate, etc.; (2) the compilation of the index, including the definition of the index, Establish procedures, compilation methods, etc.; (3) ESG evaluation system adopted by the index, including data quality, understandability, information transparency, etc.; (4) Organizational structure of index companies, including communication with investors, media, etc., Development potential, internal control and conflict of interest management, etc.; (5) Authorization fees for obtaining the index. In addition, GPIF will also fully consider the diversity of the index, so that its overall balance cannot be limited to a single factor in E/S/G, and it will be fully deployed both domestically and overseas.

GPIF also proactively cooperates with index compilers, including requiring disclosure of index compilation methodology, requiring index compilers to collaborate with companies and report progress, and support investor education for investors and issuers in index compilation. In the case of the same rate of return, GPIF will choose index companies that cooperate more actively with companies in the portfolio and choose to communicate more with constituent companies, which will also contribute to the development of the international ESG evaluation system.

In addition, GPIF’s approach to carbon targeting includes: requiring all active fund managers to incorporate ESG into their investment processes to ensure long-term returns; participating in and cooperating with relevant international organizations; and actively promoting investments in green bonds and other ESG-related bonds , launched the initiative “Promoting Green, Social and Sustainable Development Bonds” in cooperation with the World Bank; as of March 31, 2021, GPIF’s green bond assets reached 1.1 trillion yen.

The Canada Pension Plan ( CPP)

(1) Overview of CPP in Canada

The Canada Pension Plan Investment Board (CPPIB) is Canada’s largest investment manager, providing strong and sustainable long-term protection for Canada Pension Plan (CPP) beneficiaries. According to CPPIB’s 2021 fiscal year annual report, as of the end of FY2021 (March 31, 2021), the net asset management scale was 497.2 billion Canadian dollars, including 21.0% of physical assets (real estate, infrastructure, energy, power plants, etc.), 55.9% of equity investment, 23.1% fixed income (32.9% fixed income investments, net of 9.8% bond issuance and cash strategies). FY2021 achieves a net yield of 20.4%; the average annualized yield in the last 10 years is 10.8%. CPP’s investments are in 56 countries around the world, and Canadian local investment only accounts for 15.7%.

CPPIB attaches great importance to the principles of sustainable development. In 2005, the CPPIB board of directors began to adopt the United Nations Sustainable Investment Principles (UN PRI); in 2008, CPPIB released its first Sustainable Investment Report; Water Disclosure Initiative; Established Responsible Investment Committee in 2011 to help integrate ESG in investments; Created Power and Renewable Energy Group in 2017 to further focus on investment opportunities in the renewable energy sector; Announced and launched the Green Bond Framework in 2018 The first issue of green bonds; the latest issue of the Sustainable Investment Policy will be updated in November 2021[1].

(2) ESG investment case: Investing in renewable energy and issuing green bonds

In terms of ESG practice, CPPIB has two highlights, one is the direct investment in renewable energy, and the other is the issuance of green bonds.

According to the “2021 Sustainable Investment Report” released by CPPIB, as of FY2021 (March 31, 2021), CPP’s investment in renewable energy reached 7.67 billion Canadian dollars, accounting for 1.54% of the fund’s total assets, a year-on-year increase of 16.0%. The scale of CPP’s renewable energy investment in FY2020 and FY2019 has a year-on-year growth rate of 126.4% and 421.4%, respectively.

Major investment projects include: In December 2017, it jointly invested US$272 million with Brazil’s Votorantim Energia to acquire two wind power stations in northeastern Brazil; in April 2018, it acquired 6 Canadian wind and solar projects from NextEra Energy Partners, totaling 741 million US dollars USD; acquisition of 69% stake in wind power company PatternEnergy in March 2020; USD 300 million equity investment in UK renewable energy group Octopus Energy Group in December 2021, which is expected to increase smart grid capacity and green energy generation capacity , and allows Octopus to install 30 additional wind turbines, providing the community with cheaper energy.

In June 2018, CPPIB became the first pension fund in the world to issue green bonds. Since then, CPPIB has made continuous progress in green bond issuance. The first Euro-denominated EUR & USO SOFR-linked green bond was issued in 2019, the second Euro-denominated green bond was issued in 2020, and the Australian dollar-denominated green bond was issued in 2021. According to CPPIB’s 2021 Green Bond Impact Report, CPPIB has conducted a total of seven green bond issuances, six of which are still outstanding, with a total outstanding amount of over C$4.5 billion.

CPP excels in green bond information disclosure. In October 2021, CPPIB updated the latest issue of “Green Bond Framework 2021”, and made clear requirements for CPP green bond information disclosure. It is required to disclose the details of capital investment every year, and publish a green bond impact assessment report every year. The document also clearly stipulates the use of funds for CPP to issue green bonds, which are divided into four categories: (1) Renewable energy, including solar photovoltaic power generation, wind power generation, and renewable energy technology manufacturing; (2) Green buildings, that is, direct investment Buildings with LEED Platinum certification and/or global equivalent certification; (3) low carbon/clean transportation, including investment in electric, fuel cell and non-motorized vehicles, and supporting infrastructure such as charging stations; (4) energy efficiency, i.e. investing in Technology/infrastructure that can improve energy efficiency.

CPPIB said that issuing green bonds can provide funds for emerging technologies, renewable energy, and carbon reduction in traditional industries that are required for the transition to a low-carbon economy; through CPP’s green bond program, more people can access investment opportunities in these projects. High standards of green bond issuance and information disclosure not only create value for CPP beneficiaries, but also promote the development of the broader green bond market.

The Norwegian Government Pension Fund ( GPF)

(1) Overview of Norway’s GPF

The Government Pension Fund, managed by the Norwegian Ministry of Finance, consists of two parts: the Government Pension Fund Global (GPFG) and the Government Pension Fund Norway (GPFN). The former is managed by the Norges Bank, and the source of funds is mainly the income of the national oil activities, so it is also called the Norwegian Petroleum Fund; the latter is managed by Folketrygdfondet. Together, GPFG and GPFN provide long-term wealth for generations of Norwegian citizens. In terms of volume, by the end of 2021, the total assets of GPFN will be NOK 333 billion, accounting for 2.6% of GPF; the total assets of GPFG will be 12.34 trillion crowns, accounting for 97.4%. Considering that the GPFG managed by Norges Bank is a major part of the Norwegian pension fund, we analyze the sustainable investment approach of the GPFG.

As of the end of 2021, the annual rate of return of the Norwegian government’s global pension fund GPFG was 14.5%, of which equity investment was NOK 8.8 trillion, accounting for 72.0%, and the annual rate of return was 20.8%; fixed income investment was 3.1 trillion, accounting for 25.4%. The annual yield was -1.9%; the unlisted real estate investment was 312 billion yuan, accounting for 2.5%, and the yield was 13.6%; the unlisted renewable energy infrastructure investment was 14 billion yuan, accounting for 0.1%, and the yield was 4.2%.

(2) The ESG Investment Case: Environmental Investment and Divestment Policies

First, the Norwegian Ministry of Finance requires GPFG funds to have dedicated environmental investments. As of the end of 2021, GPFG’s total environment-related investment will reach 107.7 billion kronor, covering 86 companies around the world, of which environment-related equity investment will yield 21.6% in 2021 and an average annualized rate of return of 10.4% from 2010 to 2021.

When selecting investment companies, the GPFG classifies environmental activities into three categories, requiring that companies must have at least 25% of their business related to these three categories of activities. (1) Low-emission energy and renewable fuels: For example, the development of renewable energy such as wind energy, solar energy, hydropower, and geothermal energy. Such investments include renewable energy giant EDP, solar company Solaria Energia, and Spanish electric company Iberdrola, among others. (2) Clean energy and energy efficiency: such as electric vehicles, energy-efficient buildings, energy efficiency in the industrial sector, energy storage technology, etc. Such investments include STMicroelectronics Eaton, Denso and others. (3) Natural resource management: including water resource management, waste treatment, recycling, agricultural forestry and land resource management, etc. Such investments include DSM DSM, Waste Connection Canada, and GFL Environmental, a North American diversified environmental services provider.

GPFG discloses these three categories of corporate equity investments in the 2021 Responsible Investment Report.

In terms of environmental investment, in addition to company equity, GPFG will participate in unlisted renewable energy infrastructure investments for the first time in 2021. In April 2021, the GPFG fund acquired a 50% stake in the Borssele 1&2 wind farm in the Netherlands for 1.375 billion euros (approximately 13.9 billion kroner), which has an installed capacity of 752 MW and can satisfy about 1 million Dutch households electricity demand.

In addition, GPFG mitigates significant ESG risks through timely divestment , while at the same time urging companies to improve their ESG performance. GPFG decides to divest if a company is engaging in unsustainable business activities or has a significant negative impact on the environment and society. GPFG removed 52 companies from its portfolio in 2021; a total of 366 companies have been removed from GPFG since 2012.

4. California Teachers’ Retirement Fund ( CalSTRS )

(1) Overview of CalSTRS in the United States

The California State Teachers’ Retirement System (CalSTRS) was established in 1913 to provide pensions for educators in California’s public schools. For the 2020-21 fiscal year (July 1, 2020 to June 30, 2021), CalSTRS provided a total of $16.6 billion in pensions to its members. As of June 30, 2021, CalSTRS’s total net position was $312.1 billion, and the net return on the fund’s investment for the full fiscal year reached a record high of 27.19%, well above the 7% investment assumption.

Since 2004, CalSTRS has incorporated climate considerations into its investment philosophy, policies and processes. In September 2021, the CalSTRS Committee adopted a commitment to achieve “NetZero” greenhouse gas emissions from the CalSTRS portfolio by 2050 or earlier, consistent with the Paris Agreement’s science-based benchmarking targets. To this end, the CalSTRS Investment Committee has approved an implementation framework in an effort to address global climate change.

(2) ESG Investment Case: “Net Zero” Climate Action Plan

CalSTRS’ Green Initiatives Task Force Report identifies important steps to achieve a “Net Zero” portfolio:

(1) Pledge: In September 2021, the CalSTRS Investment Committee adopted a pledge to achieve net zero emissions in the portfolio by 2050 or earlier.

(2) Plan: The second step is to formulate an action plan, for which CalSTRS has formulated the NetZero Climate Action Plan.

(3) Proceed: Establish a set of near-term action plans, including creating an effective internal governance structure, assessing a methodological framework for “net zero” investment, procuring external resources and engaging external experts as needed, and measuring the carbon footprint of the investment portfolio , Set clear mid-term goals, promote multi-party communication with stakeholders, etc.

(4) Publish: Provide regular reports on progress towards achieving the goal of a “net zero” portfolio.

Among them, CalSTRS’s Net Zero Climate Action Plan is the key to achieving the 2050 net zero goal, formulating specific action plans from three core parts: risk, return, and impact.

Risk: Measure and estimate the carbon footprint of a portfolio, reducing exposure to high-emitting industries or businesses that are negatively impacted by climate change. CalSTRS plans to complete the measurement of the “carbon footprint” of public market securities in the portfolio in the first half of 2022 and will continue to advance the measurement of the “carbon footprint” of the private investment segment.

Return: CalSTRS has been actively integrating climate solutions into its product portfolio since 2004, with CalSTRS investing more than $20 billion in low carbon solutions in 2021. As of June 30, 2021, $14.2 billion was invested in LEED-certified real estate buildings, and $1.4 billion was invested in renewable energy, agroforestry, and more. As of October 31, 2021, the portfolio held USD 294 million in green bonds and USD 4.2 billion in public company equities earmarked for low carbon strategies.

Influence: As a major player in the “Climate Action 100+” (Climate Action 100+), CalSTRS actively advocates and guides companies to take action on climate change. Success stories include: promoting Duke Energy, Southern Company, Nippon Steel Commitment to net-zero emissions by 2050, Phillips 66 pledge to reduce emissions by 15% from 2019 levels by 2030, and more.

CalSTRS in 2021 has made important progress towards achieving “net zero” emissions. On the one hand, CalSTRS promotes the green transition of multiple types of assets, and has invested a total of US$1 billion in two low-carbon transition ETFs launched by BlackRock: BlackRock U.S. Carbon Transition Readiness ETF, World (U.S. Excluded) Carbon Transition Readiness ETF (BlackRock World ex US Carbon Transition Readiness ETF) to increase exposure to low carbon related stocks worldwide. CalSTRS is creating a systematic platform dedicated to sustainable investments in private equity, infrastructure and real estate, which reached $11.1 billion as of December 31, 2021; CalSTRS plans to invest $1-2 billion annually over the next two years , to find private sustainable investment opportunities.

CalSTRS, on the other hand, completes a physical climate risk analysis of a real estate portfolio. Physical climate risks include the economic impact of temperature, precipitation, sea level rise, floods, hurricanes, wildfires, etc. on physical assets. CalSTRS has exclusively engaged Rhodium Group to provide independent research on the physical risks of climate change for its real estate portfolio. Rhodium Group reviewed the core sample portion of the CalSTRS real estate portfolio (representing $11.6 billion in real estate) and projected the combined impact of climate change to be between $7 million and $10 million by 2040 (equivalent to 0.06% of sample assets- 0.08%), increasing to $14 million to $35 million by the end of the century (estimated 0.12% -0.31% of sample assets).

In addition to the Net Zero Climate Action Plan, another feature of CalSTRS is the Thermal Coal Divestment Act. In October 2015, the U.S. Senate passed Senate Bill No. 185[2], prohibiting California’s two major retirement funds, the Public Employees Retirement Fund (CalPERS) and the Teachers’ Retirement Fund (CalSTRS), from making new investments in coal power companies. It also requires CalPERS and CalSTRS to complete the liquidation of coal power investments in 2017, removing thermal coal companies from their portfolios unless they are determined to be making a clean energy transition.

V. Summary of experience in ESG investment of overseas pension funds

Through case studies on the ESG investment application of large pension funds in Japan, Canada, Norway, and the United States, several experiences of ESG investment in overseas pension funds can be summarized.

First, set a net-zero carbon portfolio goal. For example, CalSTRS, the California Teachers’ Retirement Fund introduced above, has committed to achieving net zero greenhouse gas emissions (Net Zero) in its portfolio by 2050, and has issued an action plan and a mid-term plan. In addition, a number of large overseas pension funds have signed the Glasgow Net Zero Finance Alliance (GFANZ), which is committed to achieving carbon neutrality no later than 2050, including the United Nations Joint Staff Pension Fund (UNJSPF), the New York State Common Pension Fund, etc. .

Second, promote multi-asset class ESG investment. In addition to investing in traditional methods such as listed company stocks and green bonds, overseas pension funds also actively participate in ESG-related ETFs, renewable energy infrastructure, sustainable real estate investments, etc. For example, Japan’s GPIF has invested in 8 ESG-related ETFs, Canada’s CPPIB has invested in a number of wind power, solar and other infrastructure projects, and California’s CalSTRS plans to invest US$1 billion to US$2 billion annually in the next two years to focus on private investment opportunities, with particular attention to security housing, and companies and projects related to low-carbon solutions.

Third, actively conduct ESG-related exchanges with investee companies. Giving full play to the rights of shareholders, participating in company meetings and voting, regularly communicating with investee companies on ESG-related issues and development strategies, and urging the disclosure of relevant information are an important part of ESG investment. For example, the CalSTRS fund has pushed Duke Energy, Southern Company, Nippon Steel, etc. to set 2050 net-zero emissions targets, and plans to push all its private equity partners to complete ESG disclosure under the ILPA framework by 2036.

Fourth, adopt appropriate divestment and exclusion screening policies. The 2015 U.S. Senate Bill 185 strictly prohibited California’s two largest pension funds, CalPERS and CalSTRS, from increasing new investments in coal power, and required the complete removal of thermal coal companies from their portfolios in 2017. The Norwegian GPFG fund has withdrawn from 366 companies based on ESG criteria since 2012. Appropriate divestment and exclusion policies can urge companies to improve ESG performance, reduce exposure to high-carbon industries and companies, and allow more capital to flow to green areas.

risk warning

(1) The development of ESG investment is less than expected

(2) Poor understanding of overseas pension funds

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