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Combining Sustainability And Yield In Government Bonds

Apr. 08, 2021 10:22 AM ET
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Summary

  • Progressive moves made by large institutional players, notably the country's ¥178trn Government Pension Investment Fund, have helped catalyze this striking change.
  • According to a 2016 study by the United Nations, ESG integration is lower by asset class in sovereign, supranational and agency (SSA) bonds than in equities, infrastructure, farmland and forestry, as well as in corporate bonds.
  • The new index meets a growing need amongst asset owners and asset managers - to extend a sustainable investment approach to the government bond sector, which accounts for over half the global bond market by size.

By Eisuke Nakajima, ESG lead, Japan, and Ryuichi Urino, senior manager, Japan

There's no doubt that Japanese institutions have led the world in sustainable investment. But can they extend the approach to the least environmentally-focused segment of the world's securities markets, government bonds?

According to the Japan Sustainable Investment Forum (JSIF), sustainable investment assets in Japan reached ¥336trn at the end of 2019, a 489% increase from three years earlier[1].

Progressive moves made by large institutional players, notably the country's ¥178trn Government Pension Investment Fund (GPIF), have helped catalyze this striking change.

GPIF has had a major influence on Japanese asset managers and asset owners by promoting environmental, social and governance (ESG) considerations in its own investment approach. It became a signatory to the United Nations' Principles for Responsible Investment (PRI) in 2015[2] and announced its intent to allocate some of its assets to funds tracking ESG indexes in 2017[3].

Japan's Stewardship Code, launched in 2014[4] and revised in 2017 and 2020, has also encouraged asset managers to integrate ESG into their portfolios, improving sustainability standards across the board.

The most popular ESG consideration in Japan is engagement, which represents about two thirds of sustainable investment assets, followed by proxy voting[5]. This is because Japan's Stewardship Code focuses on listed equities. However, asset managers are also increasingly applying ESG in their corporate fixed income portfolios as they are able to utilize some of the ESG elements they have used for equities.

However, there's one area of the global securities markets where sustainable investment has always lagged: government bonds.

According to a 2016 study by the United Nations, ESG integration is lower by asset class in sovereign, supranational and agency (SSA) bonds than in equities, infrastructure, farmland and forestry, as well as in corporate bonds.

ESG integration by asset class

Source: UN

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