Interview: Hiro Mizuno, CIO of Japan's GPIF
This article was written before the coronavirus pandemic had escalated in the UK, Europe and the USA and first appears in the April 2020 issue of CA magazine.
As the controller of Japan’s public sector pension fund, Hiro Mizuno has a fortune at his fingertips. He explains why he’s investing it in all our futures
Hiro Mizuno could be single-handedly shaking up the world of corporate finance. As Chief Investment Officer of Japan’s $1.6tn (£1.24trn) Government Pension Investment Fund (GPIF), the largest pension fund anywhere in the world, Mizuno uses his extensive influence to champion environmental, social and governance (ESG) concerns in line with the United Nations’ 17 sustainable development goals.
The high-profile business leader also advocates ethical practices, such as multi-generational investment, long-termism and universal ownership, which challenge the conventional short-term, market-beating strategies of the global capital market. Mizuno reasons that his ethical vision will have a profound impact on the way fund management is conducted. A change in behaviour, he argues, is vital for an industry that is set in its ways. “When we started our ESG campaign the most commonly asked question was: is it your job to save the planet and to make society better, or to do anything other than make a better return than the markets?
“I started questioning the traditional evaluation model of the asset manager, which is, how do you beat the markets and whether this business model is right – and then we came up with the concept of universal ownership. We own the universe, so if we own the universe, we cannot beat the universe. So, we should pay more attention to contributing to make the universe more sustainable.” Mizuno concluded that the conventional wisdom in asset management – to beat the market and beat the competitor – was not going to help in the long term and that finance should pay more attention to how it contributes to the whole system, including society and the environment.
“Even before we started this initiative, there was a market-level consensus among asset owners that the biggest problem in today’s capital market is shorttermism. But nobody is actually walking the talk – they talk against short-termism, but the way they build their business model promotes it. “What we have done is to introduce a multi-year contract for our asset manager contracts as concrete action to get rid of the short-termism from our investment chain.”
The only way is ethics
Of course, everybody has a different definition of the ‘long term’. For some it is three months, for others 30 years, and as Mizuno notes you cannot agree on things if you have a different timeframe in mind. As a result, he started using cross-generational or intergenerational investment, which he says resonates well with what people mean by long-term investment.
“It is interesting to hear asset managers, or even my own team, question whether we should have ethics in our job. Putting financial responsibility in front of financial return is probably not serving the purpose of their existence, which is to make money for the client. But I cannot think of any job that can be performed without ethics and I strongly believe that no job should exist without it.
“The first letter of ESG stands for environment. We tell all our asset managers to integrate ESG into their analysis, ask them to select critical ESG issues and engage with their portfolio company on these. My assumption is that most of our asset managers will choose the environmental issue as their critical ESG issue.”
When it comes to long-term action in this area, Mizuno is equally focused on delivering outcomes that have real-world impact.
“For GPIF, we started using the ESG index to improve the ESG quality of our portfolio – and the good thing about using the index is we can affect the market. Several months ago, we introduced the global environmental index to promote companies that have higher carbon efficiency and discourage those that have lower carbon efficiency. We have invested more than $10bn behind that index – which is our direct impact on the environment.
“We also recently released our ESG activity report in which we try to disclose the carbon efficiency of our global portfolio. We are at the top of the food chain, so for us to collect information our asset managers have to disclose their carbon footprint or the environmental warranty of their portfolio. But by doing it we are sending a strong message to our asset managers and the portfolio companies.”
Mizuno is also unusual in his enthusiastic and positive view of the potential impact on ESG of AI – a technology he believes the finance industry has been needlessly cautious about.
“Last year we monitored our asset managers’ activities and after six months made fascinating findings about how AI can help us. As a hidden agenda I wanted to persuade my team with this project that we should focus our efforts on something that could not be replaced by AI. As I tell them, ESG is one of the few areas where the human can prevail [over the machine].
“We are the biggest owner of Japanese equity markets, but the inconvenient truth of ownership is we have no say in today’s trading price because we don’t participate in today’s trading. Who has a say on price? The person who trades most today. According to statistics, on the New York Stock Exchange 70-80% of daily trading volume is now made by machine, and [those machines] have no opinion on what kind of society we want to live in or what kind of environment we want to keep for future generations. Machines don’t care.
“On the one hand we are talking about long-term investment and we want to get rid of short-termism, but if 70-80% of daily trading volume is made by machines, which don’t have a long-term perspective, what should humans do? I think they should focus on the long-term perspective or on value judgment. AI should scare some people, but on the other hand it streamlines what people should focus on.”
Hiro Mizuno was talking to the Saïd Business School, Oxford and City University’s Cuny TV