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Pension funds

NPS looks to expand scope of ESG criteria to step up responsible investment

Sep 08, 2020 (Gmt+09:00)

The National Pension Service (NPS) is seeking to incorporate environmental, social and governance (ESG) criteria into domestic equity and bond investments worth 450 trillion won ($378.7 billion) in a move to boost responsible investments and enhance long-term gains.

The South Korean pension fund has recently mandated an agency to introduce a system to evaluate the non-financial factors of domestic investments, according to the financial investment industry on Sept. 8.

“ESG stocks are exceptionally resilient against downward pressure. Institutional investors, including the NPS, should consider ESG factors to improve risk-management and boost long-term profitability,” said Ahn Hyo-joon, the chief investment officer of NPS at a forum in June.

The pension fund's domestic investments make up almost 59.2% of its 752.2 trillion won of assets under management. Responsible investments account for only about 4%, but are expected to steadily rise through the application of ESG criteria to domestic and overseas investments.

The NPS also expects to carry out negative screening and active exercise of shareholder rights based on the ESG evaluation, which will enhance long-term gains.npsim_main

Expanding the scope of ESG evaluation could have a huge ripple effect on the domestic capital market given that the pension fund's choice and degree of investment will heavily depend on the ESG rating.

Sectors tied to alcohol, tobacco, gambling, and coal power, among others, are likely to be crossed off as their businesses will not be in line with ESG criteria.

Currently, the NPS holds almost a 10% stake each in Hite Jinro, an alcohol beverage manufacturer; KT&G, a domestic tobacco company; and GKL, which operates casino services. The pension fund also invests hundreds of millions of dollars into overseas tobacco companies such as Philip Morris and British American Tobacco.

While ESG is a rising investment trend, particularly in Europe, there are views in Korea that ESG investment may not necessarily lead to increased profitability despite the pension fund's strong push for sustainable investing.

Between 2014 and 2018, the NPS managed a responsible investment portfolio based on ESG strategy to assess its profitability. At the time, the investment returns were high compared to the benchmark, but the volatility was also high, leading to the conclusion that its application was too risky.

“There are mixed views on how ESG investments actually influence a company’s performance or a pension fund’s long-term profitability,” said a chief investment officer from a mutual aid association. “It may be risky for the pension fund to put all of its cards into ESG.”

Other aspects include the possibility of putting unfair pressure on companies if ESG is used as a core indicator for company evaluation, given that the NPS is under government supervision. For example, investing and engaging in active shareholder activity based on ESG criteria alone may negatively affect business management as it would dismiss industry- or company-specific traits.

The global ESG market has grown to almost $31 trillion in 2018, more than double from $13.2 trillion in 2012. The market is expected to touch $35 trillion by 2025.

The NPS is the third-largest pension fund in the world alongside Japan’s Government Pension Investment Fund and the Government Pension Fund of Norway. The pension service posted a record-high return of 11.31% as of December 2019.

By Jung-hwan Hwang

Danbee Lee edited this article

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