Becht et al (2023)

Becht, Marco, Julian Franks, Hideaki Miyajima, Kazunori Suzuki. “Paper 7: Does Paying Passive Managers to Engage Improve ESG Performance?.” Working Paper (Université libre de Bruxelles), 2023.

lk notes from presentation by Kazunori Suzuki at PRI in Person Academic Network Conference (Tokyo), 2023.

Study of the natural experience of Japanese pension fund GPIF that began in 2017.

GPIF is a universal owner.

Two pillars to their initiative:

Adoption of ‘best in class’ indexes 2017~

• FTSE Blossom Japan

• FTSE Blossom Japan Sector Relative

• MSCI Japan ESG Select Leaders

  Engagement: to passive managers paid to improve ESG, 2018~

• Flat fee for engaging companies

• Gives passive managers incentive to track the index

• AM One (largest active manager for GPIF) engagement framework

• All records 2018-2022

• 3,000 meetings

  Difference in differences methodology. Used control group (firms never engaged) to distinguish between the two effects (best-in-class and engagement).

FTSE and MSCI results diverge. Why?

Did deep dive, details really matter.

1) Difference in designating non-reporters (0 for FTSE, blank for MSCI) - the zero really matters for the score

2) AM One at times engages on low or zero weight themes (per MSCI). These weights adjust rapidly. Materiality of theme at MSCI goes down w/ successful engagements. As a result, FTSE scores much more usable for this type of analysis.

3) We find a very substantial effect in Japan.

Conclusion –

• All FTSE scores went up significantly

• Inclusions in the indexes led to significant [positive] abnormal returns