Does Paying Passive Managers to Engage Improve ESG Performance?

The paper studies a natural experiment in responsible investment conducted by the Japanese Government Pension Investment Fund (GPIF), the largest public pension fund in the world. In 2018 GPIF gave its largest passive manager a remunerated mandate to improve the environmental (E), social (S) and governance (G) performance of portfolio companies. In the previous year the fund had adopted two best-in-class indexes, rewarding companies with high ESG scores through additional equity investment. We use private data and difference-in-differences analysis to show that engagement by the asset manager has resulted in improvements in some of the ESG scores for mid- and large cap companies; small-cap companies were rarely engaged. In an event study, we find some evidence that GPIF’s portfolio tilt towards ESG indexes has created financial incentives to improve ESG scores. We note that under GPIF’s programme portfolio tilting is a complement to engagement, while it is usually regarded as a substitute.