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Japan’s public pension fund will no longer lend out its foreign equity assets as it considers the practice to be too opaque and incompatible with its responsibilities as a long-term investor.
The Government Pension Investment Fund (GPIF) has around $1,452.5 billion in assets under management, of which $381 billion are foreign equities (as of March 2019), making it the world’s largest pension fund.
The fund will continue to lend its government debt assets.
In a statement on the decision, GPIF said that the fact that securities lending includes a title transfer element effectively creates a gap in the period in which the stock is held by GPIF, which “can be considered to be inconsistent with the fulfilment of the stewardship responsibilities of a long-term investor”.
Moreover, the fund expressed concerns that its programme lacked the transparency required to know who the ultimate borrower was what they were doing with the assets. The fund did not directly highlight a desire to deprive short sellers of its assets but this is understood to be one of the drivers behind the decision.
As a result, the fund confirmed today that its lending programme would be suspended until further notice, adding that it would reconsider the move “if improvements are made to enhance transparency and address the inconsistencies”.
The decision is understood to be part of GPIF’s aim of being a market leader in environmental, social and corporate governance (ESG) financing.
In September 2015, GPIF signed the Principles for Responsible Investment introduced by the United Nations, as part of GPIF’s efforts to enhance ESG implementation. The fund has since taken further steps to ensure ESG is put front-and-centre in policy decisions as well as contributing to several initiatives to launch green and social bonds.
Although GPIF is a heavyweight in the funds space the move is not expected to have a significant impact on global borrowing prices as its foreign equities holdings does not represent an overly significant portion of the global lending pool.
Nonetheless, the decision represents a negative development for the global securities lending market which has been actively attempting to incorporate ESG into the market infrastructure in recent years.
The move has drawn criticism and praise in equal measure from various financial market participants with much speculation as to whether it will cause others to consider short selling as non-ESG friendly and cause a domino effect of funds pulling out of the lending market.
