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). In 2018 GPIF gave its largest passive manager a remunerated mandate to engage with portfolio companies to improve ESG and adopted best-in-class indexes, rewarding high ESG score companies with additional equity investment. Using private data and difference-in-differences analysis we show that engagement by the asset manager has improved scores. In an event study, we find that the conditional portfolio tilt significantly impacts share prices. We also provide evidence that ESG scores for Japan increased significantly more than for companies in other countries.