FINANCE FINANCE EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT ESG Integration at the Government Pension Fund of Thailand September 2023 © 2023 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. RIGHTS AND PERMISSIONS The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2023. ESG Integration at the Government Pension Fund of Thailand. © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover: Miha Creative / shutterstock Page 3: BookyBuggy / iStock Page 5: fokkebok / iStock Page 6: Pavel Muravev / iStock Page 8: GPF Page 13: justhavealook / iStock Page 14: Vajirawich Wongpuvarak / iStock Page 18: justhavealook / iStock Page 22: Nirad / iStock Page 25: Fahroni / iStock Page 26: samart Boonprasongthan / iStock Page 28: Joejoesang / iStock Page 30: justhavealook / iStock Contents Executive Summary 2 1. Senior Leadership Statement 5 2. About this Report 7 3. Government Pension Fund of Thailand (GPF) 9 GPF’s Investment Philosophy 10 Governance of Responsible Investment 10 Overview of ESG Integration Approach 12 4. GPF-ESG Weight and Score: Asset Valuation Methodology© 15 5. Asset Class Application: Listed Equities 19 6. Asset Class Application: Fixed Income 23 7. Asset Class Application: External Managers 27 8. Looking Forward 31 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 1 >>> Executive Summary With assets under management of over 1.2 trillion baht, the Government Pension Fund of Thailand (GPF) aims to be the leader in ESG investing and initiatives in the country and globally. As a universal owner, and signatory to the UN Principles of Responsible Investment, we have a wider responsibility to support global action on sustainable development, and to ensure that environmental, social, and governance (ESG) issues are properly integrated into all of our investment decisions. FIGURE 1: GPF’s Portfolio Composition (as at September 2022) Government ESG bonds 1% 1% Thai corporate ESG bonds 22% Thai corporate bonds Safety assets 29% 13% Foreign corporate bonds 5% Private equity 4% 4% Thai equity (internal) Infrastructure 9% 9% 2% Thai equity (external) Real estate Foreign equity 1% Commodities 2 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND This report presents our practical experiences of combination of a Core Credit Score (65%) and Modifiers (35%). integrating ESG considerations into the investment Our credit research analysts determine a company’s Credit process. Score based on several factors, including ESG performance. While GPF does not currently analyse ESG issues for its The core of our approach is the GPF-ESG Weight and sovereign bond holdings, we do invest in Sovereign Green, Score: Asset Valuation Methodology©. For passive equity Social, and Sustainability (GSS) bonds which contribute to investments, a four-step process is applied to customize ESG outcomes. MSCI ESG data using local data sources and knowledge to better reflect the local context. In particular, we believe that We are proud of what we have achieved to date but there we need to place greater emphasis on corporate governance is more that we need to do in terms of our processes, factors than in MSCI’s global approach). For actively managed our reporting and our performance. We recognise that the equities, we apply negative screens and we use the the GPF- landscape of responsible investment is changing Building on ESG Weight and Score: Asset Valuation Methodology© to our work to date, areas for further action could include: adjust the weighted average cost of capital and thereby stock z Improved reporting – including on climate-related target prices. exposures. ESG factors are also included in our decisions on initial z Full incorporation of ESG factors into across all asset public offerings (IPOs) and in our external manager selection, classes. appointment and monitoring processes. z Developing and implementing a net zero strategy. In fixed income, in order to select high-quality companies and reduce the risk of default, GPF conducts a comprehensive z Continuing to work with our industry peers to drive higher credit analysis of debt issues with ESG factors forming an standards of responsible investment in Thailand, and integral part of the assessment. The GPF Credit Score is a across the Asian markets. ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 3 1. 4 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND >>> Senior Leadership Statement With assets under management of over 1.2 trillion baht (approximately USD 34 billion) invested across the globe, the Government Pension Fund of Thailand (GPF) is fully aware of its role as a universal owner. Our duties are not defined narrowly in terms of maximizing investment returns and preserving the value of pension assets. We have a wider responsibility to support global action on sustainable development, and to ensure that environmental, social, and governance (ESG) issues are properly integrated into all of our investment decisions and into the decisions of the companies and other entities that we invest in. It is our belief that good management of ESG issues goes hand in hand with our fiduciary duty. If our investee companies manage ESG issues effectively, their financial performance is also likely to improve. In 2018, we set our vision to become the leader in ESG investing and initiatives in Thailand. Since then, we have adopted the ESG integration framework of the UN Principles of Responsible Investment (PRI), OECD’s due diligence guidance for responsible business conduct, and the United Nations Guiding Principles (UNGPs) on Business and Human Rights. ESG factors have been fully integrated into GPF’s investment process from research to decision-making, with the GPF ESG score, which we first described in a report with the World Bank in 2020, serving as the cornerstone of our integration process. This report presents our practical experiences of integrating ESG considerations into our investment processes. It extends the previous report by providing greater detail on how we address ESG issues in fixed income and on how we work with our investment managers on ESG issues. As we see this as a dynamic and evolving journey, we have noted areas for further research and potential incorporation into our processes in future. As a PRI Signatory, I hope that the report will help promote wider acceptance of responsible investing within the industry, and inspire other investors to join us on the journey to creating a more sustainable future. Dr Srikanya Yathip Secretary General ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 5 2. 6 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND >>> About this Report This report describes the ESG integration practices at GPF as a practical example of how a pension fund can integrate ESG considerations into its investment practices and processes. The report focuses on the incorporation of ESG issues into our investment analysis and decision-making process. Other elements of responsible investing such as active ownership and ESG disclosure practices whilst also key to GPF’s overall approach, are not discussed in great detail in this report. The report is a product of technical co-operation between teams from GPF and the World Bank.1 The report starts by providing some background information on GPF, including its investment philosophy and an overview of ESG investment philosophy before detailing the GPF ESG Score methodology. It then describes how the GPF ESG Score methodology is applied to equity and fixed-income investments, followed by an overview of how GPF ensures that ESG considerations are integrated into the selection, appointment and monitoring of external managers. It concludes with some reflections on the landscape of responsible investment and identifies areas where GPF expects to improve its investment process in the coming years. 1 The World Bank input was coordinated with and provided by Cronos Sustainability consultants. ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 7 3. 8 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND >>> Government Pension Fund of Thailand (GPF) Government Pension Fund Act 1996 for government employees (the members) with the objectives of promoting members’ savings and of providing welfare and other benefits to members upon retirement. The Fund helps its members grow their savings for retirement by investing capital for returns under the acceptable risk level. Currently, it has 1.2 million members and 1.2 trillion baht (approximately USD 34 billion) in assets under management. FIGURE 2: GPF’s Asset Under Management and number of members between 2018 and 2022 1,200,000 1,000,000 800,000 600,000 2018 2019 2020 2021 2022 Number of Members 1,056,825 1,084,772 1,147,656 1,158,825 1,192,093 Asset Under Management 881,022 952,128 1,036,939 1,132,074 1,193,360 (million baht) ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 9 Vision: To become a ‘Thai Pension Fund with World-Class Standard’ Mission: z To provide assurance to government employees regarding payment of gratuity and pension upon termination of their official service. z To encourage regular savings among members. z To provide welfare programs and other benefits to members. G P F’ S INVEST MENT PHILO SO PH Y The Fund manages members’ savings with prudence As a major long-term institutional investor, GPF and diligence as prescribed by the laws and policies of recognizes the importance of sustainability. We believe Thailand. It prioritises diversification to maintain the optimal in sustainable investment and aim to become a sustainable balance between preservation of capital and growth of return pension fund bringing both ‘sustainable yet stable financial within acceptable risk parameters. returns’ to members and ‘social returns’ to society and to the global community. G OV ER NAN CE OF RESPONSIB L E INV EST M E NT In late 2021, the GPF Board appointed an ESG/SDGs The GPF Sustainable Investing Development Department Subcommittee. The Subcommittee has an oversight role on is responsible for formulating and executing ESG strategies the implementation of GPF’s ESG integration practices and and initiatives commensurate with GPF’s aspiration to be a ensuring that these practices are aligned with the Fund’s leader in ESG investing. ambition. The Subcommittee is also responsible for defining GPF’s actions are guided by its legal obligations under the ESG strategy, setting goals and targets, and revision of Government Pension Fund Act 1996 and by the external policies and regulations. commitments it has made, in particular to the Principles The ESG/SDGs Subcommittee’s roles complement those of for Responsible Investment and to the SEC’s Investment the Corporate Governance Subcommittee which provides Governance Principles (I Code). oversight of GPF’s corporate governance. These two Subcommittee’s along with the Risk Management and Audit Subcommittees, provide GPF’s lines of defence against ESG- related risks. 10 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND As a Signatory to the Principles for Responsible Investment (PRI), GPF commits to the following six key principles. Principle 1: Incorporate ESG issues into investment analysis and decision-making processes. Principle 2: Be active owners and incorporate ESG issues into our ownership policies and practices. Principle 3: Seek appropriate disclosure on ESG issues by the entities in which we invest. Principle 4: Promote acceptance and implementation of the Principles within the investment industry. Principle 5: Work together to enhance our effectiveness in implementing the Principles. Principle 6: Report on our activities and progress toward implementing the Principles. Under the I Code, subject to the need to meet its fiduciary responsibilities, GPF’s roles and duties are as follows. Code 1: Provide a clear written investment governance policy. Code 2: Ensure adequate prevention of conflicts of interest in the customers’ best interests. Code 3:  Create is a process for making decisions and following up closely and actively with the companies invested, with issues of strategy, good corporate governance, and social and environmental responsibility as part of the decision-making and follow-up. Code 4: Increase the level of monitoring of the companies invested where Code 3 proves insufficient. Code 5: Provide disclosure of voting policy and voting results to customers. Code 6: Collaborate with other investors as appropriate to ensure effective implementation of Code 1. Code 7: Disclose investment governance policy and compliance with investment governance principles. ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 11 OV E RVIEW OF ESG IN T EGRAT IO N A PPROAC H GPF believes in sustainability and aims to become a ESG integration in GPF investments occurs through a sustainable pension fund, bringing both ‘sustainable yet stable combination of approaches as illustrated in Figure 1 below, financial returns’ to members and ‘social returns’ to society which shows our portfolio composition by asset class and by and to the global community. As part of this process, GPF has ESG approach. Overall, about two-thirds of our holdings are established an investment framework that enables it, in line fully ESG-integrated. The rest, comprising primarily of safety with its fiduciary duties and its social responsibilities, to invest assets (the majority of which are Thai government and Bank within an ESG framework that has a high potential to deliver of Thailand bonds and bills), serves the fund’s main objective both social and investment returns, without compromising of capital preservation. either of these objectives. FIGURE 3: GPF’s Portfolio Composition (as at September 2022) Government ESG bonds 1% 1% Thai corporate ESG bonds 22% Thai corporate bonds Safety assets 29% 13% Foreign corporate bonds 5% Private equity 4% 4% Thai equity (internal) Infrastructure 9% 9% 2% Thai equity (external) Real estate Foreign equity 1% Commodities 12 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND For domestic equity, bonds, and other holdings that we For externally managed assets, we incorporate ESG into our manage in-house, ESG factors are taken into consideration external manager selection, appointment, and monitoring when analysing and making investment decisions, primarily processes. An ESG clause requires external fund managers utilising the methodology described in Section 4 but also to incorporate ESG into the mandates of our standard through active ownership which plays a key role in GPF’s ESG contract. GPF regularly engages in a dialogue with external investment strategy for internally and externally managed fund managers to emphasize the importance of responsible assets; an overview of our approach to active ownership is investment and to be informed of the managers’ operational provided in Section 5 below and a more detailed account is approaches to ESG. These processes are described in more presented in our ESG Report. In addition, we have a negative detail in Section 7 below. screening process which screens out companies that fail to meet our screening criteria or the criteria set out in our Negative List Guidelines (these prohibit GPF from further investing in companies that violate Securities and Exchange Act and/or cause serious negative ESG impact). ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 13 4. 14 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND >>> GPF-ESG Weight and Score: Asset Valuation Methodology© The scoring methodology, as well as the corresponding application in asset valuation, has been shaped by consultations with the OECD and with major pension funds such as PGGM, and refined based on the discussions with World Bank team when we published our first report describing the methodology in 2020 GPF’s GPF-ESG Weight and Score: Asset Valuation Methodology© has been in place since 2018. The methodology is a customized methodology that uses MSCI ESG data as a starting point for developing GPF-specific industry ESG weightings and company ESG scores (which we refer to as the GPF-ESG Weight and Score). While MSCI data offers the advantage of allowing global comparisons between companies, it suffers from three limitations in the Thai context. First, MSCI’s ESG data are calculated on a global basis, and if we are to rely solely on MSCI’s weights and scores, we would find that few Thai companies would have ESG scores comparable to their global peers. Second, MSCI’s data do not account for the data that are available from local sources. Third, for GPF and for the Thai market as a whole, governance factors are of higher concern, and we want to assign a greater weight to these factors in our investment process. We have therefore developed a four-step process to modify MSCI’s ESG data and scoring process to integrate Thai-specific data sources, and to reflect the concerns of Thai investors. STEP 1: MULTIPLY MSCI’S G-WEIGHT BY 1.3 This conversion factor is applied for governance factors to ensure that the G-Weight will not be less than 35% (around 1/3 of the total ESG-Weight). We also apply a cap of 65% to ensure that the G-Weight does not overshadow that of E & S issues. The result is that the final G-Weight for all companies is in the 35-65% range, to reflect the significance of governance in Thai market, yet leaving enough room for E & S issues. STEP 2: ADJUST THE E-WEIGHT AND THE S-WEIGHT The E-Weight and S-Weight take account of: (a) the total remaining weight after deducting the newly calculated G-Weight, and (b) the original MSCI E-Weights and S-Weights for the company in question. The final decision on E- and S-Weights is made by GPF’s Investment team and Sustainable Investment team, taking account of the new G-weights, the original E- and S-weights and their own views of and experience with the sector in question. ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 15 STEP 3: E-SCORE AND S-SCORE To assign the E- and S- scores for all Thai companies, GPF then searches for the Thai company that achieves the lowest CALCULATIONS E-Score and the Thai company that achieves the lowest GPF also develops proprietary ESG scores for Thai companies, S-Score. These two companies are respectively assigned which build on MSCI data but also account for the available, an E-Score of 4.0 and an S-Score of 4.0. The remaining standardized Thai local rating data and for GPF’s expert views companies then receive updated E- and S-Scores, using the on the ESG performance of Thai companies. MSCI E- and S-Scores in line with the following formula: In calculating E-Scores and S-Scores for Thai companies, [(MSCIE-score – MSCIold minimum) / Old Range / New Range] GPF’s view is that MSCI’s raw E- and S-Scores cannot be + New Minimum used directly as these are calculated so that companies can Figure 2 presents a full comparison between MSCI and GPF’s be compared with a global universe. To adjust these scores E and S-Scores. As would be expected the effect, in both for the Thai universe, GPF first re-frames MSCI’s 0.0-10.0 cases is to move the scores up and to the right. While the effect scale to 4.0-10.0 (i.e., no Thai company will have an E- or an is to compress (or reduce) the difference in scores between S-Score of less than 4 since the new minimum score starts different companies, the relative performance of individual from 4.0). companies is unchanged (i.e. the Thai leaders remain leaders and poorer performers remain poorer performers). FIGURE 4: Comparing MSCI and GPF’s E-Scores and S-Scores MSCI’s E Scores and S Scores 10.00 8.00 6.00 S Score 4.00 2.00 00 00 2.00 4.00 6.00 8.00 10.00 E Score GPF’s E Scores and S Scores 10.00 8.00 6.00 S Score 4.00 2.00 00 00 2.00 4.00 6.00 8.00 10.00 E Score 16 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND STEP 4: G-SCORE CALCULATION The weight proportion of the additional two factors are 10% and 30% respectively, leaving 60% for the original MSCI’s In calculating G-Score for Thai companies, GPF incorporates: G-scores. z The Star Rating from Thai IOD’s Corporate Governance Rating (CG Rating) where the maximum 5 stars in this STEP 5: RESULTS DISPLAY rating system is assigned a maximum score of 10 and 1-4 Research analysts and portfolio managers alike have access stars are calculated respectively and to GPF ESG score. The example in Figure 3 shows the GPF z GPF’s own internal analysis on governance-related issues ESG score for a company of interest in conjunction with the such as ESG information disclosure, qualitative responses sector averages for peer comparison. to GPF’s engagement, board structure, independency of external board etc. FIGURE 5: GPF ESG Score Output ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 17 5. 18 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND >>> Asset Class Application: Listed Equities For equity investing, GPF focuses on companies with strong fundamentals. To that end, GPF integrates ESG criteria into its stock analysis and decision-making processes. Figure 4 provides an overview of GPF’s framework for stock analysis, highlighting where ESG impact assessment is integrated into the investment process to form the final recommendation (‘the target price’). In summary, GPF’s stock research analysts conduct ‘fundamental analysis’ on the outlook for the investee company itself, along with the outlook for economy as a whole and for the specific industry sector in question. The GPF ESG score is an integral part of the ‘ESG impact assessment’ which aims to determine impact to the operating performance as well as the fair value of the stock. This calculation of fair value is used to inform the analyst’s ‘target price’ recommendation which is then communicated to portfolio managers. FIGURE 6: GPF’s Framework for Stock Analysis & Valuation ESG Score Fundamental Analysis ESG Impact Assessment Impact to Final Performance Marcro Target & Company Industry Economic Analysis Analysis Analysis Price Impact to Valuation ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 19 The GPF ESG score is integrated into the target price by modifying the discount rate in line with the rules set out in Table 1 below. TABLE 1: Rules for Incorporating ESG Scores into Asset Valuations GPF ESG SCORE DEFINITION EXECUTION Rule 1 >8 Low ESG Risk Apply a LOWER discount rate of 25bps LESS Rule 2 <6 Moderate – High ESG Risk Apply a HIGHER discount rate of 25bps MORE Rule 3 > 6 but < 8 Acceptable ESG Risk No action Using these rules, the weighted average cost of capital may GPF’s equity research analysts also produce an ESG be lowered by 25 basis points, resulting in a 4% higher target report for each investee company based on data from price. The higher recommended price reflects our belief that a various sources. The report comprises the GPF ESG score company with excellent ESG performance has a significantly along with information on other external ratings and on material greater upside potential. Since we have implemented this risks and opportunities for the company. The analysts can also methodology 6 companies in the investible universe (out of provide their views on material issues that might pose a risk a total of circa 160 companies) have met the criterion for the to the company’s performance. An example of these reports is 25bps discount rate. shown in Figure 5. FIGURE 7: A Sample ESG Report for Company X 20 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND I P OS ESG considerations are included in initial public offerings their assessment of material ESG factors and, to the extent (IPOs) investment decision making. However, the data possible, the company’s management of ESG issues. The that are available at the time of IPOs are generally much ESG Impact Assessment analysis is often more qualitative more limited than when a company has listed and is being rather than quantitative, due to the absence of ESG score researched by MSCI and other data providers. and rating data. Upon ISG’s approval portfolio managers can participate in the IPO. For companies that are coming to market for the first time, our process begins with a proposal to the Investment Steering Once a stock is included in the investible universe and has Group (ISG) to add a new stock to the investible universe. been listed, the investment process follows that of listed Our equity research analysts present their assessment of equity, and a formal ESG report will be produced by research the company, covering both fundamental factors as well as analysts within a reasonable time period. AC T IVE OWN E R S H I P Apart from integrating ESG into our investment process, GPF believes that active ownership is a powerful way to protect long-term shareholder value and to encourage beneficial outcomes to companies, investors, and the society at large. We perform our roles by attending Annual General Meetings, voting on our holdings, and engaging with investee companies. Our engagements generally take a positive approach, and generally involve the exchange of information and ideas on how to improve ESG performance. We also conduct collaborative engagements with other institutional investors. In terms of thematic topics human rights and climate change have been our priority topics for the past few years. GPF exercises its right to vote in line with its published Proxy Voting Guidelines. Our general rule is to vote in favour of all resolutions unless specified otherwise. The resolutions we most commonly vote against have related to corporate governance issues. In companies where we are concerned about corporate governance, we focus on votes relating to the election or re-election of specific directors as it is directors who set the basis for governance and culture through the organisation. We have an escalation strategy for negative issues or breaches of regulation. If we are unable to satisfactorily resolve issues through engagement or through voting, we can decide not to invest in the company until appropriate remedial action has been taken. ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 21 6. 22 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND >>> Asset Class Application: Fixed Income CORPORAT E B O NDS To select high-quality companies and reduce risk of default, GPF conducts a comprehensive credit analysis of debt issues with ESG factors forming an integral part of the assessment. The GPF Credit Score is an evaluation of a company’s creditworthiness, and is a combination of: z Core Credit Score (65%) which is based on an assessment of the company’s business and financial profiles. In determining the constituent scores for financial profile, for instance, key financial ratios such as D/E and ROA are graded against a set of predetermined thresholds; z Modifiers (35%) which relate to potential support, management quality, financial policy, and ESG. A company’s GPF ESG Score accounts for a quarter of the Modifiers. The ESG Score influences the overall GPF Credit Score for a corporate bond which in conjunction with other external credit ratings is used by portfolio managers to evaluate risk and determine the required rate of return on investment. As illustrated in Figure 6, GPF’s credit research analysts assign a company’s Credit Score based on an assessment of several factors, including ESG performance. Like in equity investments, GPF’s ESG score is one of the main inputs. ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 23 FIGURE 8: Framework for Credit Analysis) Industry Competitive Capital Operating Environment Position Structure Performance (25%) (25%) (20%) (30%) Business Profile Financial Profile (50%) (50%) Core Credit Score (65%) Credit Score Modifiers (35%) Support Management Quality (30%) (15%) ESG Financial Policy (25%) (30%) S OV ER EIG N BONDS As noted in Section 2, about a third of the Member Fund is Sovereign ESG Data Portal allows policy makers, practitioners, allocated to the Thai government and the Bank of Thailand’s and academic researchers to explore how countries compare (BOT) bonds and bills. In addition to the Member Fund, GPF to each other in terms of their macroeconomic ‘ESG’ indicators. also manages the Reserve Fund which acts as a buffer to While GPF does not currently analyse ESG issues for ensure payments to members and a mechanism to avoid the its sovereign bond holdings in the same way as it does depletion of the Fund in the long term. The Reserve fund can for listed equities and corporate fixed income, it does only be invested in (i) deposits at BOT or other state-owned invest in Sovereign Green, Social, and Sustainability banks, (ii) Thai government & BOT bonds and bills, and (iii) (GSS) bonds (see Figure 7) which do contribute to ESG other financial obligations which guaranteed by Ministry of outcomes through their use of proceeds. For instance, the Finance (MOF). sustainability bond issued by MOF’s Public Debt Management At present, GPF does not explicitly analyse ESG factors Office in 2020 is used to finance green infrastructure (the for its sovereign bond investments. GPF is aware of the Mass Rapid Transit – Orange Line) and social impact growing number of ESG-related assessment frameworks projects supporting Thailand’s recovery from the COVID-19 for government bonds. The ASCOR (Assessing Sovereign pandemic. GPF first began investing in Green, Social, and Climate-related Opportunities and Risks) project, for instance, Sustainability (GSS) bonds in 2020. These holdings have aids investors in assessing sovereign exposure to climate risk grown substantially since then, and we continue to increase and creates greater transparency between issuers, financial our holdings in GSS bonds, sovereign or otherwise, to make institutions, and relevant stakeholders. The World Bank’s significant environmental and social impact. 24 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND FIGURE 9: GPF’s GSS Bond Holdings (THB billion) 50 40 30 20 10 0 2020 2021 2022 Green Social Sustainability Sustainability-linked ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 25 7. 26 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND >>> Asset Class Application: External Managers GPF incorporates ESG considerations into the selection, appointment, and monitoring of its external fund managers. The criteria focus on six main areas: 1. Business Profile: Business strategies, operations, organizational structure, and fee structure, among other. 2. People: Human resources and personnel involved in investment activities. 3. Process: Investment decision-making processes and procedures. 4. Performance: Past performance against benchmarks and peers. 5. Service: Additional service provision to GPF, covering both investment-related and other aspects such as knowledge transfer. 6. ESG: Incorporation of ESG factors in investment analysis and decision-making. ESG factors were added in 2019. As illustrated in Figure 8, the assessment of the degree and quality of investment managers’ approach to ESG integration on ESG grounds considers the managers’ ESG policy, their investment processes, and their approaches such as proxy voting and engagement activities. ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 27 FIGURE 10: Scoring Framework for Manager Selection Factors Old New Active z Business Profile 10% 10% ESG Ownership Policy z People 25% 30% 25% 30% z Process 40% 25% z Performance 20% 20% Investment z Service 5% 5% Process 45% z ESG - 10% 100% 100% Once they have been appointed, GPF monitors and 9. On an ad hoc basis, GPF teams reach out to managers, evaluates how its fund managers integrate ESG into particularly those with segregated mandates, for more detailed their fund management. The process usually begins during discussions about their ESG practices. The data collection and the third quarter of each year with a request for ESG-related manager discussions form part of the annual portfolio review information from the managers. The sample questionnaire which influences contract renewals. for external fund manager monitoring is provided in Figure 28 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND FIGURE 11: Questionnaire for External Fund Manager Evaluation Responsible Investment Questions Following the PRI’s guideline, the Government Pension Fund (GPF) incorporates ESG considerations into the selection, appointment, and monitoring of our external fund managers. Please respond to all questions below which form part of the annual ESG performance review. FIRM LEVEL  ave there been any updates to your sustainability / 1. H No/Yes responsible investment policy in the past year? Please specify:  ave there been any changes to your responsible 2. H No/Yes investment oversight and resourcing? Please specify: FUND LEVEL – GPF INVESTMENT PORTFOLIO  hat is the proportion of the portfolio that is ESG 3. W % (estimate) integrated? Please briefly explain your answer. Are there any specific ESG targets in managing the 4.  No/Yes portfolio? Please specify: What ESG data, rating agencies, and research have been 5.  Please specify: used? Explain how ESG incorporation has impacted the portfolio 6.  Max 300 words composition. Explain how the stewardship policy has been 7.  Max 300 words implemented.  xplain how the engagement process has been 8. E Max 300 words implemented. CLIMATE ACTION & SUSTAINABLE DEVELOPMENT GOALS Have the following items been put in place at your 9.  organization? z Climate change governance No/Yes z Climate change strategy Please specify: z Climate change risk management z Climate change metrics and targets Provide up to three specific example(s) of how your 10.  responsible investment activities are aligned with (any Max 300 words of) the SDGs in managing the GPF portfolio. ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 29 8. 30 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND >>> Looking Forward T HE CHANGING L ANDSCA PE O F RESPO N S I BL E INV ESTME NT The landscape of responsible investment is evolving. Globally, we are seeing a rapid increase in the number of policy measures – covering pension fund disclosure requirements, requirements for institutional investors to adopt responsible investment practices. stewardship codes and corporate disclosure requirements. As at early 2022, the PRI estimated that, across the world’s 50 largest economies, some 868 policy tools and guidance and more than 300 policy revisions which support, encourage or require investors to consider all long-term value drivers, including environmental, social and governance (ESG) factors had been introduced. When we look at these in more detail, we see three themes: 1.  Pension funds are expected to have clear policies explaining how they implement responsible investment. These include expectations that: z These policies are published. z That the policies explain: } The coverage of the policy, and any exceptions to it. } The importance assigned to ESG issues in the asset owner’s investment practices and processes. } How the asset owner takes account of financially material considerations, including those arising from ESG considerations such as climate change. } How the asset owner acts as the stewards of their investments, including investee/ company engagement and exercising their voting rights. } How the asset owner manages conflicts of interest, including those that relate to sustainable investment. } How the asset owner accounts for the interests and preferences of their clients and/or beneficiaries. ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND 31 2.  Pension funds are expected to implement their Force on Climate-related Financial Disclosures (TCFD), policies and to report on this implementation. This and increasingly biodiversity/nature (TNFD).2 Within this, includes expectations that pension funds pension funds are expected to: z Identify the most significant (material) ESG issues for their z Ensure that they have effective governance and oversight investments. of these issues. z Set ESG-related objectives and targets. z Conduct scenario analysis or other forms of risk assessment. z Have clear plans for implementing these objectives and targets. z Set objectives and targets and develop clear strategies for delivering on these. z Track the ESG characteristics of their investment portfolios (e.g. carbon footprint). } In the specific context of climate change, there is increased emphasis on (a) making net zero z Assess and manage the ESG risks and opportunities in commitments, (b) setting net zero-aligned targets over their portfolios. the short- (through to 2025), medium- (through to 2030 z Engage with investee companies and assets, and use or 2035) and long-term (through to 2050), (c) ensuring their formal rights (e.g. voting) and information influence to that the organization has a clear strategy (or ‘transition encourage higher standards of corporate governance and plan’) for meeting these targets including clarity around sustainability performance. the actions that will be taken, the resources required, the responsibilities for oversight and implementation of  uch stronger focus on specific ESG themes, 3. M these actions. in particular climate change and net zero. Many jurisdictions now reference the requirements of the Task z Track, assess and report on performance. G PF C OM M E N T We recognise that the landscape of responsible investment is changing. We are proud of what we have achieved to date but there is more that we need to do, both in terms of our processes, our reporting and our performance. Building on our work to date, areas for further research and potential incorporation into our processes in future include: z Documenting our ESG integration efforts so that we can more clearly communicate – both at the level of individual investment and in aggregate - how these efforts have affected stock selection, portfolio composition, financial performance and ESG performance. z Critically benchmarking our practices, processes and reporting3– to identify areas of strength and weakness. z Tracking how our ESG integration processes affect our investment decisions, and assessing how these decisions may have affected our overall portfolio performance. z Publishing our first TCFD report, describing how we assess and manage our climate-related risks and opportunities and studying the new ISSB standards. z Studying the methodologies behind Net Zero and financed emissions to see how they might be applied in the local context. z Considering methodologies for incorporating ESG factors into sovereign bond analysis. z Proactively communicating with our members to better understand their expectations of our approach to ESG integration. z Continuing to work with our industry peers to drive higher standards of responsible investment in Thailand, and across the Asian markets. 2 The TCFD framework is aligned with the standards published by the International Sustainability Standards Board (ISSB) in 2023. 3 For example, using the World Bank’s Best Practice Disclosure Framework 32 ESG INTEGRATION AT THE GOVERNMENT PENSION FUND OF THAILAND