The BRICS (Brazil, Russia, India, China and South Africa) nations are making their own bank – countering the influence of the International Monetary Fund (IMF). The BRICS member nations have been disappointed with the non-implementation of the 2010 IMF reforms. Leaders of the nations signed an agreement to create the New Development Bank (NDB) to mobilize resources and capital to fund infrastructure and developments in BRICS countries. Starting with US$ 100 billion in initial authorized capital, the bank will be based in Shanghai. The first chair of the board of governors will be from Russia.
RDIF and the BRICS
The Russian Direct Investment Fund is attempting to form a joint fund to invest in equity capital of BRICS infrastructure projects. Just after the World Cup in Brazil, this topic was discussed at the BRICS Summit in Fortaleza, Brazil. Depending on negotiations, the fund could be operational by the next BRICS Summit taking place in Ufa, Russia in 2015.
Source: BRICS Summit
Sixth BRICS Summit – Fortaleza Declaration
1. We, the leaders of the Federative Republic of Brazil, the Russian Federation, the Republic of India, the People’s Republic of China and the Republic of South Africa, met in Fortaleza, Brazil, on 15 July 2014 at the Sixth BRICS Summit. To inaugurate the second cycle of BRICS Summits, the theme chosen for our discussions was “Inclusive Growth: Sustainable Solutions”, in keeping with the inclusive macroeconomic and social policies carried out by our governments and the imperative to address challenges to humankind posed by the need to simultaneously achieve growth, inclusiveness, protection and preservation.
2. In the aftermath of the first cycle of five Summits, hosted by every BRICS member, our coordination is well established in various multilateral and plurilateral initiatives and intra-BRICS cooperation is expanding to encompass new areas. Our shared views and commitment to international law and to multilateralism, with the United Nations at its center and foundation, are widely recognized and constitute a major contribution to global peace, economic stability, social inclusion, equality, sustainable development and mutually beneficial cooperation with all countries.
3. We renew our openness to increasing engagement with other countries, particularly developing countries and emerging market economies, as well as with international and regional organizations, with a view to fostering cooperation and solidarity in our relations with all nations and peoples. To that effect, we will hold a joint session with the leaders of the South American nations, under the theme of the Sixth BRICS Summit, with a view to furthering cooperation between BRICS and South America. We reaffirm our support for the South American integration processes, and recognize in particular the importance of the Union of South American Nations (UNASUR) in promoting peace and democracy in the region, and in achieving sustainable development and poverty eradication. We believe that strengthened dialogue among BRICS and South American countries can play an active role in enhancing multilateralism and international cooperation, for the promotion of peace, security, economic and social progress and sustainable development in an interdependent and increasingly complex, globalizing world.
4. Since its inception the BRICS have been guided by the overarching objectives of peace, security, development and cooperation. In this new cycle, while remaining committed to those objectives, we pledge to deepen our partnership with a renewed vision, based on openness, inclusiveness and mutually beneficial cooperation. In this sense, we are ready to explore new areas towards a comprehensive cooperation and a closer economic partnership to facilitate market inter-linkages, financial integration, infrastructure connectivity as well as people-to-people contacts.
5. The Sixth Summit takes place at a crucial juncture, as the international community assesses how to address the challenges of strong economic recovery from the global financial crises, sustainable development, including climate change, while also formulating the post-2015 Development Agenda. At the same time, we are confronted with persistent political instability and conflict in various global hotspots and non-conventional emerging threats. On the other hand, international governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness, as transitional and ad hoc arrangements become increasingly prevalent, often at the expense of multilateralism. We believe the BRICS are an important force for incremental change and reform of current institutions towards more representative and equitable governance, capable of generating more inclusive global growth and fostering a stable, peaceful and prosperous world.
6. During the first cycle of BRICS Summits, collectively our economies have consolidated their position as the main engines for sustaining the pace of the international economy as it recovers from the recent economic and financial global crisis. The BRICS continue to contribute significantly to global growth and to the reduction of poverty in our own and other countries. Our economic growth and social inclusion policies have helped to stabilize global economy, to foster the creation of jobs, to reduce poverty, and to combat inequality, thus contributing to the achievement of the Millennium Development Goals. In this new cycle, besides its contribution in fostering strong, sustainable and balanced growth, BRICS will continue to play a significant role in promoting social development and in contributing to define the international agenda in this area, building on its experience in addressing the challenges of poverty and inequality.
7. To better reflect the advancement of the social policies of the BRICS and the positive impacts of its economic growth, we instruct our National Institutes of Statistics and the Ministries of Health and Education to work on the development of joint methodologies for social indicators to be incorporated in the BRICS Joint Statistical Publication. We also encourage the BRICS Think Tanks Council to provide technical support in this task. We further request the BRICS National Institutes of Statistics to discuss the viability and feasibility of a platform for the development of such methodologies and to report thereon.
8. The world economy has strengthened, with signs of improvement in some advanced economies. Significant downside risks to this recovery remain, however. Unemployment and debt levels are worryingly high and growth remains weak in many advanced economies. Emerging market economies and developing countries (EMDCs) continue to contribute significantly to global growth and will do so in the years to come. Even as the global economy strengthens, monetary policy settings in some advanced economies may bring renewed stress and volatility to financial markets and changes in monetary stance need to be carefully calibrated and clearly communicated in order to minimize negative spillovers.
9. Strong macroeconomic frameworks, well regulated financial markets and robust levels of reserves have allowed EMDCs in general, and the BRICS in particular, to better deal with the risks and spillovers presented by the challenging economic conditions in the last few years. Nevertheless, further macroeconomic coordination amongst all major economies, in particular in the G20, remains a critical factor for strengthening the prospects for a vigorous and sustainable recovery worldwide. In this context, we reaffirm our strong commitment to continue working among ourselves and with the global community to foster financial stability, support sustainable, stronger and inclusive growth and promote quality jobs. The BRICS stand ready to contribute to the G20 goal of lifting our collective GDP by more than 2 percent above the trajectory implied by current policies over the coming 5 years.
10. We commend Russia for the successful work during its presidency of the G20 in 2013. The institution of the BRICS Summits largely coincided with the beginning of the global crisis, the first G20 Summits and the consolidation of that Group as the premier forum for economic coordination among its members. As a new round of BRICS Summits begins, we remain committed to deliver constructive responses to global economic and financial challenges and to serve as a strong voice for the promotion of sustainable development, inclusive growth, financial stability and of more representative international economic governance. We will continue to pursue our fruitful coordination and to promote our development goals within the international economic system and financial architecture.
11. BRICS, as well as other EMDCs, continue to face significant financing constraints to address infrastructure gaps and sustainable development needs. With this in mind, we are pleased to announce the signing of the Agreement establishing the New Development Bank (NDB), with the purpose of mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging and developing economies. We appreciate the work undertaken by our Finance Ministers. Based on sound banking principles, the NDB will strengthen the cooperation among our countries and will supplement the efforts of multilateral and regional financial institutions for global development, thus contributing to our collective commitments for achieving the goal of strong, sustainable and balanced growth.
12. The Bank shall have an initial authorized capital of US$ 100 billion. The initial subscribed capital shall be of US$ 50 billion, equally shared among founding members. The first chair of the Board of Governors shall be from Russia. The first chair of the Board of Directors shall be from Brazil. The first President of the Bank shall be from India. The headquarters of the Bank shall be located in Shanghai. The New Development Bank Africa Regional Center shall be established in South Africa concurrently with the headquarters. We direct our Finance Ministers to work out the modalities for its operationalization.
13. We are pleased to announce the signing of the Treaty for the establishment of the BRICS Contingent Reserve Arrangement (CRA) with an initial size of US$ 100 billion. This arrangement will have a positive precautionary effect, help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements. We appreciate the work undertaken by our Finance Ministers and Central Bank Governors. The Agreement is a framework for the provision of liquidity through currency swaps in response to actual or potential short-term balance of payments pressures.
14. We also welcome the signing of the Memorandum of Understanding on Cooperation among BRICS Export Credit and Guarantees Agencies that will improve the support environment for increasing trade opportunities among our nations.
15. We appreciate the progress our Development Banks have made in enhancing and strengthening the financial ties among BRICS countries. Given the importance of adopting innovation initiatives, we welcome the conclusion of the Cooperation Agreement on Innovation within the BRICS Interbank Cooperation Mechanism.
16. We recognize that there is potential for BRICS insurance and reinsurance markets to pool capacities. We direct our relevant authorities to explore avenues of cooperation in this regard.
17. We believe that sustainable development and economic growth will be facilitated by taxation of revenue generated in jurisdictions where economic activity takes place. We express our concern over the harmful impact of tax evasion, transnational fraud and aggressive tax planning on the world economy. We are aware of the challenges brought by aggressive tax avoidance and non-compliance practices. We, therefore, affirm our commitment to continue a cooperative approach on issues related to tax administrations and to enhance cooperation in the international forums targeting tax base erosion and information exchange for tax purposes. We direct our relevant authorities to explore ways of enhancing cooperation in this area. We also direct our relevant authorities to strengthen cooperation in the field of customs.
18. We remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness. The IMF reform process is based on high-level commitments, which already strengthened the Fund’s resources and must also lead to the modernization of its governance structure so as to better reflect the increasing weight of EMDCs in the world economy. The Fund must remain a quota-based institution. We call on the membership of the IMF to find ways to implement the 14th General Review of Quotas without further delay. We reiterate our call on the IMF to develop options to move ahead with its reform process, with a view to ensuring increased voice and representation of EMDCs, in case the 2010 reforms are not entered into force by the end of the year. We also call on the membership of the IMF to reach a final agreement on a new quota formula together with the 15th General Review of Quotas so as not to further jeopardize the postponed deadline of January 2015.
19. We welcome the goals set by the World Bank Group to help countries end extreme poverty and to promote shared prosperity. We recognize the potential of this new strategy in support of the fulfillment of these ambitious goals by the international community. This potential will only be realized, however, if the institution and its membership effectively move towards more democratic governance structures, strengthen the Bank’s financial capacity and explore innovative ways to enhance development financing and knowledge sharing while pursuing a strong client orientation that recognizes each country’s development needs. We look forward to initiating the work on the next shareholding review at the World Bank as soon as possible in order to meet the agreed deadline of October 2015. In this sense, we call for an international financial architecture that is more conducive to overcoming development challenges. We have been very active in improving the international financial architecture through our multilateral coordination and through our financial cooperation initiatives, which will, in a complementary manner, increase the diversity and availability of resources for promoting development and ensuring stability in the global economy.
20. We are committed to raise our economic cooperation to a qualitatively new level. To achieve this, we emphasize the importance of establishing a road map for intra-BRICS economic cooperation. In this regard, we welcome the proposals for a “BRICS Economic Cooperation Strategy” and a “Framework of BRICS Closer Economic Partnership”, which lay down steps to promote intra-BRICS economic, trade and investment cooperation. Based on the documents tabled and informed by the input of the BRICS Think Tanks Council (BTTC), we instruct our Sherpas to advance discussions with a view to submit their proposal for endorsement by the next BRICS Summit.
21. We believe all countries should enjoy due rights, equal opportunities and fair participation in global economic, financial and trade affairs, recognizing that countries have different capacities and are at different levels of development. We strive for an open world economy with efficient allocation of resources, free flow of goods, and fair and orderly competition to the benefit of all. In reaffirming our support for an open, inclusive, non-discriminatory, transparent and rule-based multilateral trading system, we will continue our efforts towards the successful conclusion of the Doha Round of the World Trade Organization (WTO), following the positive results of the Ninth Ministerial Conference (MC9), held in Bali, Indonesia, in December 2013. In this context, we reaffirm our commitment to establish by the end of this year a post-Bali work program for concluding the Doha Round, based on the progress already made and in keeping with the mandate established in the Doha Development Agenda. We affirm that this work program should prioritize the issues where legally binding outcomes could not be achieved at MC9, including Public Stock-Holding for Food Security Purposes. We look forward to the implementation of the Agreement on Trade Facilitation. We call upon international partners to provide support to the poorest, most vulnerable WTO members to enable them to implement this Agreement, which should support their development objectives. We strongly support the WTO dispute settlement system as a cornerstone of the security and predictability of the multilateral trading system and we will enhance our ongoing dialogue on substantive and practical matters relating to it, including in the ongoing negotiations on WTO Dispute Settlement Understanding reform. We recognize the importance of Regional Trade Agreements, which should complement the multilateral trading system, and of keeping them open, inclusive and transparent, as well as refraining from introducing exclusive and discriminatory clauses and standards.
22. We reaffirm the United Nations Conference on Trade and Development’s (UNCTAD) mandate as the focal point in the UN system dedicated to consider the interrelated issues of trade, investment, finance and technology from a development perspective. UNCTAD’s mandate and work are unique and necessary to deal with the challenges of development and growth in the increasingly interdependent global economy. In congratulating UNCTAD for the 50th anniversary of its foundation in 2014, which is also the anniversary of the establishment of the Group of 77, we further reaffirm the importance of strengthening UNCTAD’s capacity to deliver on its programs of consensus building, policy dialogue, research, technical cooperation and capacity building so that it is better equipped to deliver on its development mandate.
23. We acknowledge the important role that State Owned Companies (SOCs) play in the economy and encourage our SOCs to continue to explore ways of cooperation, exchange of information and best practices. We also recognize the fundamental role played by small and medium-sized enterprises in the economies of our countries as major creators of jobs and wealth. We will enhance cooperation and recognize the need for strengthening intra-BRICS dialogue with a view to promote international exchange and cooperation and to foster innovation, research and development.
24. We underline that 2015 marks the 70th anniversary of the founding of the United Nations (UN) and the end of the Second World War. In this connection, we support the UN to initiate and organize commemorative events to mark and pay tribute to these two historical moments in human history, and reaffirm our commitment to safeguarding a just and fair international order based on the UN Charter, maintaining world peace and security, as well as promoting human progress and development.
25. We reiterate our strong commitment to the UN as the fundamental multilateral organization entrusted with helping the international community maintain international peace and security, protect and foster human rights and promote sustainable development. The UN enjoys universal membership and is at the very center of global governance and multilateralism. We recall the 2005 World Summit Outcome Document. We reaffirm the need for a comprehensive reform of the UN, including its Security Council, with a view to making it more representative, effective and efficient, so that it can adequately respond to global challenges. China and Russia reiterate the importance they attach to Brazil, India and South Africa’s status and role in international affairs and support their aspiration to play a greater role in the UN.
26. We recall that development and security are closely interlinked, mutually reinforcing and key to attaining sustainable peace. We reiterate our view that the establishment of sustainable peace requires a comprehensive, concerted and determined approach, based on mutual trust, mutual benefit, equity and cooperation, that addresses the root causes of conflicts, including their political, economic and social dimensions. In this context, we also stress the close interrelation between peacekeeping and peacebuilding. We also highlight the importance of bringing gender perspectives to conflict prevention and resolution, peacebuilding, peacekeeping, rehabilitation and reconstruction efforts.
27. We will continue our joint efforts in coordinating positions and acting on shared interests on global peace and security issues for the common well-being of humanity. We stress our commitment to the sustainable and peaceful settlement of disputes, according to the principles and purposes of the UN Charter. We condemn unilateral military interventions and economic sanctions in violation of international law and universally recognized norms of international relations. Bearing this in mind, we emphasize the unique importance of the indivisible nature of security, and that no State should strengthen its security at the expense of the security of others.
28. We agree to continue to treat all human rights, including the right to development, in a fair and equal manner, on the same footing and with the same emphasis. We will foster dialogue and cooperation on the basis of equality and mutual respect in the field of human rights, both within BRICS and in multilateral fora – including the United Nations Human Rights Council where all BRICS serve as members in 2014 – taking into account the necessity to promote, protect and fulfill human rights in a non-selective, non-politicized and constructive manner, and without double standards.
29. We commend the efforts made by the United Nations, the African Union (AU), Economic Community of West African States (ECOWAS) and the Community of Portuguese-Speaking Countries (CPLP), among others, in support for the realization of legislative and presidential elections in Guinea Bissau, paving the way for the return to constitutional democracy in the country. We recognize the importance of promoting long-term political stability in Guinea-Bissau, which necessarily encompasses measures to reduce food insecurity and to advance a comprehensive security sector reform, as proposed by the Guinea-Bissau Configuration of the UN Peacebuilding Commission. Similarly, we also welcome the efforts of the UN, AU and Southern African Development Community (SADC) in support of legislative and presidential elections in Madagascar, assisting in the return of constitutional democracy in the country.
30. We commend the efforts of the international community in addressing instability in Africa through engagement with, and coordination by, the AU and its Peace and Security Council. We express our deep concern at the deterioration of the security and the humanitarian situation in West Africa. We call upon all parties in these conflicts to cease hostilities, exercise restraint and engage in dialogue to ensure return to peace and stability. However, we also note the progress that has been made in areas of the region in addressing political and security challenges.
31. We also express our concern with the plight of the abducted women and children of Chibok and call for an end to the continued terrorist acts perpetrated by Boko Haram.
32. We support the efforts of the UN Multidimensional Integrated Stabilization Mission in Mali (MINUSMA) in its task to help the Government of Mali fully stabilize the country, facilitate national political dialogue, protect civilians, monitor the human rights situation, create conditions for the provision of humanitarian assistance and the return of displaced persons, and extend the State authority in the whole country. We emphasize the importance of an inclusive political process; the immediate implementation of a disarmament, demobilization and reintegration (DDR) process; and political, economic and social development in order for Mali to achieve sustainable peace and stability.
33. We express our concern about the ongoing political and humanitarian crises in South Sudan. We condemn the continuation of violence against civilians and call upon all parties to ensure a safe environment for the delivery of humanitarian assistance. We also condemn the continuation of confrontations despite the successive commitments to the cessation of hostilities and express our belief that a sustainable solution to the crisis is only possible through an inclusive political dialogue aimed at national reconciliation. We support, in this regard, the regional efforts to find a peaceful solution to the crisis, especially the mediation process led by the Intergovernmental Authority on Development (IGAD). We welcome the “Agreement to Resolve the Crisis in South Sudan”, signed on May 9, and expect the political leaders of South Sudan to remain committed to the negotiation process and to the completion of dialogue on the formation of a transitional government of national unity within 60 days, as announced by IGAD on June 10. We commend the efforts of the United Nations Mission in South Sudan to fulfill its mandate and express our deep concern about the armed attacks that were led against UN bases in the country.
34. We reiterate our grave concern with the situation in the Central African Republic (CAR). We strongly condemn the abuses and acts of violence against the civilian population, including sectarian violence, and urge all armed groups to cease hostilities immediately. We recognize the efforts of the Economic Community of Central African States and the AU to restore peace and stability in the country. We commend the establishment of the UN Multidimensional Integrated Stabilization Mission in the CAR (MINUSCA). We express our support for a successful transition from the African-led International Support Mission to the CAR (MISCA) to MINUSCA by 15 September 2014. We urge the transitional authorities in the CAR to adhere strictly to the N’Djamena Roadmap. We call upon all parties to allow safe and unhindered humanitarian access to those in need. We reaffirm our readiness to work with the international community to assist the CAR in accelerating the implementation of the political process of the country.
35. We support the efforts by the UN, in particular the UN Organization Stabilization Mission in the Democratic Republic of the Congo (MONUSCO), deployed under UN Security Council resolution 2098, and the regional and sub-regional organizations to bring peace and stability to the Democratic Republic of the Congo (DRC), and we call upon all involved to honor their obligations in order to achieve lasting peace and stability in the DRC.
36. We welcome the AU Malabo Summit decision to establish an interim African Capacity for Immediate Response to Crises (ACIRC) by October 2014 to respond quickly to crisis situations as they arise. We stress the importance of adequate support to ensure the timely operationalization of the ACIRC, pending the final establishment of the African Stand-by Force.
37. We express deep concern about the ongoing violence and the deterioration of the humanitarian situation in Syria and condemn the increasing violations of human rights by all parties. We reiterate our view that there is no military solution to the conflict, and highlight the need to avoid its further militarization. We call upon all parties to commit immediately to a complete cease-fire, to halt violence and to allow and facilitate immediate, safe, full and unimpeded access for humanitarian organizations and agencies, in compliance with the UN Security Council resolution 2139. We recognize practical steps undertaken by the Syrian parties in implementing its requirements, including the practice of local cease-fire agreements reached between the Syrian authorities and the opposition forces.
We reiterate our condemnation of terrorism in all its forms and manifestations, wherever it occurs. We are gravely concerned at the continued threat of terrorism and extremism in Syria. We call on all Syrian parties to commit to putting an end to terrorist acts perpetrated by Al-Qaeda, its affiliates and other terrorist organizations.
We strongly condemn the use of chemical weapons in any circumstances. We welcome the decision of the Syrian Arab Republic to accede to the Chemical Weapons Convention. In accordance with related Organization for the Proscription of Chemical Weapons (OPCW) Executive Council decisions and UN Security Council resolution 2118, we reiterate the importance of the complete removal and elimination of the Syrian chemical weapons. We commend the progress in that regard and welcome the announcement that the removal of declared chemicals from the Syrian Arab Republic was completed. We call on all Syrian parties and interested external actors with relevant capabilities to work closely together and with the OPCW and the UN to arrange for the security of the monitoring and destruction mission in its final stage.
We support the mediation role played by the UN. We appreciate the contribution made by former Joint UN – Arab League Special Representative for Syria, Mr. Lakhdar Brahimi, and welcome the appointment of Mr. Staffan De Mistura as UN Special Envoy to Syria, and express our hope for his active efforts to promote an early resumption of comprehensive negotiations. We recall that national dialogue and reconciliation are key to the political solution for the Syrian crisis. We take note of the recent Syrian presidential elections. We stress that only an inclusive political process, led by the Syrians, as recommended in the Action Group on Syria Final Communiqué of 2012, will lead to peace, effective protection of civilians, the realization of the legitimate aspirations of the Syrian society for freedom and prosperity and respect for Syrian independence, territorial integrity and sovereignty. We emphasize that a national reconciliation process needs to be launched as early as possible, in the interest of the national unity of Syria. To that end, we urge all parties in Syria to demonstrate political will, enhance mutual understanding, exercise restraint and commit to seeking common ground in accommodating their differences.
38. We reaffirm our commitment to contribute to a comprehensive, just and lasting settlement of the Arab-Israeli conflict on the basis of the universally recognized international legal framework, including the relevant UN resolutions, the Madrid Principles and the Arab Peace Initiative. We believe that the resolution of the Israeli-Palestinian conflict is a fundamental component for building a sustainable peace in the Middle East. We call upon Israel and Palestine to resume negotiations leading to a two-State solution with a contiguous and economically viable Palestinian State existing side by side in peace with Israel, within mutually agreed and internationally recognized borders based on the 4 June 1967 lines, with East Jerusalem as its capital. We oppose the continuous construction and expansion of settlements in the Occupied Palestinian Territories by the Israeli Government, which violates international law, gravely undermines peace efforts and threatens the viability of the two-State solution. We welcome recent efforts to achieve intra-Palestinian unity, including the formation of a national unity government and steps towards conducting general elections, which is key element to consolidate a democratic and sustainable Palestinian State, and call on the parties to fully commit to the obligations assumed by Palestine. We call on the UN Security Council to fully exercise its functions under the UN Charter with regard to the Israeli-Palestinian conflict. We recall with satisfaction the decision of the UN General Assembly to proclaim 2014 the International Year of Solidarity with the Palestinian People, welcome the efforts of UN Relief and Works Agency (UNRWA) in providing assistance and protection for Palestine refugees and encourage the international community to continue to support the activities of the agency.
39. We express our support for the convening, at the earliest possible date, of the Conference on the establishment of a Middle East zone free of nuclear weapons and all other weapons of mass destruction. We call upon all states of the region to attend the Conference and to engage constructively and in a pragmatic manner with a view to advancing that goal.
40. Noting the open-ended consultations on a draft International Code of Conduct on Outer Space Activities, and the active and constructive engagement of our countries in these consultations, we call for an inclusive and consensus-based multilateral negotiation to be conducted within the framework of the UN without specific deadlines in order to reach a balanced outcome that addresses the needs and reflects the concerns of all participants. Reaffirming our will that the exploration and use of outer space shall be for peaceful purposes, we stress that negotiations for the conclusion of an international agreement or agreements to prevent an arms race in outer space remain a priority task of the Conference on Disarmament, and welcome the introduction by China and Russia of the updated draft Treaty on the Prevention of the Placement of Weapons in Outer Space, the Threat or Use of Force Against Outer Space Objects.
41. While reiterating our view that there is no alternative to a negotiated solution to the Iranian nuclear issue, we reaffirm our support to its resolution through political and diplomatic means and dialogue. In this context, we welcome the positive momentum generated by talks between Iran and the E3+3 and encourage the thorough implementation of the Geneva Joint Plan of Action of 24 November 2013, with a view to achieving a comprehensive and long-lasting solution to this issue. We also encourage Iran and the International Atomic Energy Agency (IAEA) to continue strengthening their cooperation and dialogue on the basis of the Joint Statement signed on 11 November 2013. We recognize Iran’s inalienable right to the peaceful use of nuclear energy in a manner consistent with its international obligations.
42. Recognizing that peace, security and development are closely interlinked, we reaffirm that Afghanistan needs time, development assistance and cooperation, preferential access to world markets and foreign investment to attain lasting peace and stability. We support the commitment of the international community to remain engaged in Afghanistan during the transformation decade (2015-2024), as enunciated at the Bonn International Conference in December 2011. We stress that the UN should play an increasingly important role in assisting Afghanistan’s national reconciliation, recovery and economic reconstruction. We also reaffirm our commitment to support Afghanistan’s emergence as a peaceful, stable and democratic state, free of terrorism and extremism, and underscore the need for more effective regional and international cooperation for the stabilization of Afghanistan, including by combating terrorism. We extend support to the efforts aimed at combating illicit traffic in opiates originating in Afghanistan within the framework of the Paris Pact. We expect a broad-based and inclusive peace process in Afghanistan which is Afghan-led and Afghan-owned. We welcome the second round of the presidential elections in Afghanistan which contribute to the democratic transfer of power in this country. We welcome China’s offer to host the Fourth Heart of Asia Ministerial Conference in August 2014.
43. We are deeply concerned by the situation in Iraq. We strongly support the Iraqi government in its effort to overcome the crisis, uphold national sovereignty and territorial integrity. We are concerned about spillover effects of the instability in Iraq resulting from increased terrorist activities in the region, and urge all parties to address the terrorist threat in a consistent manner. We urge all regional and global players to refrain from interference that will further deepen the crisis and to support the Iraqi government and the people of Iraq in their efforts to overcome the crisis, and build a stable, inclusive and united Iraq. We emphasize the importance of national reconciliation and unity in Iraq, taking into consideration the wars and conflicts the Iraqi people have sufferedand in this context we commend the peaceful and orderly holding of the latest parliamentary elections.
44. We express our deep concern with the situation in Ukraine. We call for a comprehensive dialogue, the de-escalation of the conflict and restraint from all the actors involved, with a view to finding a peaceful political solution, in full compliance with the UN Charter and universally recognized human rights and fundamental freedoms.
45. We reaffirm our commitment to continue to tackle transnational organized crime, with full respect for human rights, in order to reduce the negative impact it has on individuals and societies. We encourage joint efforts aimed at preventing and combating transnational criminal activities in accordance with national legislations and international legal instruments, especially the UN Convention against Transnational Organized Crime. In this regard, we welcome BRICS cooperation in multilateral fora, highlighting our engagement in the ECOSOC Commission on Crime Prevention and Criminal Justice.
46. Piracy and armed robbery at sea are complex phenomena that must be fought effectively in a comprehensive and integrated manner. We welcome the efforts made by the international community to counter maritime piracy and call upon all stakeholders – civilian and military, public and private – to remain engaged in the fight against this phenomenon. We also highlight the need for a transparent and objective review of the High Risk Areas, with a view to avoiding unnecessary negative effects on the economy and security of coastal states. We commit to strengthen our cooperation on this serious issue.
47. We are deeply concerned by the world drug problem, which continues to threaten public health, safety and well-being and to undermine social, economic and political stability and sustainable development. We are committed to countering the world drug problem, which remains a common and shared responsibility, through an integrated, multidisciplinary, mutually reinforcing and balanced approach to supply and demand reduction strategies, in line with the three UN drug conventions and other relevant norms and principles of international law. We welcome the substantive work done by Russia in preparing and hosting the International Ministers Meeting on 15 May 2014 to discuss the world drug problem. We take note of the proposal for the creation of an Anti-Drug Working Group presented at the Second Meeting of BRICS Heads of Drug Control Agencies.
48. We reiterate our strong condemnation of terrorism in all its forms and manifestations and stress that there can be no justification, whatsoever, for any acts of terrorism, whether based upon ideological, religious, political, racial, ethnic, or any other justification. We call upon all entities to refrain from financing, encouraging, providing training for or otherwise supporting terrorist activities. We believe that the UN has a central role in coordinating international action against terrorism, which must be conducted in accordance with international law, including the UN Charter, and with respect to human rights and fundamental freedoms. In this context, we reaffirm our commitment to the implementation of the UN Global Counter-Terrorism Strategy. We express our concern at the increasing use, in a globalized society, by terrorists and their supporters, of information and communications technologies (ICTs), in particular the Internet and other media, and reiterate that such technologies can be powerful tools in countering the spread of terrorism, including by promoting tolerance and dialogue among peoples. We will continue to work together to conclude as soon as possible negotiations and to adopt in the UN General Assembly the Comprehensive Convention on International Terrorism. We also stress the need to promote cooperation among our countries in preventing terrorism, especially in the context of major events.
49. We believe that ICTs should provide instruments to foster sustainable economic progress and social inclusion, working together with the ICT industry, civil society and academia in order to realize the ICT-related potential opportunities and benefits for all. We agree that particular attention should be given to young people and to small and medium-sized enterprises, with a view to promoting international exchange and cooperation, as well as to fostering innovation, ICT research and development. We agree that the use and development of ICTs through international cooperation and universally accepted norms and principles of international law is of paramount importance, in order to ensure a peaceful, secure and open digital and Internet space. We strongly condemn acts of mass electronic surveillance and data collection of individuals all over the world, as well as violation of the sovereignty of States and of human rights, in particular the right to privacy. We take note of the Global Multistakeholder Meeting on the Future of Internet, held in São Paulo, on 23-24 April 2014. We thank Brazil for having organized it.
50. We will explore cooperation on combating cybercrimes and we also recommit to the negotiation of a universal legally binding instrument in that field. We consider that the UN has a central role in this matter. We agree it is necessary to preserve ICTs, particularly the Internet, as an instrument of peace and development and to prevent its use as a weapon. Moreover, we commit ourselves to working together in order to identify possibilities of developing joint activities to address common security concerns in the use of ICTs. We reiterate the common approach set forth in the eThekwini Declaration about the importance of security in the use of ICTs. We welcome the decision of the National Security Advisors to establish a group of experts of BRICS member States which will elaborate practical proposals concerning major fields of cooperation and coordinate our positions in international fora. Bearing in mind the significance of these issues, we take note of Russia’s proposal of a BRICS agreement on cooperation in this field to be jointly elaborated.
51. We reiterate our commitment to the implementation of the Convention on Biological Diversity and its Protocols, with special attention to the Strategic Plan for Biodiversity 2011-2020 and the Aichi Targets. We recognize the challenge posed by the agreed targets on conservation of biodiversity and reaffirm the need to implement the decisions on resource mobilization agreed to by all parties in Hyderabad in 2012, and set resource mobilization targets that are ambitious in order to allow for their fulfillment.
52. Acknowledging that climate change is one of the greatest challenges facing humankind, we call on all countries to build upon the decisions adopted in the UN Framework Convention on Climate Change (UNFCCC) with a view to reaching a successful conclusion by 2015, of negotiations on the development of a protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties, in accordance with the principles and provisions of UNFCCC, in particular the principle of common but differentiated responsibilities and respective capabilities. In this regard, we reiterate our support to the Presidency of the 20th session of the Conference of the Parties and the 10th session of the Conference of the Parties serving as the Meeting of the Parties to the Kyoto Protocol, to be held in Lima, Peru, in December 2014. We also note the convening of the UN Climate Summit 2014 to be held this September.
53. While bearing in mind that fossil fuel remains one of the major sources of energy, we reiterate our belief that renewable and clean energy, research and development of new technologies and energy efficiency, can constitute an important driver to promote sustainable development, create new economic growth, reduce energy costs and increase the efficiency in the use of natural resources. Considering the dynamic link between renewable and clean energy and sustainable development, we reaffirm the importance of continuing international efforts aimed at promoting the deployment of renewable and clean energy and energy efficiency technologies, taking into account national policies, priorities and resources. We stand for strengthening international cooperation to promote renewable and clean energy and to universalize energy access, which is of great importance to improving the standard of living of our peoples.
54. We are committed to working towards an inclusive, transparent and participative intergovernmental process for building a universal and integrated development agenda with poverty eradication as the central and overarching objective. The agenda should integrate the economic, social and environmental dimensions of sustainable development in a balanced and comprehensive manner with concise, implementable and measurable goals, taking into account differing national realities and levels of development and respecting national policies and priorities. The Post-2015 Development Agenda must also be based on and fully respect all Rio principles on sustainable development, including the principle of common but differentiated responsibilities. We welcome the outcome document of the UN General Assembly Special Event on the Millennium Development Goals, which decided to launch an intergovernmental process at the beginning of the 69th Session of the UN General Assembly that will lead to the adoption of the Post-2015 Development Agenda.
55. We reiterate our commitment to the UN General Assembly Open Working Group on Sustainable Development Goals (SDGs) and to working together to achieve a consensual and ambitious proposal on SDGs. We emphasize the importance of the work by the Intergovernmental Committee of Experts on Sustainable Development Financing and highlight the need for an effective sustainable development financing strategy to facilitate the mobilization of resources in achieving sustainable development objectives and supporting developing countries in the implementation efforts, with ODA as a major source of financing. We support the creation of a facilitation mechanism for the development, transfer and dissemination of clean and environmentally sound technologies and call for the establishment of a working group within the UN on this proposal, taking into account the Rio+20 outcome document and the Secretary General’s reports on the issue. In this regard, we reaffirm that the outcome of each of these processes can contribute to the formulation of Sustainable Development Goals.
56. We recognize the strategic importance of education for sustainable development and inclusive economic growth. We reaffirm our commitment to accelerating progress in attaining the Education for All goals and education-related Millennium Development Goals by 2015 and stress that the development agenda beyond 2015 should build on these goals to ensure equitable, inclusive and quality education and lifelong learning for all. We are willing to strengthen intra-BRICS cooperation in the area and welcome the meeting of Ministers of Education held in Paris, in November 2013. We intend to continue cooperation with relevant international organizations. We encourage the initiative to establish the BRICS Network University.
57. In March 2014 we agreed to collaborate through dialogue, cooperation, sharing of experiences and capacity building on population related matters of mutual concern to member states. We recognize the vital importance of the demographic dividend that many of us possess to advance our sustainable development as well as the need to integrate population factors into national development plans, and to promote a long-term balanced population and development. The demographic transition and post-transition challenges, including population ageing and mortality reduction are amongst the most important challenges facing the world today. We confirm our strong commitment to address social issues in general and in particular gender inequality, women’s rights and issues facing young people and we reaffirm our determination to ensure sexual and reproductive health and reproductive rights for all.
58. We recognize that corruption negatively affects sustainable economic growth, poverty reduction and financial stability. We are committed to combat domestic and foreign bribery, and strengthen international cooperation, including law enforcement cooperation, in accordance with multilaterally established principles and norms, especially the UN Convention Against Corruption.
59. Considering the link between culture and sustainable development, as well as the role of cultural diplomacy as a promoter of understanding between peoples, we will encourage cooperation between BRICS countries in the cultural sector, including on the multilateral basis. Recognizing the contribution and the benefits of cultural exchanges and cooperation in enhancing our mutual understanding and friendship, we will actively promote greater awareness, understanding and appreciation of each other’s arts and culture. In this regard, we ask our relevant authorities responsible for culture to explore areas of practical cooperation, including to expedite negotiations on the draft agreement on cultural cooperation.
60. We are pleased with progress in implementing the eThekwini Action Plan, which further enhanced our cooperation and unleashed greater potential for our development. In this regard, we commend South Africa for the full implementation of the eThekwini Action Plan.
61. We are committed to promoting agricultural cooperation and to exchange information regarding strategies for ensuring access to food for the most vulnerable population, reduction of negative impact of climate change on food security and adaptation of agriculture to climate change. We recall with satisfaction the decision of UN General Assembly to declare 2014 the International Year of Family Farming.
62. We take note of the following meetings which were held in preparation for this Summit:
– Third BRICS Think Tanks Council (BTTC);
– Third BRICS Business Council;
– Sixth Academic Forum;
– Fifth Business Forum;
– Fourth Financial Forum.
63. We welcome the outcomes of the meeting of the BRICS Finance Ministers and Central Bank Governors and endorse the Joint Communiqué of the Meeting of the BRICS Trade Ministers held in preparation for the Summit.
64. The 5th edition of the BRICS Business Forum provided an opportunity for match-making and for in-depth discussion of highly relevant issues of the trade and investment agenda. We welcome the meeting of the BRICS Business Council and commend it for its Annual Report 2013/2014. We encourage the respective business communities to follow-up the initiatives proposed and to deepen dialogue and cooperation in the five areas dealt with by the Industry/Sector Working Groups with a view to intensifying trade and investment flows amongst BRICS countries as well as between BRICS and other partners around the world.
65. We reiterate our commitment made during the BRICS Leaders-Africa Retreat at the 5th BRICS Summit to foster and develop BRICS-Africa cooperation in support of the socioeconomic development of Africa, particularly with regard to infrastructure development and industrialization. We welcome the inclusion of these issues in discussions during the BRICS Business Council Meeting, held in Johannesburg in August 2013.
66. We welcome the BTTC Study “Towards a Long-Term Strategy for BRICS: Recommendations by the BTTC”. We acknowledge the decision taken by the BTTC, taken at its Rio de Janeiro meeting in March 2014 to focus its work on the five pillars upon which the BRICS long-term strategy for cooperation will rest. The BTTC is encouraged to develop strategic pathways and action plans that will lead to the realization of this long-term strategy.
67. We welcome the holding of the first Meeting of the BRICS Ministers of Science, Technology and Innovation and the Cape Town Declaration, which is aimed at: (i) strengthening cooperation in science, technology and innovation; (ii) addressing common global and regional socio-economic challenges utilizing shared experiences and complementarities; (iii) co-generating new knowledge and innovative products, services and processes utilizing appropriate funding and investment instruments; and (iv) promoting, where appropriate, joint BRICS partnerships with other strategic actors in the developing world. We instruct the BRICS Ministers of Science and Technology to sign at their next meeting the Memorandum of Understanding on Science, Technology and Innovation, which provides a strategic framework for cooperation in this field.
68. We welcome the establishment of the BRICS Information Sharing and Exchange Platform, which seeks to facilitate trade and investment cooperation.
69. We will continue to improve competition policy and enforcement, undertake actions to address challenges that BRICS Competition Authorities face and further enable competitive environments in order to enhance contributions to economic growth in our economies. We note South Africa’s offer to host the 4th Meeting of BRICS Competition Authorities in 2015.
70. We reiterate our commitment to fostering our partnership for common development. To this end, we adopt the Fortaleza Action Plan.
71. Russia, India, China and South Africa extend their warm appreciation to the Government and people of Brazil for hosting the Sixth BRICS Summit in Fortaleza.
72. Brazil, India, China and South Africa convey their appreciation to Russia for its offer to host the Seventh BRICS Summit in 2015 in the city of Ufa and extend their full support to that end.
Fortaleza Action Plan
1. Meeting of BRICS Ministers of Foreign Affairs / International Relations on the margins of UN General Assembly.
2. Meeting of BRICS National Security Advisors.
3. Mid-term meeting of BRICS Sherpas and Sous-Sherpas.
4. Meetings of BRICS Finance Ministers and Central Bank Governors on the margins of G20 meetings, WB/IMF meetings, as well as stand-alone meetings, as required.
5. Meetings of BRICS Trade Ministers on the margin of multilateral events, or stand-alone meetings, as required.
6. Meeting of BRICS Ministers of Agriculture and Agrarian Development, preceded by the Meeting of BRICS Agricultural Cooperation Working Group.
7. Meeting of BRICS Health Ministers.
8. Meeting of BRICS Ministers of Science, Technology and Innovation.
9. Meeting of BRICS Ministers of Education.
10. Meeting of Ministers or Senior Officials responsible for social security, on the margins of a multilateral meeting.
11. BRICS Seminar of Officials and Experts on Population Matters.
12. Meeting of BRICS Cooperatives (held in Curitiba on 14-16 May 2014).
13. Meetings of financial and fiscal authorities on the margins of WB/IMF meetings as well as stand-alone meetings, as required.
14. Meetings of the BRICS Contact Group on Economic and Trade Issues (CGETI).
15. Meeting of the BRICS Friendship Cities and Local Governments Cooperation Forum.
16. Meeting of the BRICS Urbanization Forum.
17. Meeting of BRICS Competition Authorities in 2015 in South Africa.
18. Meeting of BRICS Heads of National Statistical Institutions.
19. Meeting of Anti-Drug Experts.
20. Meeting of BRICS Experts on Anti-corruption cooperation, on the margins of a multilateral meeting
21. Consultations amongst BRICS Permanent Missions and/or Embassies, as appropriate, in New York, Vienna, Rome, Paris, Washington, Nairobi and Geneva, where appropriate.
22. Consultative meeting of BRICS Senior Officials on the margins of relevant sustainable development, environment and climate related international fora, where appropriate.
23. Sports and Mega Sporting Events.
New areas of cooperation to be explored
– Mutual recognition of Higher Education Degrees and Diplomas;
– Labor and Employment, Social Security, Social Inclusion Public Policies;
– Foreign Policy Planning Dialogue;
– Insurance and reinsurance;
– Seminar of Experts on E-commerce.
GPIF’s head of investments tells SWFI what’s really behind the Japanese pension giant’s new fee structure, why the asset management industry is in need of a paradigm shift, and how to create a sustainable business model that works for the small-scale asset owner.
It’s been nearly four years since Hiromichi Mizuno left his position at one of London’s premier private equity firms to help reshape the world’s largest public pension – first as a constituent of its eight-member advisory committee, then as its chief investment officer. Since returning to his native Japan – where people 65 or older already account for more than a quarter of the population – Mizuno has been on the front lines, leading the country’s massive Government Pension Investment Fund in a fight against time that is being waged by asset owners in aging nations around the globe.
To prepare Japan’s welfare apparatus for future generations, Mizuno has had to aggressively redeploy GPIF’s US$ 1.45 trillion in assets away from the government bonds of years past towards higher-yield bets in stocks both foreign and domestic, as well as alternatives in real estate and infrastructure; recruit talent from the private sector capable of executing the migration into uncharted asset classes; and roll out an innovative new set of Stewardship Principles for sustainable investment and company engagement that has been felt throughout the country’s famously staunch business culture. Now he’s working on redefining how the asset management industry should be judged and compensated for their efforts – all within the budget afforded to him and the 100 or so civil servants who work together at the fund’s headquarters in Tokyo’s bustling Toranomon district.
Course-correcting such a monolithic public institution – especially one responsible for the financial security of more than 70 million stakeholders from all walks of life, including the many Nikkei-listed firms in which GPIF invests – has not been easy. A universal owner in the truest sense, the fund relies upon a host of external managers and index vendors to provide for the retirement of more than half of Japan; taken as a whole, its movements have consequences for the economic wellbeing of the entire country, if not the world. Like a flagship at sea, its fortune is inextricably tied to the supporting fleet of vessels arrayed in formation around it, and the steadfastness of their crews in the face of disaster.
At its helm, Mizuno’s every move is put under intense scrutiny in Japan – often times by those who measure success in terms of news cycles and quarterly reports, rather than generations or the systematic integrity of global markets. Even with what is perhaps the most drastic portfolio restructuring in the history of the industry almost behind him, appealing to the concerns of a public made wary by decades of deflation without giving away the fund’s investment strategy to its competitors is likely to remain a full-time responsibility for the pension chief – no matter how effective his policies prove to be over the long-term.
Despite the pressures of the job, Mizuno’s abiding optimism remains firmly rooted in the ingenuity of the human spirit he sees expressed in rapidly developing technologies such as artificial intelligence and big data analytics – disruptors he hopes may one day soon be harnessed to propel the financial world into a new age of investment in which sustainability, in every sense of the word, is universally valued as the key to a brighter future that is ever on his mind.
In this interview from early April with Spencer Ward, research associate and writer here at the Sovereign Wealth Fund Institute, Mizuno provides insight into what went into GPIF’s recently implemented performance-based fee structures, why he believes asset managers need to be closely reevaluating their business model, and how small-scale asset owners can cost-effectively focus their stewardship activity to systematically affect change across the investment chain.
SPENCER WARD: Why don’t we start by telling me about how GPIF has evolved as an organization since you first started there?
HIROMICHI MIZUNO: Well from an organizational and cultural perspective, we still carry the image of a bureaucratic organization. But everybody who has recently joined our team here has been very surprised, I think, by how open and dynamic our organizational culture is. We have been encouraging members of our team to find new and innovative ways to contribute, not only within the framework of conventional asset management, but also in terms of how to add value to the sustainable performance of GPIF throughout the investment chain, and more recently about how to impact social responsibility for the benefit our pensioners.
I think that this shift in mindset has resulted in a growing sense of pride in what we are doing here. It wasn’t too long ago that we were regarded as these bureaucratic investors. But now we have a lot of opportunities – thanks to people like yourself – to have our work recognized, not just as a slight variation or copy of what other asset owners are doing, but what I think is our own quite creative approach to the markets. It’s difficult to explain to someone from the outside how much GPIF has changed and evolved as an organization since I first began. But when I get feedback from people coming to us from the private sector, from which we are heavily recruiting, they are always surprised by how much more dynamic we are from their previous organizations.
We are not competing against other asset owners, and because GPIF is the textbook definition of a universal owner, we can’t beat the market either.
WARD: Now you’ve played a big part in that shift. You’ve become a vocal advocate for the integration of ESG criteria into long-term sustainable investment, which has gained a lot of traction in the private sphere over the past couple of years, and you’ve worked with stakeholders across the investment chain to help shift their focus as well. When did you start including sustainability as one of your responsibilities as chief investment officer (CIO) at one of the world’s largest public pensions?
MIZUNO: Initially it was a reflection of my analysis of the industry. When I came into this role, I tried to analyze the business model of asset managers, as well as asset owners, and when I looked at the two of them side by side, I found that most asset owner’s business model is just a copy – in many cases a low quality copy – of the asset manager’s. So I realized that we needed to find the proper business model that works for the long-term investor, particularly asset owners, with the resources available to them.
The initial reason I pushed for ESG integration was that I questioned what exactly we were trying to achieve as fiduciaries. If I were an asset manager, I have to rise to a certain level of competitiveness, right? I either have to beat the market, or beat the competition. But asset owners have no competitors, in a sense, because our sole responsibility is to our pensioners and our government’s fiscal obligation to the health and wellness of future generations.
We are not competing against other asset owners, and because GPIF is the textbook definition of a universal owner, we can’t beat the market either. We own the market through a globally diversified portfolio that is largely managed passively, and as a truly long-term investor, we have very low chance of actually divesting from those assets, so we need to be paying more attention to how to make the system more sustainable – and our performance with it – over the long term.
To my thinking, ESG is one of the most effective tools for communicating our deep concerns about sustainability to our investment chain. In other words, GPIF is less concerned with how we beat the market, or with how to underweight or overweight specific companies. We don’t benefit from zero-sum competition within an industry. If one company took the whole market, well yes, their stock may appreciate. But we would lose as much, if not more, from our holdings in their competitors. So what we need to do is ensure that capital markets as a whole become more sustainable.
It’s a very high level concept for most people in the industry, I think, and at the beginning I struggled to convey it to our partners throughout the investment chain. But when I was first introduced to ESG, this concept began to fall into place for me as a way to bridge the conceptual into something tangible that could be acted upon. So rather than simply telling our managers, “We want you to manage our money with more long term focus,” it became far more effective to say, “You need to integrate ESG factors into your investment process,” in order to get them to pay closer attention to sustainability, and frame it as a goal that was within their reach.
WARD: Of the three sustainability factors – environmental, social, and governance – which one came for you first personally?
MIZUNO: I of course have my own personal interest in the different issues, but as an organization we never prioritize one issue over another for a number of reasons. The first is the multi-stakeholder model of the investment chain that you mentioned earlier. Given our organizational structure, we really struggle to focus on any one issue. Unlike the asset manager, who manages money strictly for their clients, we have a fiduciary responsibility to all Japanese individuals, well as Japanese corporations that contribute to our funds. So it just didn’t appear to be wise for GPIF as an organization to pick one issue over another.
What we decided in the end was to promote ESG as an integrated whole. But on the other hand, in our Stewardship Principles we make it very clear that our asset managers should integrate those factors into their investment process, and that for critical issues they need to proactively engage with their portfolio companies. So far, we’ve refused to spell out which of these issues are critical, and have left it to our managers to decide that for themselves.
Now this is somewhat of a tactical approach, in that rather than raising the issue with all our stakeholders and debating which are most important, we’ve outsourced that discussion to our managers. As a matter of fact, I think I speak not only for GPIF, but for the asset owner community as a whole when I say that we have a shortage of resources compared to managers. With the exception of some very fortunate funds like those in Canada, asset owners are almost always short on staff and expertise. In contrast, asset managers have a high concentration of resources, and that gives them the freedom to find out how to best engage on these issues on our behalf as they see fit.
I think this approach has worked out well so far. Right now we are checking with all our external managers on what ESG factors they’ve identified as critical, and making sure that they really are engaging with their portfolio companies those issues. It’s a bit of a chess game, going down the chain one by one, but the important thing for us is verifying that these changes are moving the system in a more sustainable direction.
Here at GPIF, we are trying to develop a model for demanding best-in-class corporate governance that is more suitable to the public investor, and I hope that this kind of approach can be adopted by small-scale asset owners – whether it’s in Japan, emerging markets, or even in the United States.
WARD: GPIF has been somewhat instrumental then in using its status as a universal owner to drive asset owners towards ESG integration and engagement in Japan. What kind of lessons do you think other asset owners around the world – particularly in emerging markets – can draw from your experience?
MIZUNO: From the beginning, when we first started analyzing the business model of asset owners, one of the challenges I identified in the community is that there are actually very few who are fortunate enough to have the resources to apply a more direct engagement model and become what is essentially an impact investor. In California and Canada, for example, they are shifting their operations to take on more of the responsibilities of an external manager and engaging directly with companies. But given regulatory restrictions, which prohibit us from direct investing in specific companies, we were not able to go in that direction.
So we began exploring how we could focus our stewardship activity on the asset manager, rather than on specific companies, as well as how to promote ESG integration holistically, rather than targeting some particular issue. One of the things we found in our analysis, is that the industry as a whole does not pay enough attention to the importance of the index vendor – many of whom are shifting from a simple market cap weight, or mechanical index building, towards more qualitative and adjustive indices that factor in ESG considerations.
We now probably spend as much time examining and working with index vendors as we do with our asset managers, which is unconventional in this industry. But I’ve always thought that if we can work with vendors to change their metrics, which would in turn directly affect external asset managers’ investment decisions, then we can be a role model for change to smaller investors throughout the global asset owner community who cannot afford their own in-house investment team, and so are forced to outsource everything in the way that we are required to do by law.
Many of the practices that the fashionable asset owner is doing these days cannot be replicated with the resources available to the average public pension. GPIF has about 110 people, and together we manage about US$ 1.45 trillion, which is quite a bit larger than most asset owners, but we still face many of the same challenges as other public investors in terms of insourcing. When we put together our Stewardships Principles, we took a somewhat innovative approach of sampling all the other major asset owners, looking at their guidelines for direct company engagement, and then adapting them to apply instead to the external manager. So rather than outlining how to engage with companies as many asset owners have, our set of Stewardship Principles explains how we engage with our managers.
Here at GPIF, we are trying to develop a model for demanding best-in-class corporate governance that is more suitable to the public investor, and I hope that this kind of approach can be adopted by small-scale asset owners – whether it’s in Japan, emerging markets, or even in the United States.
WARD: Well it seems like you’ve developed a strategy for bringing about that best-in-class governance by making the best of what you have available to you. You’re putting the responsibility on your external managers and index vendors to utilize their own resources – which are considerable – to meet your needs as a customer, and in doing so instigating a shift in perspective across the industry at the systematic level, which is in contrast to what some other asset owners have done by striking out down the direct investment path.
MIZUNO: You know, the keyword I use when I discuss our approach with my team is “systematic.” We simply cannot afford to optimize our portfolio by tackling individual investment decisions. At the end of the day, we are both a beneficiary as well as a potential victim of the global economic system as a whole. If the system fails, we also fail. That’s the concept I believe everyone should be aware of, but I’m afraid that there are very few players in the industry who actually understand that.
Many of them continue to act as though we, the asset owners, are trying to beat the market, and I still very much appreciate the importance of active managers and the value they bring, especially because they are keeping a certain level of pricing discipline in the capital markets. But we are still, like I said, more invested – as both a beneficiary and victim – in the sustainability of the system as a whole.
WARD: Let’s move on and talk about your new performance-based fee structures. Now, you’ve been very careful to emphasize that the goal of these changes is not to reduce the total fee amount, and in fact under the new system you’ve actually provided a large incentive to your active managers to generate alpha by removing fee-caps that existed under the previous structure. Based on what you’ve seen so far, how have your managers prepared to meet these changes? And what do you think will separate those who thrive in this new environment, from those who struggle to earn their keep, so to speak?
MIZUNO: First of all, I cannot say this enough: We have zero intention of reducing our total fee payment. Actually, I’d be happy to pay more, because that means we’re getting greater returns from our portfolio. To those who say that we are no longer willing to pay – and there are players in the industry who always criticize our fees as being too low – I would respond by arguing that our management fees have always been low, even before these changes.
But if you look back on our performance net of fees over the past decade, the alpha has been almost zero. My question for the asset management industry, particularly active managers, is this: How can you expect us to pay you more, when you didn’t leave us any money in our pockets the last time? I believe that the active management industry has to change their business model, because over the past decade, after accounting for costs, they didn’t bring any value to us as a customer. First of all, how can they survive like that? And second, how can they expect us to pay more? It’s a very simple observation of what we have experienced in the past, but it’s a crucial starting point.
I’ve always said publicly that I would like to increase our active portfolio. But I can’t do that if we are continuously facing a situation where the alpha net of fees added by our active managers is zero, and what I’ve told them is, “You are the ones who need to prove that GPIF has the basis to increase its active portfolio.” We are trying to send a signal to active managers that they have to do better. If they can do that – and I think they can – they will earn more, and GPIF can allocate more money towards them through our active portfolio.
The second point I’d like to make sure is understood clearly, is that incentivizing asset managers to do better is not my main focus. I came from the asset management side before I became CIO, and I know how hard they work. I really don’t think that if I just give them more of an inventive that their performance will improve overnight. If that were the case, then that would mean they are lazy, and I know our asset managers are not lazy. So I really don’t believe that these new performance-based fees will incentivize them to work harder, because I think they’re working hard anyway.
We are challenging the traditional concept that active managers should be paid according to their costs, when they should be paid according to the value they bring to the customer, and that’s what I really want to make crystal clear.
What we are trying to achieve with these performance-based fees is a change in concept around remuneration. With our passive managers, I really don’t mind discussing their costs, because they cannot really prove they are adding value to us other than through qualitative analysis. I have been advocating that our passive managers be more active owners in terms of engagement, and am happy to discuss raising their fees to cover operational costs if their business model is compelling.
But for active managers, what I would like to change in terms of concepts around remuneration is this: If they don’t deliver the value they proposed, which is to produce a certain level of alpha, why should we pay them more than our passive managers? Sometimes they even underperform the benchmark, and then we end up paying fees on poor performance, and that makes no sense to me.
In the investment industry, active managers have traditionally charged fees to cover their operational costs. But in any other industry, customers don’t care about the cost of the producers; we only care about the added value their product delivers, right? So I’ve told our active managers, “I really don’t care how expensive it is to hire analysts, or researchers, or fund managers; that’s your problem. We only pay you if you add value to our business through alpha.”
So our new fee structure is less about incentivizing them to do a better job, and more about making it clear that for GPIF, the active manager’s value is alpha, and if they fail to deliver that, then they shouldn’t be paid any more than our passive managers when we can achieve the same results with them at a much lower cost. We are challenging the traditional concept that active managers should be paid according to their costs, when they should be paid according to the value they bring to the customer, and that’s what I really want to make crystal clear.
One piece of technical jargon in this industry that I never really thought made sense is capacity. Everyone conceptually agrees – and this is supported by academic research – that if the manager’s portfolio grows past a certain size, their capacity to generate alpha will diminish. In practice though, all we can do is ask the asset manager how much money they are willing to take on for us.
From their side, there are a lot of different incentives – especially if the fee is fixed – for them to take more and more of our assets under management, even at the expense of a deteriorating alpha. From the asset owner’s side though, we are working with an asymmetry of information that doesn’t put GPIF in a good position to fairly judge their capacity limit. So let the asset manager be responsible. With this new fee structure, asset manager’s shouldn’t be taking on more than they can manage, because then it becomes punitive as alpha starts deteriorating.
Part of the issue is the alpha target that asset managers pitch to me and my investment team, and that we agree upon at the time of hiring. Unfortunately, in the history of GPIF’s management, less than 20% of managers have delivered the target for alpha that they have set for themselves. If a company, in this case a fund manager, is delivering on their contract only 20% of the time, the customer should get a refund, right? So we made it very clear to our managers, that if you agree or propose an alpha target, that’s the break-even point, and the new system is actually designed for our active managers to receive identical fees if they achieve their target.
This is not a reduction in fees; it’s a change in the fee structure. If they perform as well as they propose, they will receive exactly the same amount. If they perform above their alpha target, of course they will be rewarded on top of that – and we put no cap on that bonus. But if they don’t achieve what they propose, then they’ll be penalized.
It’s surprising to me that they invest in all these tech companies, and they know how dynamic their portfolio companies are in adopting new technologies to improve their business model, and yet they don’t seem to be applying them to their own business.
WARD: And how have they responded so far to this change in concept?
MIZUNO: Well their initial concern was with whether they could continue to cover costs, and I reiterated my point to every single one of our asset manager’s that I sat down with, and it’s that I really don’t think that the cost-transfer model for remuneration is acceptable in business anymore. It’s only the utility and asset management industry who still think they can transfer costs to the customer, when what we should be moving towards is an environment of competition centered around bringing value to the customer.
Probably the biggest problem has been the misperception among our asset managers that GPIF is trying to reduce fees, or incentivize them to perform better, when that is not our goal. All we want to do is try to challenge the norm of how fee structures should be designed and who they work for, and what we’ve paid the most attention to throughout this process is alignment of interest between us and the asset manager, as well as creating self-governance mechanisms that let the asset manager be responsible about what they can accomplish during the negotiation process. So alignment of interest and implementing mechanisms for self-governance have been the two key objectives of this new proposal.
WARD: Now let’s back up a bit to your point about how incentivizing better performance isn’t your goal. You already know how hard your asset managers work, and they work hard. But you know, as they say, if you can’t work harder, work smarter. In previous interviews you’ve talked about how adoption of technologies like artificial intelligence and big data analytics are already fundamentally changing the investment world, particularly in areas of short-term trading. Do you think the asset management community is doing enough to adopt these new technologies, and how do you think asset managers will need to adapt their investment philosophies, strategies, and models to keep pace?
MIZUNO: In our discussions with asset managers on our new fee proposal, we spent quite a bit of time with them going over their cost structure, and what kept coming up was automation. In every industry today, when the customer is not willing to pay a given price, and companies are competing to reduce costs, they automate some of their operations, right? So I asked them why they are not doing the same. You cover this industry, so you know how much pressure asset managers are under to reduce costs, and in my opinion, what they should be thinking about is how to automate their process. That’s the case for any industry facing consumer pricing pressure.
From the beginning, I’ve held the view that the asset management industry needs to adopt technology much faster than its current pace. It’s surprising to me that they invest in all these tech companies, and they know how dynamic their portfolio companies are in adopting new technologies to improve their business model, and yet they don’t seem to be applying them to their own business. So I’ve been somewhat frustrated by asset managers who come to see me that are only focused on the macro-economy and capital markets, when I want to be hearing more about how they are improving their business, including how to bring these technologies in-house.
I think fin-tech is most likely to change how we do indirect financing, and the banking and brokerage sectors in particular are feeling a lot of pressure right now. But I’m surprised by how much the asset management industry seems to feel like they are secure or isolated from these disruptive technologies. This is one reason why I’ve been pushing GPIF towards research in artificial intelligence (AI), to sort of stimulate the industry to take a serious interest in its development. Because we are such a data and intelligence-centric industry, I think it’s natural to believe that AI will reshape how we do business.
The more I learn about AI, the less optimistic I become that people in short-term trading and investment will be able to survive in the future. So I’ve been asking our asset managers, as well as my own team, how we are going to stay in business when AI begins to take over short-term investments. I could be wrong, and I’m really looking forwards to the ideas that people come up with, but so far I haven’t heard much.
I think that what humans should be focusing on are long-term issues that AI wouldn’t care about, like systematic social and environmental sustainability. ESG is one of those areas that requires a human value judgment, at least that’s my thinking. All I can do is raise these issues when I communicate with our asset managers, but so far I haven’t really received any compelling input from the industry, so we’ve decided to move ahead and start a joint research program with Sony Computer Science Laboratories, which is obviously a non-conventional player in the investment management chain. But we’ve been discussing with them a lot of new ideas about how to use AI systems to assist in making our manager selection and monitoring process more dynamic.
I don’t think that AI will replace asset managers for the time being, not because their performance is not good enough, but because people’s perceptions will prohibit us from fully replacing human management. But I think that getting AI’s assistance will be critical moving ahead, simply because so many investors – including GPIF – are short of staff. So we feel that we should be pushing AI into this business, and that’s why we are leading on this issue.
WARD: Well, humans are nothing if not resilient.
MIZUNO: Absolutely, but we have to work hard to prove that we are better, and not allow ourselves to become entrenched in our thinking. I don’t think you can assume that AI won’t at some point become overwhelming, which is why we have to find out what particular areas humans can do better, as well as what we can do much better with the assistance of AI. So GPIF is now working with Sony to see if we can use AI to analyze all the investment data that we have been collecting over the decades from our asset managers and the companies in our US$ 1.45 trillion portfolio.
If you are the CIO of an external manager, you really don’t have to care about how your investment strategy will be perceived by different stakeholders, because at the end of the day you’re judged only on your performance. But even if we made US$ 100 billion in profits, we just can’t make everybody happy.
WARD: Let’s shift from the future back into the present. You’ve talked about your desire to have a more active portfolio, of allocating up to 5% of your assets towards alternative investments in infrastructure and real estate, and over the past couple of years you’ve overseen a pretty massive shift in the fund’s fundamental portfolio structure. Bringing about that kind of change to a government institution responsible for the financial security of 70 million people – especially in Japan, which is facing a number of demographic and economic challenges – is no easy task. As we wrap up here, can you tell us about how you’ve navigated and grown from that process, and what else you hope to bring to the fund moving forward?
MIZUNO: The last time we decided on some of these big policy changes to our asset mix in 2014, my involvement in the process was still only as a member of the investment advisory committee. It was only afterwards that I was made CIO and began to implement what was probably the most drastic portfolio rebalancing in the history of the industry.
Unlike a sovereign wealth fund, GPIF and other public pension funds almost always have to work to meet certain transparency and accountability requirements that are required by law, and GPIF’s requirements are sometimes almost impossible to cope with. GPIF also has many different stakeholders, so that’s made my job even more difficult.
I joke with the CIO of the U.K.’s environmental agency pension plan, because she always tells me that she never has any problem introducing concepts like ESG to her employees, and I tell her, “Of course you don’t! Their job is to be conscious about the environment, so nobody’s going to argue that incorporating the environment into investment decisions isn’t a part of your fiduciary duty!”
But in our case, we have to manage the interests of every single Japanese beneficiary and company that contributes to our fund. So making these kinds of drastic policy changes at GPIF requires a lot of stakeholder management and massaging of the media, who tend to be very tough in their coverage of what we are trying to achieve and don’t usually give us enough in the newspapers to explain fully why we’re doing what we’re doing. It’s very difficult, and will continue to be difficult.
If you are the CIO of an external manager, you really don’t have to care about how your investment strategy will be perceived by different stakeholders, because at the end of the day you’re judged only on your performance. But even if we made US$ 100 billion in profits, we just can’t make everybody happy.
What I would really like is for our stakeholders and people in the industry to know more about what we are trying to achieve in how we approach our portfolio. For instance, we’ve set up a manager registration system that’s open and dynamically responsive 24-7, and one of things we’ve began offering as part of the new performance-based fee structure is multi-year contracts to public equity and fixed income managers, which is somewhat unconventional as you know. It’s similar to the private equity world that I came from, where managers will receive a 10-year mandate. Nobody offers anything like that in public equity, but we would like to give away the option of firing a public equity manager at our discretion within a short cycle.
What we are essentially telling our managers with this is that we want them to manage our money with a long term perspective, and one of the ways we would like to do that is through a performance fee carry-over mechanism. We don’t allow them to vest all of their performance fees each year. Rather than focusing on getting a big check at the end of the year and risking a crash from focusing too much on the short-term, we want them to look at their performance over the long-term, and I hope that’s something that is being observed alongside everything GPIF is doing to make sure our asset manager’s investment process becomes more oriented towards sustainability.
SWFI’s Chat with the Chief interview series aims to present the investment perspectives and experiences of some of the foremost C-level practitioners in the sovereign wealth fund and public pension community. This interview was conducted over the phone on April 5, 2018, and has been edited for clarity.
The winner of the mandate to oversee the F Fund, the fixed income index fund for the Federal Retirement Thrift Investment Board, is BlackRock – specifically – Blackrock Institutional Trust Company, N.A. The manager agreement is for 1-year with four 1-year options to extend.
The F Fund allocates capital to a portfolio of fixed income instruments that follows the Bloomberg Barclays U.S. Aggregate Bond Index.
The F Fund has roughly US$ 27.4 billion in assets as of April 2018.
BlackRock also manages the C Fund, S Fund and I Fund for the Federal Retirement Thrift Investment Board.
IHS Markit signed a deal to acquire Ipreo, a financial services data company, for US$ 1.855 billion from private equity funds managed by Blackstone and the Goldman Sachs Merchant Banking Division. IHS Markit is using debt financing for the purchase.
The deal is expected to close before the end of 2018.
Barclays is the lead financial advisor for IHS Markit, while HSBC is acting as financial advisor to to IHS Markit for its acquisition of Ipreo. HSBC will act as sole lead arranger and book runner for the committed debt financing for the acquisition of Ipreo. Davis Polk & Wardwell LLP is acting as IHS Markit’s legal advisor. Goldman Sachs and Morgan Stanley were joint financial advisors for Ipreo.
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