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Japan helps drive ESG trend

By: Tony Campos, director, ESG product management

The attempt to drive change at any level is daunting at best. Driving change on a global scale can seem the hardest of all. Only weeks after the Paris Agreement on climate change came into force last November, President Trump announced that the US would not participate. The move was widely criticized as undermining the international effort to mitigate climate change. And yet it is striking how many other countries - both developed and emerging markets - are continuing to push forward by enacting new laws and codes to incentivize companies and industries to adopt more sustainable business practices.

The investment industry is an essential catalyst in this process. Countries around the world are encouraging, and in some cases, requiring investors and their asset managers to consider how their investees are managing environmental, social and governance (ESG) risks and opportunities. Of all the countries driving the sustainability agenda, Japan deserves a notable focus. Tracing back to 2014, Japan’s Financial Services Agency introduced the Japan Stewardship Code to "promote sustainable growth of companies through investment and dialogue.” Fast forward to the end of 2015 – the ¥132trn Government Pension Investment Fund (GPIF) signed up to the Principles of Responsible Investment (PRI), signaling their commitment to responsible investment. At the end of 2016, 200 institutional investors have signed up to the Stewardship Code. Both these drivers, along with widespread adoption of the PRI has helped drive growth in sustainable investment assets in Japan, doubling in value from ¥26trn in 2015 to ¥56trn in 2016.[1]  

Recognizing this shift, FTSE Russell has designed the FTSE Blossom Japan Index to help integrate and promote ESG considerations into investment decisions. The index is designed to minimize any industry bias by using an industry neutral weighting methodology, while applying the robust FTSE4Good Index Inclusion Rules, which utilize the FTSE Russell's ESG Ratings to determine index inclusion. The result is an index that only includes companies that exhibit strong management of ESG-related risks and closely tracks the industry weights of the broad-based market index.

Japan’s stewardship efforts and investment activities are creating strong incentives for change. This index allows market participants to identify and measure the performance of companies with effective ESG practices without losing the characteristics of a broad-market index focused on Japan. Equally important, FTSE Blossom Japan Index’s transparent methodology provides market participants with a firm basis for engagement with listed companies, thereby driving how companies are managing ESG risks.

For more information on FTSE Russell’s newest sustainable investment index please read FTSE Blossom Japan Index introduction page.

 

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[1] Survey of Japanese institutional investors conducted by Japan Sustainable Investment Forum, October 2016.

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