April 2018

Client engagement | Client case study

ESG integration into
Japan’s passive
investments
Mr. Norihiro Takahasi, President of the Government Pension Investment
Fund said:“GPIF expects that the selected ESG indices incentivise Japanese companies toimprove their ESG evaluations and enhance enterprise values in the long term.”
Source: GPIF statement, 3 July 2017

Mr. Hiromichi Mizuno, Chief Investment Officer of the Government Pension
Investment Fund said:“GPIF wants to incentivise Japanese corporates to perform better onenvironmental, social, and governance issues, and allocate more to corporates
and managers that took such issues seriously.”
Source: IPE article, 7 June 2017

About the client
ProfileObjectives

Index Criteria

The FTSE Blossom Japan Index wasdeveloped with input from the Government
Pension Investment Fund (GPIF) in Japanfor their first passive investment to track an
ESG index. FTSE Russell was selected as
one of two index providers for a totalpassive fund of 1 trillion Japanese yen.
GPIF have made groundbreaking steps
forward to incentivise Japanese companies
to improve their ESG evaluations andenhance enterprise values in the long term.

–An industry-neutral benchmarkthat reflects the performance ofcompanies demonstrating strong
environmental, social andgovernance practices (ESG) inJapan–––Increase transparency anddisclosure in the capital markets
and improve corporate performance
Improve awareness and activities
within the Japanese market
Improve effectiveness ofstewardship and engagement
within a passive mandate
Develop market standard indices inJapan to incentivise companies on
their ESG practices

Client engagement | Client case study

The need
In 2014, the Japanese Stewardship Code was established to encourage ownershipand dialogue between investors and investee companies to support the long term
growth of companies and investments.
The emphasis on a longer time horizon has put additional focus on incorporating
environmental and social risks into both the investment and engagement activities.
As signatories to the Japanese Stewardship Code, investors needed a tool toshowcase the ESG performance by the Japanese corporate issuers, as well as totrack the impact of engagement activities conducted by the market participants.

The index solution
The FTSE Blossom Japan Index is constructed using FTSE Russell’s ESG Scores
data model, which draws on existing international ESG standards, including the UN
Sustainable Development Goals. The inclusion thresholds are aligned with theglobally established FTSE4Good Index Series.
The index enables investors to identify companies that have strong ESG practices,while at the same time achieving index characteristics similar to the underlying
market capitalisation index.

Figure 1. FTSE Russell’s ESG Scores framework
Theme
indicators

Tax
Transparency
Risk
Management

Theme
score

ClimateChangeCorporate
Governance

ESG
Scores

AntiCorruption

Human Rights& Community>300 Indicators
Individually researched aspects
which focus on key operational
issues

Themeexposure

Pollution &Resources

Water
Security

Customer
Responsibility

LaborStandards

FTSE Russell

Score

Biodiversity

Health &Safety

14 Themes
A score and exposure for theseissues in each ESG Pillar, such as
climate change/anti-corruption

01
2
3Pillarscore

Pillarexposure

ESG Scores

3 Pillars
A cumulative score and exposure foreach of environment/social/governanceNo disclosure

Good practice45

Best practiceExposure
3High

2Medium

1Low

0

Negligible/NA

1 ESG score
A cumulative calculation of total ESGperformance2

Client engagement | Client case study

Index features–

Demonstrates a clear ESG standard for market participants and companies toutilise in their stewardship and engagement efforts–

Utilises the globally established FTSE4Good Index Inclusion Rules and ESG
Scores methodology–

Minimises any industry bias through industry neutral weighting, thereby
providing a benchmark designed to closely reflect the constituents of theunderlying index universe–

Provides a benchmark solution that incorporates ESG considerations and has
similar index characteristics, including industry weights and performance, of the
traditional market capitalisation weighted benchmark, the FTSE Japan Index 1Index construction
The FTSE Blossom Japan Index uses FTSE Russell’s transparent ESG Scores tomeasure exposure to and management of ESG-related risks.
FTSE Japan IndexInclusion Selection (Overall ESG score 3.1 and above)*E (Climate Change, Pollution & Resources, Biodiversity, Water Use, Supply Chain)
S (Customer Responsibility, Health & Safety, Human Rights & Community,
Labor Standards, Supply Chain – Social)
G (Anti-Corruption, Corporate Governance, Risk Management, Tax Transparency)

Industry Neutral weighting
Equal industry weighting to the underlying (FTSE Japan) Index**FTSE Blossom Japan Index* Currently companies must score 3.1 and above for new inclusion, and will be at risk ofdeletion when the company scores below 2.7** A single constituent’s weight within the index is capped at 15%, and 20 times its index
weight in the FTSE Japan Index

1

Source: FTSE Russell as at 28 February 2018. Past performance is no guarantee of future results. Returns
for the FTSE Blossom Japan Index reflect hypothetical historical performance. See the end for important
legal disclosures.

FTSE Russell

3Client engagement | Client case study

Result of deep client collaboration

Financial products launched–In 2015, FTSE Russell contributed to a research mandate from GPIF to help thepension fund consider best practice approaches to stewardship responsibilities
and ESG integration by asset owners globally.

–

Following the report, GPIF have been working through the recommendations
including becoming a signatory of the Principles for Responsible Investment,
and issuing an RFP for ESG indices.

–The FTSE Blossom Japan Index was launched in July 2017 upon selectionby GPIF.

–As part of the constituent outreach program, FTSE Russell grants permission toindex constituents to use the FTSE Blossom Japan Index logo in their corporate
literature to promote their inclusion in the index and help to communicate theirachievements in ESG performance to their broader constituents.

–Later in 2017, two Exchange Traded Funds tracking the FTSE Blossom Japan
Index were listed on the Tokyo Stock Exchange by two leading ETF providers,showing the blossoming trend for accessible ESG funds.

Since the launch of the index, twoExchange Traded Funds havebeen introduced to the Japaneseinstitutional and retail market:–Daiwa Asset Management
selects FTSE Blossom Japan
index for ‘Daiwa ETF FTSE
Blossom Japan Index’ –26 September 2017

–Asset Management One
selects FTSE Blossom Japan
index for ‘One ETF ESG’–
28 November 2017

Figure 2. ESG Scores: Global overall score comparison
Japan features in the bottom three countries within the Developed Markets whencomparing overall ESG scores of each market. The FTSE Blossom Japan Index
selects companies meeting a certain ESG standard, and therefore on par withmarkets with a higher average.
5432Korea

Hong KongJapanUSACanada

Australia

Switzerland

Germany

FTSE Blossom
JapanUK0France1

Source: FTSE Russell as at 20 June 2017. Companies identified as large or mid size bymarket capitalisation in the FTSE Developed Index in markets with 40 or more constituents, aswell as FTSE Blossom Japan Index constituents are shown. The overall ESG Scores scoredata from 20 June 2017 is used, and the average score for companies represented in each
respective market and the FTSE Blossom Japan Index are shown.

Additional information
FTSE Blossom Japan Index

FTSE Russell

4

ABOUT FTSE RUSSELL
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