September 2021

Client engagement | Client story

Integrating climate
risk in a global
bond allocation“It has been an important step for us to have an extended ‘ecosystem’ in ourESG-related fixed income product line up, whereas we have already developed
various types of ESG equity-related products for both active and passive
fund management.”– Mr. Hideki Suruga, Managing Executive Officer and Head of Products, Mitsubishi UFJ Kokusai AM

About the client
ProfileObjectives

Solution

Mitsubishi UFJ Kokusai AM, the coreasset management company ofMitsubishi UFJ Financial Group (MUFG),is one of the largest asset managers inJapan, with AUM of over ¥18 trillion.

To provide Japanese retail andinstitutional investors with a way toinvest in global government bonds
while mitigating climate risk.

The FTSE Climate Risk Adjusted
World Government Bond Index
integrates the physical climate risk,
transition risk and climate resilience ofsovereign debt issuers.

A pioneer in responsible investment

Mitsubishi UFJ Kokusai AM:
Client profile

The Mitsubishi UFJ Financial Group (MUFG) promotes investment management that
focuses on environmental, social and governance (ESG) concerns.

Mitsubishi UFJ Kokusai AM promotes
investment management that focuseson environmental, social andgovernance (ESG) issues. Bysuggesting to clients that they should
consider non-financial information
when making investment decisions,the firm is contributing to therealisation of a sustainable
environment and society.

In May 2006, MUFG was one of the first Japanese institutional investors to become asignatory of the United Nations Principles for Responsible Investment (UN PRI).
The Group also endorses the Japanese Stewardship Code, which was formulated by
the Financial Services Agency for the purpose of increasing the medium- to long-term
return on investment for customers and beneficiaries.

Client engagement | Client story

Objective: Integrating climate risk inglobal bond investments
Government bonds are the largest single asset class in the world’s securities
markets, and their issuers are highly exposed to energy and climate risks.
For example, governments own 78 percent of world fossil fuel reserves, andup to 20 percent of public expenditures and fiscal revenues are directly linked tofossil fuels.
Governments are also the primary source of funding for the world’s future
low-carbon infrastructure, and they are the key stakeholders in setting
environment-related fiscal and regulatory policy.
However, up to now, investors in global government bonds have had less successin integrating ESG considerations into their portfolios than investors in global
equities, where ESG frameworks are more established.
Mitsubishi UFJ Kokusai AM therefore wished to:–––Foster ESG integration in a global government bond portfolio
Base its ESG framework on a flagship global bond benchmark
Focus on managing and mitigating climate-related risk

Solution: the FTSE Climate Risk
Adjusted WGBI

Three climate risk “pillars” inthe FTSE Climate WGBI
PhysicalMitsubishi UFJ Kokusai AM selected the FTSE Climate Risk-Adjusted World
Government Bond Index (“FTSE Climate WGBI”) as the underlying performancetarget for a new index fund, launched in March 2021.

Idiosyncratic geographicalexposure to the adverse impact ofclimate change

The fund is designed for Japanese defined-contribution (DC) pension schemes,
other institutional investors, and financial institutions seeking to integrate climate
risk in their global bond allocations.

Transition

The FTSE Climate WGBI is derived from the flagship FTSE World Government
Bond Index (WGBI), launched in 1984 and widely used by bond investors. TheWGBI measures the performance of fixed-rate, local currency, investment-grade
sovereign bonds, and comprises sovereign debt from over 20 countries,denominated in a variety of currencies.
The FTSE Climate WGBI incorporates climate risks into its construction
methodology in a comprehensive, robust, and transparent manner. It does this byintegrating three climate risk “pillars”:–––

Physical risk (the level of climate-related risk exposure to a country and its
economy from the physical effects of climate change)
Transition risk (the risks of economic dislocation or financial losses associatedwith the future transition to a low-carbon economy)
Climate resilience (a country’s preparedness and actions to cope with its levelof climate-related risk exposure)

The FTSE Climate WGBI is constructed by “tilting” the starting weight of eachcountry in the parent index (the FTSE WGBI) to reflect its climate risk, as measured
using the three climate risk pillars.
The net effect of these tilts is to provide higher exposure to the government bondsof countries that are more resilient to climate change risks, and lower exposure tothe bonds of countries that are more exposed to climate risks.

FTSE Russell

The level of future carbon
emissions reduction needed tomeet the Paris conference target*Resilience
The degree to which an individual
economy is prepared for climatechange* Paris conference target of less than two degrees
of global warming and the recent trend of
historical carbon emissions
Source: FTSE Russell and LSEG Sovereign
Sustainability Solutions

Additional informationLearn more about FTSE Climate
WGBI
Further information on our range ofproducts and services is available atlseg.com/ftse-russell

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