Index Methodology

MSCI Japan ESG SelectLeaders Index
Methodology
August 2024

© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

MSCI Japan ESG Select Leaders Index Methodology | August 2024

Contents
1. Introduction ............................................................................................................. 3
2. Constructing the Index ............................................................................................. 4
2.1 Underlying Universe ...................................................................................................... 4
2.2 Eligible Citeria ................................................................................................................ 4
2.2.1 ESG Rating Eligibility .................................................................................................. 4
2.2.2 ESG Controversies Score Eligibility .......................................................................... 4
2.3 Market Capitalization Targeting ................................................................................... 4
2.4 Treatment of Unrated Companies ............................................................................... 4
3. Maintaining the Index .............................................................................................. 5
3.1 Semi-Annual Index Review ........................................................................................... 5
3.1.1 Updating the Eligible Universe .................................................................................. 5
3.1.2 Ranking of Eligible Securities .................................................................................... 5
3.1.3 Selection of Eligible Securities .................................................................................. 5
3.2 Quarterly Index Reviews................................................................................................ 6
3.3 Ongoing Event-Related Maintenance .......................................................................... 6
4. MSCI ESG Research ................................................................................................. 8
4.1 MSCI ESG Ratings ......................................................................................................... 8
4.2 MSCI ESG Controversies .............................................................................................. 8
Appendix I: Guidelines on Achieving the Target Sector Coverage of 50% ..................... 9
Appendix II: Methodology Transition ......................................................................... 10
Appendix III: Methodology Set ................................................................................... 12
Appendix IV: Changes to this Document .................................................................... 13© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024

1. Introduction
The MSCI Japan ESG Select Leaders Index (the “Index”) is a free float-adjusted market
capitalization-weighted index designed to represent the performance of companies that have highEnvironmental, Social and Governance (“ESG”) ratings relative to their sector peers. The Index aims
to target sector weights that reflect the relative sector weights of the MSCI Japan Investable Market
Index (IMI) (the “Parent Index”) to limit the systematic risk introduced by the ESG selection process.
Overall, the Index targets coverage of 50% of the Parent Index1.

1 The Index is governed by a set of methodology and policy documents (“Methodology Set”), including the present index

methodology document. Please refer to Appendix III for more details© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024

2. Constructing the Index
2.1 Underlying Universe
The selection universe for the Index is defined by the constituents of the Parent Index.

2.2 Eligible Citeria
The Index uses company ratings and research provided by MSCI ESG Research2 to determine
eligibility for index inclusion.

2.2.1 ESG Rating Eligibility
The Index uses MSCI ESG Ratings to identify companies that have demonstrated an ability to
manage their ESG risks and opportunities. Companies are required to have an MSCI ESG Rating of‘BB’ or above to be eligible for inclusion in the Index.

2.2.2 ESG Controversies Score Eligibility
The Index uses MSCI ESG Controversies Scores to identify companies that are involved in very
serious controversies involving the environmental, social, or governance impact of their operations
and/or products and services. Companies are required to have an MSCI ESG Controversies Score of
3 or above to be eligible for inclusion in the Index.

2.3 Market Capitalization Targeting
The Index targets 50% of the free float-adjusted market capitalization within each Global Industry
Classification Standard (GICS®)3 sector of the Parent Index.

2.4 Treatment of Unrated Companies
Companies not assessed by MSCI ESG Research on data for any of the following MSCI ESG
Research products are not eligible for inclusion in the Indexes.
•

MSCI ESG Ratings•

MSCI ESG Controversies

2 See section 4 for further information regarding ESG and climate data used in the Indexes that MSCI Limited and MSCI DeutschlandGmbH source from MSCI ESG Research LLC, a separate subsidiary of MSCI Inc. MSCI ESG Research is solely responsible for thecreation, determination and management of such data as a provider to MSCI Limited and MSCI Deutschland GmbH. MSCI Limited
and MSCI Deutschland GmbH are the benchmark administrators for the MSCI indexes
3 GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.

© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024

3. Maintaining the Index
3.1 Semi-Annual Index Review
The Index is reviewed on a semi-annual basis in May and November to coincide with the May andNovember Semi-Annual Index Reviews of the Parent Index, and the changes are implemented at theend of May and November. In general, the pro forma index is announced nine business days before
the effective date.
In general, MSCI uses MSCI ESG Research data (including MSCI ESG Ratings and MSCI ESG
Controversies Scores) as of the end of the month preceding the Index Reviews for the rebalancing of
the Index. For some securities, such data may not be published by MSCI ESG Research by the end of
the month preceding the Index Review. For such securities, MSCI will use ESG data published after
the end of month, when available, for the rebalancing of the Index.
At each Semi-Annual Index Review, the eligible universe is updated, and the composition of the Index
is reassessed in order to target 50% free float-adjusted cumulative market capitalization of eachsector of the Parent Index.

3.1.1 Updating the Eligible Universe
The eligible universe is updated during each Semi-Annual Index Review.
Companies that are currently not constituents of the Index are evaluated using the same eligibility
criteria described in Section 2.2.
Existing constituents of the Index are maintained in the eligible universe if they meet all the following
conditions:•

MSCI ESG Rating of ‘B’ or above•

MSCI ESG Controversies Score of 1 or above.

3.1.2 Ranking of Eligible Securities
For each sector, eligible securities of the Parent Index are ranked based on the following criteria:•

ESG Rating•

Current index membership (existing constituents above non-constituents)•

Industry-adjusted ESG scores•

Decreasing free float-adjusted market capitalization.

3.1.3 Selection of Eligible Securities
For each sector, eligible securities of the Parent Index are then selected from the ranked universe in
the following order until the target 50% coverage by cumulative free float-adjusted market
capitalization is reached:•

Securities in the top 35% cumulative free float-adjusted market capitalization coverage of theranked universe, including the first security that increases the cumulative coverage above 35%© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024•

‘AAA’ and ‘AA’ rated securities in the top 50% cumulative free float-adjusted market
capitalization coverage of the ranked universe, including the first security that increases the
cumulative coverage above 50%•

Current index constituents in the top 65% cumulative free float-adjusted market capitalization
coverage of the ranked universe, including the first security that increases the cumulative
coverage above 65% if that security is a current index constituent•

Remaining eligible securities in the ranked universe

Please see Appendix I for additional details on the ranking and selection rules to achieve the target
sector coverage.

3.2 Quarterly Index Reviews
The Index is also reviewed on a quarterly basis to coincide with the regular Index Reviews of the
Parent Index. The changes are implemented at the end of February and August. The pro forma
indexes are in general announced nine business days before the effective date.
For the Quarterly Index Reviews, MSCI ESG Ratings and MSCI ESG Controversies Score assessments
data are taken as of the end of the month preceding the Index Reviews, i.e., January and July. For
some securities, this data may not be published by MSCI ESG Research by the end of the month
preceding the Index Review. For such securities, MSCI will use ESG data published after the end ofmonth, when available, for the rebalancing of the Index.
At the Quarterly Index Reviews, existing constituents are deleted from the Index if they do not meetthe eligibility criteria described in Section 3.1.1. Existing constituents that meet the eligibility criteria
are retained in the Index.
Additions from the eligible securities as per Section 2.2 are made only to those sectors where thecurrent market capitalization coverage is less than 45%, until the 50% target is reached.
Market price movements may cause small deviations in the sector coverage between two Index
Reviews. Therefore, in order to minimize turnover, a buffer of 10% is used on the target coverage of
50% to define under-representation.

3.3 Ongoing Event-Related Maintenance
The following section briefly describes the treatment of common corporate events within the MSCIJapan ESG Select Leaders Index.
No new securities will be added (except where noted below) to the Index between Index Reviews.
For cases where additions are noted below, securities will be added to the index only if added to the
Parent Index.
Parent Index deletions will be reflected simultaneously.
There are no deletions from the Index between Index Reviews on account of a security becoming
ineligible because of MSCI ESG Rating downgrade and/or decrease in MSCI ESG Controversies
Score.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024

EVENT TYPE

EVENT DETAILSNew additions to the Parent Index

New securities added to the Parent Index (such as
IPOs, other early inclusions and migrations from adifferent size-segment) will be added to the Index on
the date of security inclusion only if they meet theeligibility criteria described in Section 2.2 and themarket capitalization coverage of the sector to which
the security belongs is less than 45%.

Spin-Offs

All securities created as a result of the spin-off of an
existing Index constituent will not be added to theIndex at the time of event implementation.
Reevaluation for addition in the Indexes will occur atthe subsequent Index Review.

Merger/Acquisition

If an existing Index constituent is acquired by a nonIndex constituent, the existing constituent will bedeleted from the Index and the acquiring nonconstituent will not be added to the Index.

Changes in Security Characteristics

A security will continue to be an Index constituent if
there are changes in characteristics (country, sector,
size segment, etc.). Reevaluation for continued
inclusion in the Index will occur at the subsequentIndex Review.

Further detail and illustration regarding specific treatment of corporate events relevant to this Index
can be found in the MSCI Corporate Events Methodology book.
The MSCI Corporate Events methodology book is available at: https://www.msci.com/indexmethodology© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024

4. MSCI ESG Research
The Index is a product of MSCI Inc. that utilizes information such as company ratings and research
produced and provided by MSCI ESG Research LLC (MSCI ESG Research), a subsidiary of MSCI Inc.
In particular, the Index uses the following MSCI ESG Research products: MSCI ESG Ratings and
MSCI ESG Controversies. MSCI Indexes are administered by MSCI Limited and MSCI DeutschlandGmbH.

4.1 MSCI ESG Ratings
MSCI ESG Ratings aim to measure entities’ management of environmental, social and governancerisks and opportunities. MSCI ESG Ratings use a weighted average key issue calculation that isnormalized by industry to arrive at an industry-adjusted ESG score (0-10), which is then translated toa seven-point scale from ‘AAA’ to ‘CCC’, indicating how an entity manages relevant key issues
relative to industry peers.
The MSCI ESG Ratings methodology can be found at: https://www.msci.com/legal/disclosures/esgdisclosures.

4.2 MSCI ESG Controversies
MSCI ESG Controversies provide assessments of controversies concerning the potential negativeenvironmental, social, and/or governance impact of company operations, products and services. The
evaluation framework used in MSCI ESG Controversies is designed to be consistent withinternational norms represented by the UN Declaration of Human Rights, the ILO Declaration on
Fundamental Principles and Rights at Work, and the UN Global Compact. MSCI ESG Controversies
Score falls on a 0-10 scale, with “0” being the most severe controversy.
The MSCI ESG Controversies methodology can be found at:https://www.msci.com/legal/disclosures/esg-disclosures.

© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024

Appendix I: Guidelines on Achieving the Target Sector Coverageof 50%The Index targets 50% coverage of the free float-adjusted market capitalization of each Global
Industry Classification Standard (GICS®) sector of the Parent Index. The underlying principle in theconstruction of the Index is to achieve cumulative sector coverage closest to 50%, while aiming tomaintain index stability.
The following guidelines are used in achieving the target cumulative sector coverage of 50%:•

For each sector, the eligible companies of the Parent Index are first ranked based on thecompany level ESG Rating.

•If two companies have the same ESG Rating, the existing constituent of the Index is given priority
to maintain index stability. Between two existing constituents of the Index with the same ESG
Rating, the company with the higher industry-adjusted ESG Score is given priority. For two
existing constituents of the Index with the same industry-adjusted ESG score, the security withthe largest free float-adjusted market capitalization is given priority.

•

The cumulative sector coverage at each rank is calculated.

•

In each sector, companies are selected as per the rules mentioned in Section 3.1.2 until the
cumulative sector coverage crosses 50% or there are no eligible securities left to be selected.

•

MSCI defines the company that increases the cumulative sector coverage above 50% as the“marginal company”.

•-

If the marginal company is a current constituent of the Index, then it is always selected.

-

If the marginal company is not a current constituent of the Index, then it is selected only if
the cumulative sector coverage with the marginal company is closer to 50% compared to the
cumulative sector coverage without the marginal company.

The minimum cumulative sector coverage is set to 45%.
-

The marginal company is always selected if this is required to achieve cumulative sector
coverage of 45%.

Securities which are ineligible as per Section 3.1.1 will not be selected even if the cumulative sector
coverage after selection of all eligible securities is below 50%© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024

Appendix II: Methodology Transition
June 2016
Prior to the May 2016 Annual Index Review, the MSCI Japan Index was used as the parent index.
Effective from the May 2016 Annual Index Review, the parent index was changed to the MSCI JapanIMI Top 500 Index.
December 2018
Prior to the November 2018 Semi-Annual Index Review, the MSCI Japan IMI Top 500 Index was usedas the parent index. Effective from the November 2018 Semi-Annual Index Review, the parent index
was changed to the MSCI Japan IMI Top 700 Index.
June 2022
Prior to the May 2022 Semi-Annual Index Review (SAIR), the MSCI Japan IMI Top 700 Index wasused as the parent index. Effective from the May 2022 SAIR, the parent index was changed to the
MSCI Japan IMI.
MSCI applied a full index reconstitution for the MSCI Japan ESG Select Leaders Index at the May
2022 SAIR. Specifically, the following rules were applied:
Non-constituents

Existing constituents•
Eligibility

Ranking

Selection

MSCI ESG Rating of ‘BB’ or• MSCI ESG Rating of ‘BB’ or
above
above
• MSCI ESG Controversies Score • MSCI ESG Controversies Scoreof 3 or aboveof 1 or above
For each sector, eligible companies of the Parent Index are ranked
based on the following criteria:• ESG Rating• Industry-adjusted ESG scores• Decreasing free float-adjusted market capitalization
Securities are then selected from the ranked universe by decreasing
rank until 50% coverage by cumulative free float-adjusted market
capitalization target is reached.4

As shown in the above table, the ESG Controversies Score buffer for existing constituents was still
applied to mitigate potential reverse turnover due to the implementation of changes to the MSCI ESG
Controversies methodology, which impacted the Index starting from the August 2022 Quarterly Index
Review (QIR).
The transition to the new methodology was implemented in two steps as part of the May 2022 SAIR
and August 2022 QIR, respectively.
4 The marginal company is selected only if the cumulative sector coverage with the marginal company is closer to 50% compared tothe cumulative sector coverage without the marginal company.

© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024•

Securities added to the Index as part of the transition had an inclusion factor of 0.50 applied totheir free float-adjusted market capitalization at the May 2022 SAIR and were included in full at
the August 2022 QIR.

•

Securities deleted from the Index as part of the transition but that were still included in the MSCIJapan IMI were maintained with an inclusion factor of 0.50 at the May 2022 SAIR and were fully
deleted at the August 2022 QIR.

•

Securities deleted from the Index due to their deletion from the MSCI Japan IMI were fully
deleted at the May 2022 SAIR.

The pro forma index for the May 2022 SAIR and August 2022 QIR was announced nine businessdays before the effective date. Prices as of the tenth business day before the effective date wereused to perform index maintenance activities (e.g., calculating the cumulative sector coverage).

© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024

Appendix III: Methodology Set
The Index is governed by a set of methodology and policy documents (“Methodology Set”), including
the present index methodology document as mentioned below:•

Description of methodology set –www.msci.com/index/methodology/latest/ReadMe•

MSCI Corporate Events Methodology –www.msci.com/index/methodology/latest/CE•

MSCI Fundamental Data Methodology –www.msci.com/index/methodology/latest/FundData•

MSCI Index Calculation Methodology –www.msci.com/index/methodology/latest/IndexCalc•

MSCI Index Glossary of Terms –www.msci.com/index/methodology/latest/IndexGlossary•

MSCI Index Policies –www.msci.com/index/methodology/latest/IndexPolicy•

MSCI Global Industry Classification Standard (GICS) Methodology –www.msci.com/index/methodology/latest/GICS•

MSCI Global Investable Market Indexes Methodology –www.msci.com/index/methodology/latest/GIMI•

ESG Factors In Methodology*

The Methodology Set for the Index can also be accessed from MSCI’s webpage
https://www.msci.com/index-methodology in the section ‘Search Methodology by Index Name orIndex Code’.

* ‘ESG Factors in Methodology’ contains the list of environmental, social, and governance factors
considered, and how they are applied in the methodology (e.g., selection, weighting or exclusion). It
can be accessed in the Methodology Set as described above.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024

Appendix IV: Changes to this Document
The following sections have been modified as of September 2017:
Section 4.1: Annual Index Reviews and Section 4.2: Quarterly Index Reviews•

Clarification on use of ESG data for securities whose data would be available after the end of themonth preceding Index Review

The following sections have been modified as of November 2018:
Section 4.1: Semi-Annual Index Reviews and Section 4.2: Quarterly Index Reviews•

Changed to reflect the updated rebalancing frequency

Introduction and Appendix I:•

Changed to reflect the updated Parent Index

The following sections have been modified as of May 2022:
Introduction•

Updated to reflect the change of Parent Index

Section 3: Constructing the MSCI Japan ESG Select Leaders Index•

Removed the references to minimum ESG Rating and ESG Controversies Score for existing
constituents

Section 4: Maintaining the MSCI Japan ESG Select Leaders Index•

Added references to minimum ESG Rating and ESG Controversies Score for existing constituents

Section 4.1.3: Selection of Eligible Securities•

Clarified the selection rules

Section 4.3: Ongoing Event-Related Maintenance•Clarified the maintenance rules

Appendix 1: MSCI Japan IMI Top 700 Index:•

Removed given the change of Parent Index

Appendix 1: Guidelines on Achieving the Target Sector Coverage of 50%•

Added clarifications

Appendix 2: Methodology Transition•

Added details on the December 2018 and June 2022 transitions

The following sections have been modified as of August 2022:
Appendix 2: Methodology Transition© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Japan ESG Select Leaders Index Methodology | August 2024•

Updated to reflect the completion of the transition

The following sections have been modified as of August 2024
Section 2.4: Treatment of Unrated Companies•

New section detailing the treatment of companies with ratings and research not available fromMSCI ESG Research

Section 4: MSCI ESG Research•

Moved the MSCI ESG Research section after Section 3•

Updated the descriptions of MSCI ESG Research products.

Appendix III: Methodology Set•

Added details on the Methodology Set for the Index.

© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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