Market consultation

FTSE Russell Client Consultation:
Proposed inclusion of Japanese
small cap companies and changeof underlying benchmark forFTSE Blossom Japan Index

ftserussell.com

July 2020

FTSE Russell Client Consultation: Proposed inclusionof Japanese small cap companies and change ofunderlying benchmark for FTSE Blossom Japan Index
Purpose of Consultation
The purpose of this consultation is to invite index users and other stakeholders to provide feedback on theinclusion of Japanese small cap companies to the FTSE Blossom Japan Index by changing the underlying
benchmark from FTSE Japan Index to FTSE All Cap Japan Index.

Background
Since its launch in 2017, the FTSE Blossom Japan Index has helped to catalyse improvements incorporate practices with respect to global environmental, social and governance standards in Japan.
This has been achieved in part through a programme of positive engagement and communication withcorporates, giving them a clear understanding of FTSE Russell’s ESG ratings data model.
Approximately 40% of the constituents of the companies in the underlying index qualify for inclusion in theFTSE Blossom Japan Index. This has been achieved through the improving corporate practices of large
and mid cap companies in the underlying benchmark.
In addition, the opportunity for inclusion in the index provides further incentive for companies toimprove their ESG scores by enhancing their ESG practices and disclosure in order to meet theindex eligibility criteria.

Proposed Inclusion of Small Cap
Companies into FTSE Blossom Japan Index
In December 2019, FTSE Russell expanded it’s ESG ratings coverage for Japanese companies to include
small caps, bringing the total number of securities covered by FTSE Russell’s ESG ratings in Japan to1300. The intended aim of this increased coverage is to promote and encourage improvements in ESG
practices across all Japanese companies, including small caps.
This expanded ESG ratings coverage now provides for the opportunity to further promote improved
ESG practices by making Japanese small cap companies eligible for inclusion in the FSTE Blossom
Japan Index.
1. In line with existing FTSE Blossom Japan Ground Rules, it is proposed that the same ESG ratings
threshold should apply to small companies as to those in large and mid market capitalisation size
bands.1 As at December 2019, this would mean that four small cap companies would become
eligible for entry to the index. (*This number will be updated when June rating are released.)
2. The inclusion of Small Cap companies in the FTSE Blossom Japan Index would necessitate achange in the underlying index from the FTSE Japan index to the FTSE All Cap Japan index.
Sufficient time should be allowed to clearly communicate and explain the change to clients andaffected companies.
The proposed changes would be effective from the December 2020 index review.

1As of December 2019, the ESG rating threshold for inclusion in the index is a score of 3.3 and the deletion threshold is 2.9.
https://research.ftserussell.com/products/downloads/FTSE_Blossom_Japan_Index_Ground_Rules.pdf

FTSE Russell

2Impacts
The impact of this proposal on FTSE Blossom Japan Index if it was implemented can be seen in Figure 1.
Figure 1. Impact of proposed inclusion of Japanese small cap companies
No. of Japanese small cap companies eligible for inclusion based on Dec 2019 ESG scores
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Responding to the consultation
FTSE Russell would like to receive feedback on the following questions regarding the inclusionof Japanese small cap companies into the FTSE Blossom Japan Index.
Please submit your response to the questions included in this consultation online at:https://www.surveymonkey.co.uk/r/XQ962KZ
All responses will be treated as confidential. FTSE Russell may publish a summary of the consultation results.

Question 1: Should Japanese small cap companies be eligible for inclusion in theFTSE Blossom Japan index?
☐ Yes☐ No☐ If “No” is selected please provide further comments in the box below.

Question 2: If you answered yes to Question 1, do you agree that the benchmark for theFTSE Blossom Japan Index should be changed from the FTSE Japan index to theFTSE All Cap Japan index to provide for the inclusion of small cap companies?
☐ Yes
☐ No
☐ If “No” is selected please provide further comments in the box below.

Question 3: Do you support the application of the same ESG rating inclusion threshold to small cap
companies as used for large and mid cap companies?
☐ Yes
☐ No
☐ If “No” is selected please provide further comments in the box below.

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