Integrating ESG into Core Japanese Benchmarks

The FTSE Blossom Japan Index helps investors integrate ESG considerations and enhance ESG exposure, while maintaining the index characteristics of a broad market benchmark. It also provides a strong basis for corporate engagement.

Introduction

Investors globally are developing investment strategies that aim to integrate environmental, social and governance (ESG) considerations into their core approaches and are growing in sophistication. The Japanese sustainable market is no exception to this global trend and has blossomed in recent periods, creating a demand to integrate ESG criteria into the core benchmark construction and passive strategies of investors.

Recognizing this shift, in 2017, FTSE Russell designed the FTSE Blossom Japan Index to help investors, and other market participants, integrate and promote ESG considerations. The FTSE Blossom Japan Index can be used to integrate ESG considerations into a diversified investment strategy. The index, as this paper will explain, can enhance ESG exposure, while maintaining the index characteristics of a broad market benchmark, and also provides a strong basis for corporate engagement. In addition, in 2022, FTSE Russell developed a sector relative version of the FTSE Blossom Japan Index.

The FTSE Blossom Japan Sector Relative Index uses a sector-relative approach to reduce the deviation from the base index and identify a company's relative ESG ratings in the business sector. The index also aims to address the climate transition by incorporating climate risk management criteria from the perspective of management quality. FTSE Russell's index methodology helps incorporate ESG into investment strategies, while using corporate disclosures and transparent methodologies. Rating and index calculation methodologies provide clear standards for companies' ESG compliance, support understanding and dialogue across the investment chain, and help support stewardship activities in investors' investment activities.