Daiwa to roll out three ESG-focused ETFs on Tokyo Stock Exchange

Sep 14th, 2017 | By | Category: Equities

Tokyo-based Daiwa Asset Management is planning to launch three new ETFs in Japan, each tracking locally listed equities while utilizing environmental, social and governance (ESG) stock screening. The funds are due to begin trading on Tuesday 26 September 2017.

Daiwa to roll out three ESG-focused ETFs on Tokyo Stock Exchange

Daiwa is planning to launch three ESG-related ETFs on Tokyo Stock Exchange on 26 September 2017.

Yohan Choi, director of global product planning department at Daiwa Asset Management, commented: “ESG is becoming an increasingly popular and important investment theme in the global fund market. This is reflected too in Japan where the ESG theme has also been supported by political and financial policies, as seen in the ‘three new arrows of Abenomics 2.0’. These policies emphasize empowering women in the workplace, enhancing corporate governance, and strengthening the stewardship code as means to stimulate economic growth.

“Backed by those policies, GPIF (Government Pension Investment Fund), a Japanese pension manager and one of the largest investors in the world, in July this year decided to select three ESG indices and has started a passive initial investment in these indices worth ¥1 trillion ($9 billion).”

Daiwa’s three soon-to-be-launched ETFs have been designed to track these indices.

The Daiwa MSCI Japan ESG ETF (1653) will track the MSCI Japan ESG Leaders Index. The index targets companies with the best ESG profile relative to their sector peers. The index is designed using MSCI ESG Ratings and targets companies with the highest ESG quality from within its parent index, the MSCI Japan IMI Top 500.

Companies in the parent index found to be in violation of international norms (for example, facing severe controversies related to human rights, labour rights or the environment) and those involved in controversial weapons (for example, landmines, cluster munitions, depleted uranium, and biological and chemical weapons) are initially excluded.

The index provider furthermore evaluates each remaining firm based on the most pertinent ESG themes specific to its sub-industry and assigns an ESG rating between AAA (highest) and CCC (lowest).

Companies that are currently not constituents of the index are required to have an MSCI ESG rating above B to be considered eligible for addition.

The Daiwa Japan Empowering Women ETF (1652) will track the MSCI Japan Empowering Women Index. The index comprises companies whose gender diversity initiatives have been determined by MSCI ESG Research to encourage more women to enter or return to the workforce, while also selecting companies which have maintained superior financial quality as defined by the MSCI Quality Score methodology.

Each company is assigned a Gender Diversity Score which is based on a number of metrics. These include the percentage of women as new hires, the percentage of women in the total workforce, the difference in average employment years for female to male employees, the percentage of women in senior management, and the percentage of women as directors on the board.

The MSCI Quality Score for each security is calculated by combining the z-scores of three fundamental descriptors, return on equity, debt to equity and earnings variability.

The constituents of the index are weighted in proportion to their market capitalization, sector relative Gender Diversity Score and sector relative MSCI Quality Score. The index is rebalanced on a semi-annual basis in May and November.

The Daiwa FTSE Blossom Japan ETF (1654) will track the FTSE Blossom Japan Index. The index is constructed using FTSE Russell’s ESG Ratings data model, which draws on existing international ESG standards, such as the UN Sustainable Development Goals, and sets its inclusion thresholds to align with the globally established FTSE4Good Index Series. The model uses over 300 indicators in its evaluation of a company’s ESG rating.

The model assigns companies an ESG rating between 0 and 5 with those scoring 3.1 or above being added to the FTSE Blossom Japan Index. Companies which are embroiled in controversy or those which have scored particularly low in a ‘high exposure’ theme will not be included. The index is reconstituted and rebalanced semi-annually in June and December. To minimise industry bias, the index has been designed using an industry-neutral weighting approach to match the industry weights in the underlying FTSE Japan Index. Constituents are weighted by free-float market capitalization.

Each ETF will have a total expense ratio (TER) of 0.15%.

Daiwa is also planning the launch of the Daiwa TOPIX Dividend Yield 40 ETF (1651) which is due to be rolled out on the same day as the three ESG-focused ETFs. It will track the TOPIX High Dividend Index which is made up of the top 40 stocks from the TOPIX Index which have the highest dividend yield. Its TER is setto be 0.19%.

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