FTSE Russell has launched the FTSE Blossom Japan Index, tracking the performance of Japanese firms which have scored highly in an analysis of their environmental, social and governance (ESG) practices. The index may be used as a benchmark for discretionary fund management or as the underlying for investment products including ETFs.

The FTSE Blossom Japan Index screen for companies with superior ESG ratings while maintaining sector weights similar to the parent FTSE 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.

From 493 constituents within the FTSE Japan Index, the ESG screening has reduced this number to 151 for the FTSE Japan Blossom Index. Its largest constituents are Toyota (6.7% compared to 3.9% for FTSE Japan Index), Mitsubishi Financial (3.8% vs 2.5%) and East Japan Railway (3.1% vs 1.0%).

Through its use of industry weighting constraints, the FTSE Blossom Japan Index aims to provide a superior ESG profile while maintaining similar characteristics compared to the FTSE Japan Index. Using back-tested data, the ESG index has returned 35.2% over the past year which is significantly higher than the 31.9% return on the FTSE Japan Index. It has shown higher volatility though with a standard deviation of 16.0% compared to 15.5% for the FTSE Japan Index over this period.