Leading index provider to the exchange-traded funds industry MSCI has launched two new Japan equity indices utilising environmental, social and governance (ESG) screening criteria – the MSCI Japan Empowering Women Index and the MSCI Japan ESG Select Leaders Index.
The MSCI ESG Ratings methodology evaluates each firm based on the most pertinent ESG themes specific to its sub-industry.
Recent research has suggested that greater participation of women in the workforce may have benefits for the Japanese economy. As a result, the Japanese government has set out explicit goals to encourage women’s participation and promotion in the business world.
The MSCI Japan Empowering Women 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.
An examination of the index’s back-tested performance reveals the gender diversity and quality screenings produced enhanced returns with less risk compared to a broad market Japanese equity benchmark. As of 30 June 2017, the index returned 18.7% per annum with an annualized standard deviation of 15.7% over the past five years, compared to a return of 18.0% per annum and an annualized standard deviation of 16.5% for the parent MSCI Japan IMI Top 500.
The second index, the MSCI Japan ESG Select Leaders 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 index has also produced superior risk-adjusted returns compared to its parent index with a return of 18.9% per annum and annualized standard deviation of 16.4% over the past five years, compared to 18.0% per annum return and 16.5% annualized standard deviation over the same period.
“MSCI is a leader in providing ESG indices for investors to use when making informed asset allocation and investment strategy decisions,” said Diana Tidd, MSCI’s head of index. “The Japan Empowering Women Index and the MSCI Japan ESG Select Leaders indices we launched today reflect the thought leadership and innovation we bring to the world’s largest institutional investors as they seek to integrate ESG into their investment processes, and benchmark selection.”
Seiichiro Uchi, head of Japan index & ESG coverage at MSCI, added: “These two indices come at a time when the importance of ESG integration is becoming ever more important and diversifying Japan’s workforce is increasingly viewed as a key factor in the country’s continued economic development.”
The indices may be licensed for future product development, including ETF creation.