Japanese asset manager Mitsubishi UFJ Kokusai AM has launched a new ETF providing broad exposure to Japan’s equity market while tilting in favour of sectors and companies with lower carbon emissions.
The fund is the first ETF in Japan to offer low-carbon exposure to the country’s equity market.
The MAXIS Carbon Efficient Japan Equity ETF (2560 JP) has listed on the Tokyo Stock Exchange (TSE) and comes with an expense ratio of 0.125%.
The fund is linked to the S&P/JPX Carbon Efficient Index which uses the TOPIX Index as its parent universe.
The TOPIX is a leading reference for Japan’s equity market, consisting of all domestically listed stocks (over 1,800 companies) on the First Section of the TSE.
Constituents with insufficient liquidity (average daily trading volume below ¥50 million) and those which are embroiled in ESG (environmental, social, and governance)-related controversies are removed from the selection pool.
The remaining constituents have their annual carbon footprint calculated based on data from ESG analytics firm Trucost. The footprint is defined as the company’s annual greenhouse gas emissions (direct and first-tier indirect) per unit of revenue. Companies for which an annual carbon footprint cannot be calculated are also excluded from the selection pool.
The methodology maintains the Global Industry Classification Standard (GICS) sector weights of the parent TOPIX Index but reweights constituents within each sector to reduce the index’s total emissions-per-revenue profile. This involves tilting in favour of firms within the lowest three deciles, and away from firms in the highest three deciles, when ranked by carbon footprint per sector.
Additionally, each GICS sector is identified as either Low, Mid, or High Impact with High Impact sectors displaying the widest range between their first and tenth decile average emissions-per-revenue. Constituents from High Impact sectors that are undergoing a weight change will have that change multiplied by a factor of three, while constituents from Low Impact sectors that are undergoing a weight change will have that change multiplied by a factor of 0.5.
The index is primarily exposed to the industrials (22.4%), consumer discretionary (18.2%), information technology (11.6%), financials (10.3%), and healthcare (9.0%) sectors. Reconstitution and rebalancing occur annually in March.
The fund is the first ETF in Japan to deliver low-carbon access to the country’s equity market.
There are, however, a number ETFs providing broad ESG-screened exposure. The largest and cheapest of these is the One ESG ETF (1498 JP) which houses ¥11.1 billion ($100 million) in AUM and comes with an expense ratio of 0.13%. It tracks the FTSE Blossom Index, providing exposure to constituents from the FTSE Japan Index that display strong ESG practices.