Nikko Asset Management has launched the first ETF in Japan to provide responsibly focused exposure to the country’s real estate investment trust (REIT) market.
The Listed Index Fund Nikkei ESG REIT (2566 JP) has debuted on the Tokyo Stock Exchange (TSE) and comes with a management fee of 0.15%.
The ETF aims to tap into the growing demand for responsible investments, driven by a desire from an increasing number of investors to limit potential negative implications of their investments while also encouraging companies to effect positive change across environmental, social, and corporate governance matters.
While the ESG trend has taken hold in equity and, increasingly, fixed income asset classes, adoption in alternative investments is still in its infancy.
This seems poised to change, however, as investors become more attuned to the consequences of urbanization and increasingly alert to the scale of carbon emissions during building construction and in the ongoing day-to-day operations of buildings.
Koei Imai, Head of ETF Center at Nikko Asset Management, said, “In recent years, both retail and institutional investors in Japan and around the world have been placing more emphasis on ESG when choosing investments. We expect they will make the same ESG considerations when choosing REITs.”
Methodology
The fund tracks the Nikkei ESG-REIT Index, unveiled in June, which consists of all TSE-listed REITs with market capitalizations greater than ¥20 billion (approx. $190 million) and average daily trading values above ¥50m ($500,000).
Constituents are weighted by market capitalization and adjusted by their ESG score which is provided by GRESB, an institutional-asset-owner-led non-profit organization founded to assess the ESG performance of real assets.
In assigning each REIT an ESG score, GRESB utilizes an international framework for sustainability performance and uses over 50 indicators related to energy use, greenhouse gas emissions, water, and waste.
ESG scores are reflected in a star-based system whereby REITs with the poorest ESG profiles receive no stars and their weights remain unchanged in the index. REITs with a one-star rating will have their index weight increased by 10%, those with a two-star rating by 20%, and so on up to a maximum five-star rating and 50% weight increase.
Ruben Langbroek, Head of Asia Pacific at GRESB, said, “A recovery that addresses acute economic issues as well as chronic environmental and social issues will require the efficient and equitable deployment of large amounts of capital. The Nikkei ESG-REIT Index allows investors to align their listed real estate investment allocation with this green recovery.”
As of the end of May 2020, the ESG-REIT index had a dividend yield of 4.2% which is in line with the total market for TSE-listed REITs.