Japan, the world’s third-largest economy has been charting its journey towards environmental, social, and governance (ESG). This is now also reflected in an increasing number of investment strategies available in the field. Various companies offer ESG ETFs (Exchange Traded Funds) and investment funds with a focus on Japan.
While Japan ESG mutual funds are still quite small in number, more ETFs in that sphere have been rolled out in recent years. The following selected ESG ETFs by DWS, UBS, iShares, Fidelity and Invesco trade in Europe and provide investors with exposure to Japanese firms, which have more bandwidth on ESG goals. Most of these ETFs have their focus on the “E” by focussing on Japanese companies that actively persue being a good steward of nature.
Xtrackers MSCI Japan ESG UCITS ETF
Launched in Ireland on 24 April 2018, Xtrackers MSCI Japan ESG UCITS ETF (ISIN IE00BG36TC12) by DWS Investment Group, seeks long term investment in large and medium-sized Japanese companies with low carbon emissions and a high ESG rating. The passively managed ETF tracks the performance of the MSCI Japan Low Carbon SRI Leaders Index which has approx. 110 stocks, while its parent index is the MSCI Japan Index. The fund investment strategy is full replication (physical) of the performance of the underlying index i.e. buying all the index constituents.
In order to be considered for inclusion in the reference index, only companies from the parent index are eligible that exhibit high ESG performance compared to their competitors. Emphasising the “E” and “S” in ESG, the index tracks the performance of companies that have low carbon exposure and excludes companies whose products have negative social or environmental impacts.
The total expense ratio (TER) of the accumulating ETF is at 0.20% p.a. The Xtrackers MSCI Japan ESG UCITS ETF has generated returns of 5,12% since the beginning of the year**. The fund size is at $2.3 bn.*
iShares MSCI Japan ESG Enhanced UCITS ETF
The iShares MSCI Japan ESG Enhanced Focus UCITS ETF (ISIN IE00BHZPJ452), was launched on 16 April 2019. Domiciled in Ireland, the passively managed fund by BlackRock Asset Management aims to invest in equity securities.
With a TER of 0.15% p.a. the fund tracks the performance of the MSCI Japan ESG Enhanced Focus Index and replicates its performance physically by buying a selection of the most relevant index constituents. The underlying index gives greater weightage to companies that have higher ESG scores and that are working on reducing their carbon equivalent exposure to carbon dioxide (CO2) and other greenhouse gases (GHG) as well as their exposure to potential emissions risk of fossil fuel reserves by 30%. The index also screens out controversial business areas.
The iShares MSCI Japan ESG Enhanced UCITS ETF is reinvesting dividend income and has a volume of $531m*. It has risen 7,52% since the start of 2021**.
Fidelity Sustainable Research Enhanced Japan Equity UCITS ETF
Launched on 1 December 2020, the Ireland-domiciled Fidelity Sustainable Research Enhanced Japan Equity UCITS ETF (ISIN IE00BNGFMX61), is an accumulating ETF that invests in equities and has a fund volume of $394 m*. In comparison to the other profiled ETFs, it is actively managed. It reference the MSCI Japan(Net Total Return) Index as part of its investment process.
This ETF aims for long-term capital growth from a portfolio primarily made up of equity securities of Japanese companies which are selected according to Fidelity’s sustainability and fundamental criteria. The three biggest industries, industrials (23.6%), consumer discretionary (21.0%) and information technology (15.6%) make up for over 60% of the portfolio (as of 31 August 2021).
The Fidelity Sustainable Research Enhanced Japan Equity UCITS ETF has a Total Expense Ratio of 0.30% p.a. and has risen 8,97% since the start of 2021**.
Invesco MSCI Japan ESG Universal Screened UCITS ETF
The final ETF we review is one of the latest Japan ESG ETFs available for investors. Launched on 8 January 2021, the Invesco MSCI Japan ESG Universal Screened UCITS ETF (ISIN IE00BMDBMV87) aims to track the performance of the total net return of the MSCI Japan Universal Select Business Screens index. It is thereby fully replicating the performance of the underlying index.
Incorporated in Ireland, the UCITS compliant ETF offers investors exposure to Japanese companies that not only have a good ESG profile, but also demonstrably continue to improve it. Furthermore the “S” factor of ESG is emphasised by excluding companies that are associated with controversial weapons, nuclear weapons, oil sands or recreational cannabis, or derive revenues from conventional weapons, thermal coal, tobacco or civilian firearms, or are involved in very severe controversies pertaining to ESG issues or have an MSCI ESG rating of CCC.
The Invesco MSCI Japan ESG Universal Screened UCITS ETF has a fund size of $113 m*. The accumulating ETF has a running charge of 0.19% and has risen 3.49% in the past six months**.
*as of 20 September 2021.
**USD, as of 21 September 2021.