LSEG and JPX to develop net zero climate indices covering Japan’s equity market
- Climate transition benchmarks are becoming an important tool for investors to manage climate risk
- The new LSEG and JPX indices will enable investors to reallocate capital based on the climate credentials and carbon performance of the constituent companies in the index
- The FTSE/JPX Net Zero Index Series will achieve alignment to net zero by 2050
- The indices will incorporate multiple dimensions of climate exposure including carbon emissions, carbon reserves, green revenues, and climate governance
London Stock Exchange Group (LSEG) and Japan Exchange Group (JPX) are expanding their existing partnership by developing climate indices based on the TOPIX 500 which provides diversified exposure across the Japanese stock market. LSEG’s index business, FTSE Russell, JPX and Tokyo Stock Exchange (TSE) are working closely to launch the FTSE/JPX Net Zero Index Series in the first half of 2022. The index series will adhere to the EU’s Climate Transition Benchmark (CTB) standards.
The need for these solutions is clear. FTSE Russell’s 2021 Sustainable Investment survey of asset owners released in October found that over two thirds (68%) of APAC asset owners are prioritising climate issues and over half are ‘very concerned’ about climate risk.
The FTSE/JPX Net Zero Index Series will align to net zero by 2050 by applying index tilts to the market cap weighted adjusted TOPIX 500 to achieve a 30% reduction in carbon emissions and fossil fuel reserves and a significant uplift in exposure to the green economy. The indices can be used as the basis of passive fund allocation, as a performance benchmark for actively managed funds, or to inform investment research.
The indices will also integrate Transition Pathway Initiative (TPI) Management Quality scores which measure a company’s incorporation of climate change considerations into their business strategy. The scores are used to increase exposure to companies that demonstrate a higher level of preparedness for a low-carbon transition. The TPI is backed by over 100 major asset owners with a combined $40 trillion in AUM and advice. TPI Management Quality scores are based on the recommendations of the Taskforce for Climate Related Financial Disclosures (‘TCFD’). The FTSE ESG data model provides TPI Management Quality scores for over 1300 Japanese companies.
David Schwimmer, CEO, LSEG, comments:
“While governments are currently negotiating here in Glasgow, we in the private sector can take action to accelerate the shift in the funds required to finance the climate transition. This partnership with JPX provides investors with important new tools to enable capital reallocation in Japanese equity markets. Climate indices such as the FTSE/JPX Net Zero Index Series will give investors the ability to align their exposure with the 2015 Paris Agreement using the TOPIX 500.”
Akira Kiyota, Director, Representative Executive Officer, Group CEO of JPX comments:
“In July 2018, London Stock Exchange Group and JPX agreed to collaborate in the sustainable investment field and on product marketing around ESG-related products and services. Under that framework, we are very pleased to announce that FTSE Russell and Tokyo Stock Exchange will carry out collaborative development of a new environmental index. Reducing greenhouse gas emissions to prevent global warming is an issue that must be addressed across national borders, by both the public and private sectors. We hope to be able to support these initiatives through the new index.”
JPX and LSEG, as Partner Exchanges in the United Nations (UN) Sustainable Stock Exchanges (SSE) initiative, are both firmly and demonstrably committed to promoting sustainable investment. LSEG and JPX announced in 2018 that they have agreed to identify and collaborate on financial market infrastructure initiatives designed to promote global sustainable investment and on product marketing initiatives.
On 20 October 2021, the London Stock Exchange became the first exchange to launch climate reporting guidance to its listed companies, and did this based on the SSE Model Climate Reporting guidance issued earlier in the year. The framework will help issuers navigate climate disclosure, associated engagement with their shareholders, and ultimately improve the climate data available to the investment and finance community. JPX is supporting listed companies in their voluntary efforts to disclose ESG information, including through publication of the Practical Handbook for ESG Disclosure and the launch of the JPX ESG Knowledge Hub in 2020. On climate change, JPX has set a target to switch all energy used by the Group to renewable energy by FY20241 and achieve carbon neutrality on the same timeline. JPX took its first steps towards this goal in October 2021 by taking measures at its main office buildings, including switching electricity contracts, which are expected to cut CO2 emissions by 27% on a yearly basis.
The introduction of new climate transition indices for the Japanese market is consistent with LSEG’s commitment as a founding member of the Net Zero Financial Services Providers Alliance, whose mission is to accelerate the transition to a net zero financial system.