August 28, 2003
Morningstar Japan Launches First SRI Index Covering Japanese Market Exclusively
by William Baue
The introduction of an socially responsible investing index by Morningstar Japan represents a
significant milestone in the development of SRI in Japan.
Socially responsible investing (SRI), which is slowly but surely gaining a foothold in Japan,
recently got a major boost with Morningstar Japan's launch of the first SRI index covering the
Japanese market exclusively. The index screens companies based on their performance in five areas
of corporate social responsibility (CSR): corporate governance, employment, consumer services, the
environment, and social contributions.
The Center for Public Resource Development, a
non-profit organization that helped develop the index, applied these screens to all listed
companies in Japan. Only about 200 companies passed the screens. Morningstar Japan narrowed the index's universe a
little more by taking into account liquidity and tradability, which whittled the index constituency
down to 150 companies. The index is weighted by a free float; in other words, a company's market
capitalization excludes block ownership to reflect only outstanding shares that are truly tradable
"Making an index itself is not a problem, but making the index
prevailing is a real challenge," said Sho Ikeda, director and head of research at the Good Bankers. In 1999, the Good Bankers
launched one of the first Japanese SRI funds, the Nikko Eco Fund, in conjunction with Nikko Asset Management. "There
are a number of factors affecting the success or failure of such an SRI index in a practicable
These factors include market conditions, the transparency of the index, the
features of the index, the continuity of the index's research and screening, and finally, the
index's performance, according to Mr. Ikeda.
"The Morningstar SRI index will have to be
tested in these aspects before becoming a benchmark index," Mr. Ikeda told SocialFunds.com. "I do
not know if anybody intends to use this index or not."
Morningstar Japan intends to
license the index to institutions for the creation of investment vehicles including mutual funds,
sub-account variable annuities, and derivative securities. In addition to licensing the index,
Morningstar Japan will provide institutional investors with CSR reports on the 200 companies in the
"Two famous SRI indices worldwide, FTSE4Good and DJSI [Dow Jones Sustainability Index], have not
published SRI Japan indices yet," said Mr. Ikeda. "But if SRI expands in Japan in the future,
obviously they will do so."
Sandra Steel, head of external relations for the FTSE Group,
addressed this speculation.
"We don't have plans for specifically covering the Japan
market in the pipeline right now," Ms. Steel told SocialFunds.com. "Japanese stocks are included
in the FTSE4Good Global Index."
The last review of the FTSE4 Good Global Index, conducted
in March 2003, resulted in the addition of ten Japanese stocks including Kirin Brewery (ticker: KNBY) and Konica
FTSE4Good Global Index now includes almost 60 Japanese stocks, such as Canon (CAJ), Honda (HMC), NEC (NIPNY), Sony (SNE), and Toyota (TM).
"Because index creation and management is all we do, we tend to be very market driven," Ms.
Steel continued. "If we saw demand from the Japanese market for a specific Japanese index, we
would certainly consider it."