New index will reward best performers on gender equity, says Morningstar Indexes.
A new index supported by the world’s largest asset owner aims to “push Japan toward becoming a leader in gender diversity”, according to Robert Edwards, Director of Product Management at Morningstar Indexes.
The Morningstar Japan ex-REIT Gender Diversity Tilt Index, which was developed by Morningstar Indexes and informed by data provider Equileap’s gender equality scorecard, will target Japan-based companies exhibiting strong gender diversity policy and practices.
Japan’s Government Pension Investment Fund (GPIF), the world’s largest asset owner with US$1.4 trillion in AuM, has withdrawn a portion of assets managed under other ESG indices and allocated the US$3.7 billion to track the new index, which will form the basis of its Japan-based gender diversity investment strategy.
“Japan has historically been a laggard in gender diversity practices, and that’s one of the reasons why we wanted this index to specifically target the Japanese market,” Edwards told ESG Investor.
“As GPIF is the largest asset owner, they can put serious weight behind gender diversity and influence companies to improve their practices.”
Japan was the only Group of Seven (G7) country which failed to break the top 100 in the World Economic Forum’s (WEF) 2022 Global Gender Gap report, reaching 116 out of 146 assessed countries. Further, Equileap’s 2023 Gender Equality Global Report and Ranking identified that Japan has the largest median gender pay gap of G7 countries at an average 22.1%. Only 8% of assessed Japanese companies publicly published gender-disaggregated pay information, Equileap added.
“Based on our belief that the sustainable growth of investee companies and the whole market is crucial for the stable investment returns from assets under management, GPIF takes gender diversity, as one of the ESG factors, into consideration in its passive investment in domestic and foreign equities,” said GPIF President Miyazono Masataka.
The new index offers GPIF exposure to companies across a range of sectors, including Sony Group and Mitsubishi.
Rewarding best performers
Companies are assessed against the 19 metrics outlined in Equileap’s scorecard, including company performance on equal compensation, parental leave, sexual harassment policies, and protecting women in the supply chain.
Corporates are then ranked in descending order according to their score and divided into five equally sized groups.
“We will tilt our weightings in companies according to their performance on this scale,” said Edwards, noting that Morningstar Indexes is also looking to balance the financial performance of the index with the overall Japanese equity market as much as possible.
“When a company scores highly [a five], then we will upweight them by 1.5%. If they are not scoring highly [receiving a score of one], then that weighting will drop to 0.5%,” he said. “Essentially, we’re trying to give more exposure to the companies that have the best gender equity scores.”
Individual constituent weights are capped at 5% of the overall index weight. The index will be reviewed annually and rebalanced quarterly.
Employers in Japan with more than 301 employees will soon have to annually disclose the gender pay gap for financial years ending on or after 8 July 2023, according to Japan’s Act on the Promotion of Women’s Participation and Career Advancement in the Workplace.
“This approach should hopefully incentivise companies to not just improve the quality of their disclosures on gender pay gap, but to also behave better and engage better on the topic,” said Edwards.
“For GPIF, this should serve as a tool to engage companies.”
The new mandate will complement GPIF’s strategy based on the US$3.4 billion Morningstar Developed Markets ex-Japan Gender Diversity Index (Morningstar GenDi), which was first implemented in December 2020.
“Morningstar GenDi has a global focus beyond the Japanese market, so the Morningstar Japan ex-REIT Gender Diversity Tilt Index will be complementary to it,” Edwards said.
“My call to action for Japanese companies is to understand where they sit now and figure out ways to improve their gender diversity performance.”