For some time, ESG investing has slowly built momentum in Japan’s toshin (mutual funds) market. In July 2020, Asset Management One launched its Global ESG High Quality Growth Equity Fund (JPY unhedged) which became the best-selling fund of the year. Since then, there has been a noticeable increase in ESG funds, both new funds and repurposed existing funds.
Shoko Shinoda, Fund Analyst at Rakuten Securities Economic Research Institute, analyzes the state of ESG-related funds in Japan.
The following article (translated) was originally published in DC Wave (September 2021), a magazine for managers of defined contribution (DC) corporate pension plans in Japan.

As of the end of July, there were 170 ESG-related open-type publicly offered toshin funds in Japan, with over JPY 3.8 trillion in AUM, nearly JPY 1.5 trillion of which was held by the AM One Global ESG High Quality Growth Equity Fund (unhedged).  ESG-related funds are increasingly offered as investment products by DC pension plans, thus establishing a genre in the toshin market.

Major ESG-related Funds for DC Pension Plans

< Fund name > < Provider > < Launch date > < AUM >
million yen
  < Target >
Nomura Global ESG Equity Index Fund Nomura AM July 30, 2004 844   Global equity
BlackRock ESG Global Equity Fund, unhedged BlackRock Japan Sep. 30, 2015 3,322   Global equity
BlackRock ESG Global Equity Fund, limited hedged BlackRock Japan

Sep. 30, 2015

962   Global equity
MitsuiSumitomo Japan Equity ESG Fund SMD AM Feb. 9, 2018 1,106   Japanese equity
Japan Equity ESG Asset-building Fund Nissay AM Dec. 19, 2018 241   Japanese equity
Improve the World Corporate Fund Nomura Japan Equity ESG Investment DC Nomura AM May 27, 2020 1,456   Japanese equity
One Global ESG Select Stock Fund AM One June 5, 2020 1,355   Global equity
Amundi DC Fund Global Equity Climate Change Response Amundi Japan July 22, 2020 90   Global equity
Amundi DC Fund Global Equity Next Generation Education Amundi Japan July 22, 2020 39   Global equity

Baillie Gifford Global Stewardship Equities Fund


Aug. 31, 2020

199   Global equity
MUFG DC Japan ESG Select Leaders Index Fund MUFG AM Aug. 31, 2020 41   Japanese equity
MUFG DC Japan Equity ESG Active Fund MUFG AM Aug. 31, 2020 11   Japanese equity
BlackRock Global Equity Impact Fund BlackRock Japan Oct. 30, 2020 29   Global equity
MUFG DC World ESG Balanced Fund MUFG AM Mar. 25, 2021 4   Balance
DC Japan Equity ESG Select Leaders Index Fund SMT AM Apr. 23, 2021 398   Japanese equity
DC Foreign Equity ESG Leaders Index Fund SMT AM July 8, 2021 1,533   Global equity

in order of launching date


Two kinds of ESG-related toshin (not including ETFs) are offered publicly in Japan.  The first incorporates ESG screening as part of investment policy.  The second tasks investment managers specifically with applying ESG screening as part of their fiduciary duty.  The overwhelming majority of Japanese ESG funds is of the first type, with most having an environmental focus.  The second type is increasingly adopted by European asset managers, such as BNP Paribas which has implemented ESG standards in all its funds since September 2019.  The implementation of ESG standards in Japan is not at all common but is happening more often.

Quantitative evaluation based on investment performance alone is difficult, not only because ESG screening is conducted mostly on a fund-by-fund basis in Japan, but also because about 70% of all funds (on a unit basis) are relatively new, in operation for five years or less.  The same is true for ESG-related funds sold to DC investors.  Further, some nominally ESG toshin products are merely thematic investment trusts, which may never produce the expected environmental and social results.  In fact, the FSA's Expert Panel on Sustainable Finance has warned that thematic ESG funds may be ESG in name only.

I suggest DC managers keep two considerations in mind when selecting toshin products:

1) Do not invest in ESG only as an investment theme.

The essence of ESG investing is to focus on the process of earning returns and the quality of the resulting returns.  ESG is a framework for selecting investment targets, not a means for earning returns.  Even if a company is a good investment from a valuation perspective, if its ESG score is low or ESG-related risks are high, it is necessary to make the courageous decision not to invest.

For example, Morningstar in the US does not include either Amazon or Tesla in its “Morningstar US Sustainability Index”.  Amazon does not meet Morningstar’s social (S) adoption criteria and Tesla's carbon footprint in the electric vehicle manufacturing process has long been an environmental (E) thorn.  In Japan, Japan Tobacco, known for high dividends, and Nissan, although a while ago, were listed as gray investments from ESG point of view.

2) Learn about the management company’s investment philosophy and determine whether it aligns with your company’s values and goals.

Consult the management company’s website or reports on individual funds to see if you identify with its philosophy. Recently, companies have taken to revealing their rationales for selecting certain stocks in special reports and sales materials.  Even when a fund includes ESG darlings such as Google and Apple, it is important to know why they are there, for legitimate ESG reasons or merely as greenwashing.


** Data in the text are as of the end of July, 2021. **