Global Fiduciary Leaders With Keiko Honda

I'm Chris Battaglia, the founder and CEO of Pareto Partners, a global consultancy firm working with the world's largest asset owners and asset managers, and the president of the Global Fiduciary Symposium in Japan. It is my great pleasure to host a discussion today with an important leader from the global investment community, Keiko Honda.

Keiko is an adjunct senior research scholar at Columbia University School of International and Public Affairs. She's a visiting professor at Columbia University from January 2020 to May 2024. In addition, she's served as a member of the United Nations Investment Committee since 2018, a director of AGC, And Mitsubishi UFJ Financial Group since 2020 and a director of Recruit Holdings since 2022.

She was CEO and CIO of the Multilateral Investment Guarantee Agency of the World Bank from 2013 to 2019. and the first female senior partner in McKinsey's Asia Division until 2013, advising financial institutions on corporate strategy and M& A for 24 years. She has served as a member of Japan's Cabinet Office Regulatory Reform Council and the Regulatory Reform and Privatization Promotion Council, a member of Japan's financial services agencies corporate accounting council, a professor at Waseda University, a visiting associate professor at Hito Tsubashi University Graduate School of International Corporate Strategy and a part time lecturer at Chuo University Graduate School of Accounting.

Her published works include ESG Investment, Its Origins, Practice, and Future, co authored with Takatoshi Ito, Alliance Strategy, co authored with Yoshinori Yokoyama, Business Revitalization, Cash Flow Management, Business Valuation, and Business Value Management. Thank you Keiko Honda is also an advisory council member of the Global Fiduciary Symposium in Japan, where she recently addressed our audience in Tokyo with a keynote speech on ESG, sustainable investment and corporate value.

Keiko, welcome to the podcast.

[00:02:42] Keiko Honda: Well, Chris, thank you very much for having me.

[00:02:45] Chris Battaglia: We're really excited to talk to you as an expert , in ESG and your vast experience. And we are especially excited to discuss with you , your book on ESG, which you and I got to talk a little bit about in New York City, along with my colleague Michio Ikeda many months ago.

And, and now we're in Japan together on the eve of you speaking at the annual Global Fiduciary Symposium here in Tokyo, and it's a great opportunity to spend some time with you on this topic. One of the things that is apparent is many years later, we are still struggling with definitions of ESG and all the subcomponents underneath it now.

And so I want to use that opportunity to get your views on how we need to think about definitions today and what it means tomorrow. But before we get into that, , I wanted to ask you, you have such an impressive background in both management consulting and academia at Columbia University, along with your board work and experience with the UN's Investment Management Committee.

What first drew you to explore the intersection of financial markets, especially in Japan, and sustainability through ESG investing?

[00:03:59] Keiko Honda: Okay, well, that was about 10 years ago. I moved from Tokyo to Washington, D. C. to join the Amiga, which is one of the World Bank Group agencies to support private Investing in developing country. Both Amiga and that sister organization, IFC already had established and alignment and social standards that were applied to all project involving private investors. Initially, I viewed these standards as a potential burden for the private investors. However, through my work on numerous projects, I came to realize that incorporating an environmental and social perspective is essential for ensuring the long term, sustainable success of the private sector.

A financial success of the project. That's why I think, you know I got really interested in

[00:04:53] Chris Battaglia: Well I mean, i'm sure you're you're extremely well published. When when did your es g book, come out? Was it earlier this year or last year?

[00:05:00] Keiko Honda: It was it was a last year.

[00:05:02] Chris Battaglia: So in your book, you, you emphasize a lack of standard definitions for ESG, and we've been speaking about these for quite some time. What are the key elements you feel should be universally accepted as part of ESG investing?

[00:05:16] Keiko Honda: In this chart, lay out the ESG investing sustainable investing, impact investing, responsible investing, social, responsible investing in philanthropy.

I think philanthropy is very straightforward. Therefore, I'm not really talk about it. Among those five, all this is social responsible investing. DAVA started around 1920s, but this one is reflecting more moral or ethical beliefs sometimes coming from religious meaning. So therefore, this is a very different.

Then responsible investing came after that around 1930s, because you know, sometimes people kind of don't want to be socially responsible, but I think they want to responsible for something. This one actually, let me came back a little bit of later. Then I think next oldest is the ESG investing.

That was invented in 2004 in New York City by the United Nations former Secretary General Kofi Annan and his team. They have set up the Millennium Development Goal, MDGs, which is the predecessor of SDGs, which is, by the way, it's very popular in Japan. But I think Kofi Annan and his team knew that to achieve the MDGs they you know, public sector did not really have money, so therefore they actually needed to ask private sectors to come in, which is very timely because, to the cash flow, to the developing country, I think around 1993, a private sector cash flow exceeded the ODA, which is the public flow. So, so, so therefore a private sector cash flow is very important for them. And they had 2 choices, they actually kind of formed a study group and asked from the private sector what they really need. They found out private sector also has a mission to achieve. Therefore, they had actually two choices.

One is to still force them to support the public meetings or, you know, accomplishing or solving a lot of social problems. But rather, they decided to first ask them to aware what is the environmental, social, and governance issues, the potential impacting the long term cash flow of the business or corporation.

So, so therefore, they propose in 2004, the original definition is integrate ESG factors into the investment decisions, along with data, find ourselves factors, such as market share, market size and cost and so forth. Therefore, in other word, ESG investing itself does not require each ESG investing project to create the impact to the society.

So that's what it is. Then I think next one is getting popularized impact investing. That one IFC actually the initiative around 2019 to came up with specific target, which is create E. N. S. measurable impact while generating financial returns. By the way, according to the survey of G. I. I. N. majority of impact investors seek the market returns from this investment. Therefore, if you look at this chart, the market size of asset under management of impact investing is over only 1. 1 trillion dollars, while ESG investing is different at more than 30 trillion dollars. And a sustainable investing. This is a little bit of a tricky one.

This came popular recently, since some of the asset managers sort of stopped calling their investing ESG investing, a lot of shifting to the sustainable investing. Therefore, you know, definition is still unclear, but something I think what I kind of hearing from several different asset managers, which actually have a very specific definition with their own sustainable investing.

This is a little more than ESG investing, but significantly less than impact investing, but it's interesting enough. ISSB, which is creating data disclosure standard. They're calling sustainable data disclosure standard instead of ESG data disclosure. So that's the kind of my version of definition of those , investing.

[00:09:43] Chris Battaglia: Yeah, that's extremely helpful and especially knowing the, you know, as many people probably do, but maybe some don't know the origins and and how. ESG was incubated, but I have a follow up question for you, which I think about a lot in speaking to investors over many, many, many years. And in some ways I, I think about ESG investing as simply another way to.

Manage the research process of, of investing from a risk management standpoint. So if ESG didn't come out of the UN in in 2004, and it came out of a financial institution or a combination of financial institutions and famous Nobel laureates in economics, like Bob Merton and these kinds of folks. And they got together in a room and said, here's another way to view

research on investing, and we should consider these factors in the investment process. Do you think we would have sort of the challenges that we have with discussing the the viability of ESG, the way governments are thinking about whether to integrate it into the process or not, or would we have the same sort of issues as something that's relatively new that people are trying to get clarity around?

In other words, does the origin of where it came from matter?

[00:11:00] Keiko Honda: I think. It doesn't matter. As a matter of fact many asset managers and asset owners who engage ESG investing were, I think, when, when I actually interviewed more than 35 large asset managers and asset owners whose aggregated asset under management is 24 trillion dollars, most of them were not aware of the history or origin.

so therefore things the same as a matter of fact, you know, this was introduced in 2004, but ESG investing got popular is only after 2015, which is the year Paris agreement was raised. So, I think it, it's, it's probably doesn't matter.

[00:11:41] Chris Battaglia: Well, we're going to come back to the Paris agreement in the Paris accord, especially it relates to the United States and the new president elect.

We're recording this on Thursday, November 7th in Japan, which is Wednesday, November 6th in the United States. So we'll have a lot to talk about there. Can you help us a little bit more think about the balance of ESG investing as it's related to being designed to balance financial returns with social and environmental and impact and particularly, for more risk averse investors like pension funds, wherever they may be right, whether they're in in North America and Japan or, or in Europe.

What are the unique characteristics and what does that asset owner community need to think about in your mind as you've interviewed so many of these important investors?

[00:12:29] Keiko Honda: A lot of asset managers now realize some of the factors, which is included under the ESG factors impacting their own cashflow.

Let me take one example, which is the climate change. When it comes to climate change, I do understand that P& C insurance companies have the best data. According to the research paper published by Professor Keyes of the Wharton School, United States P& C insurance premium for the homeowner insurance, by the way, that's include fire insurance and fraud insurance for the home, has increased 33 percent between 2020 and 2023.

In addition, at least Allstate and State Farm stopped selling homeowner insurance, you know, fire and fraud insurance in the state of California. So that's definitely, I think, you know, statistically or financially significant risk must be arising from the climate change. So therefore, you know, smart asset owners, including pension funds. Our thinking, ESG factors definitely impacting our cash flow, how to integrate those and their investment decisions.

[00:13:57] Chris Battaglia: Do you still see a gap there though, Keiko? As you said, it's the property and casualty insurance community, I'm assuming globally, right? Basically, climate change is not picking on 1 place or another, it's affecting every part on the planet. So presumably that data is available in many different places.

Now, is there still a gap with that data reaching the wider asset management and asset owner community? You know, for example, I think about the meetings that I go to, and even the things that you're you're hearing in terms of this discussion, which is an important one. That link is that you don't always hear the insurance companies speaking side by side with the asset owner and the asset management community.

[00:14:39] Keiko Honda: Well, that's, that's correct. I think, you know, yeah, as a matter of fact, this morning, I think all of us saw the TV news, you know, how the Spain, I'm sorry to say that people in Spain are suffering. You know, suffering from the flood and and and also the New York City, I think we observed the sky. Of the New York City got orange due to the fire.

In Canada, so that was last year. So, so therefore we know, I think all of us know that this is the risk, but the question is, do we have a very detailed data? You know, the occurrence data as well as how much loss or damages. That old card. And you know, that's why I'm saying P& C insurance company have better, better informations than most of the people in the other financial sector in the world.

And, unfortunately, it has not been public domain of the knowledge yet. But I think I'm pretty sure a lot of asset managers are very kind of keen to kind of find out those data and try to kind of reflect to it. But one of the hope that we have is sustainable data disclosure standard, which

was set by the ISSB. And, and then I think on top of it, it with a building block system, SCC of the United States, FSA in Japan, or even China. And some other countries are building the data disclosure. And based on the data disclosure, we are supposed to see increase from large corporates to start disclosing from like you know, 2005 or oh six.

So I think we, with those data, I think we have a better decision.

[00:16:26] Chris Battaglia: So, I mean, as you say, we can see a progression here, right? So things are continuing to improve with regard to disclosure, reduction of greenwashing, more clarity in terms of information, distribution information. I hate to put you on the spot, but on a scale of one to five, five being, Sort of the best place, the goal of where we need to be in terms of data and measurement and clarity.

Where are we on that scale today? And where do you think we'll be in a few years?

[00:16:55] Keiko Honda: I think today is maybe one.

[00:17:01] Chris Battaglia: So we still have a long way to go.

[00:17:02] Keiko Honda: We're still one. I think when it comes to the data, I think we have three issues. Data availability, data accuracy, as well as data comparability. I think to make a very good investment decisions, data comparability is a key and so availability is coming in 2025 and six, but I think relatively large corporates and then accuracy is another one.

I think, you know, I'm on a couple of board of public health company. I think they are working very, very hard to choose the best method to express, for example, like a greenhouse gas emission. And have they kind of, you know, planning to improve and so forth. But, everybody kind of tried to kind of figuring out what is the best method. So I think accuracy, you know, I think it's coming very soon, but comparability is another one. I think that one probably takes like a few more years.

[00:17:55] Chris Battaglia: It reminds me of some of the performance standardization that the asset management business went to went through with with Amer, which is now known as CFA, where you had some level of comparability and standardization of investment returns and and disclosing investment returns.

So I appreciate your thoughts on that. That's hopeful in the sense that we're we almost can't fall off the floor, but we're we're making some progress to a place where we should be, much better soon in terms of particularly the comparability of the data. Can we shift a little bit and get back to the asset owner community and specifically their views in Japan compared to possibly other views in terms of how they look at ESG investing.

When we first started, you said that ESG is a very important thing in Japan. And so can you elaborate a little bit more, where are the common nodes, if you will, with how the asset owner community, the large pension funds in Japan, think about ESG compared to other parts and where do they differ?

[00:18:56] Keiko Honda: Okay, I, you know, I don't think Poverty pension fund in Japan have one voice when it comes to the ESG investment.

Okay. I think in society overall, I said Japanese business people are keen to, to kind of work for sustainable development goals, but it may not be the ESG. Let me start with GPIF, which is publicly, you know, very transparently saying they will integrate ESG factors in their investment decisions.

[00:19:30] Chris Battaglia: And for the benefit of the audience, the GPIF is the largest asset owner in the world, right?

[00:19:37] Keiko Honda: Right, that's right. So GPIF started ESG investing 2015 with the previous head of the organization, Takahashi san, along with CIO, but a current the President Miyazono-san continued to do that because they do think the potential impact on the cash flows of business or corporations that are, they're investing in and on top of it.

Their well, I think their primary investing is the index investing and then they came up with nine ESG indices to invest, but they also comparing those 9 indices performance. Along with their parent index. And among 9 since the investment, I understand that a 6 outperformed the parents index, according to their annual report, but less of the public pension funds, I would say some of them are very keen to do that.

Some of them are still. thinking what they really have to do.

[00:20:47] Chris Battaglia: And what about the corporate community in Japan, the corporate plan sponsors, the corporate asset managers, how do they view it alongside the views of the public pension systems like the GPIF and others?

[00:21:00] Keiko Honda: It's depends, but I would say none of the corporates are bulking against

to disclosing sustainable data or ESG data. Some of them have already decided to disclosing it and many others are preparing for it. And I don't really, I have never really seen that, I think anybody refuse to do that. That's essentially means, at least they do see the needs of relatively large asset owners to see those data.

And they try to be cooperative with them.

[00:21:39] Chris Battaglia: Interesting. So I, I I want to get back also to something you said earlier about returns. And you just cited an example, I think, with GPIF, where you had six of the nine ESG passive indices you know, had outperformance from the general benchmarks. And, you know, in the earlier days, you had a discussion that you were sacrificing return for some.

Underlying impact or imperative with regard to ESG. But would you say that we are at a point now where there is enough performance data that we've satisfied that concern about performance and targeting returns or do we still have a way to go there?

[00:22:23] Keiko Honda: Chris, that's very, very good question.

I dig this issue quite a bit. Especially like a professor Ito, who is the uh, also the author of the book really worked on it. We actually, you know checked many papers checked with you know, many people, but nobody so far really come up with a very good conclusion yet. And of course, integrating more data probably improve the financial returns, theoretically.

Having said that, everybody started to including those data. Of course, there is no alpha or additional or increments of return.

[00:23:04] Chris Battaglia: Remains remains to be seen. And I think, you know, to your point, as as we get further along here and to paraphrase, we're relatively early days, given how long things normally take when you have changes in financial markets and different thinkings in terms of investing and an asset allocation.

 The elephant in the room, if you will, is what's happened in the United States. And we have a few minutes to discuss this topic, which is a big topic of many levels, and I don't want to make it a geopolitical discussion. But the reality is, is that the United States' policy has changed quite a bit over the last couple of administrations from the Obama administration to the Trump administration, Biden administration, and now back to the Trump administration as the president elect for 2025. And we, we all are feeling and probably knowing what, what those policies are going to look like with regard to the Paris accord and all the other things related to the US Department of Labor and their recommendations and views with, with regard to ESG and and you know, it's safe to say that things are going to change again.

What impact does, does this swinging back and forth of these sort of things have on the global community and, and Japan? And right, we're speaking today in Japan. We care very deeply about the Japanese community, because it is in a really important community around the world with an aging population and a demographic that the rest of the world can learn from in a lot of ways, because it's an aging society that has low immigration.

Up until recently, we had deflation and a negative interest rate policy, and now inflation is back and investors need to think about inflation in a very different way. So as we're, as we're sitting here in Japan and hearing the news that the policies are once again going to change, what impact does this have on how Japan thinks about ESG, if at all?

[00:25:12] Keiko Honda: Well, Chris, thank you very much for a very difficult question.

[00:25:16] Chris Battaglia: I'm sorry.

[00:25:18] Keiko Honda: Well, actually, let me segment the asset owner. I think first category is pension. Second category is the others. Let me start with the others. Others are not necessarily restricted, you know, what kind of investment strategy, including ESG strategy, to take or not to take.

So, therefore, it's purely their own decisions to take. Let's take the example of climate change. That's the center of the discussion. If all ambassadors see climate change, some kind of risk, they also have to start to think about, well, should we really kind of reduce the weight of P&C insurance sector, you know, that kind of discussion is going on.

I think that will continue to be going on. But at the same time, some of you started to thinking, well, because of this climate change, if the government is kind of thinking those are the real risk, they may come to praise some kind of regulations. Therefore, that change of the regulation may impact the financial flow some of the corporates. But such regulatory change, from the climate change, are probably less likely to be happening during the next administration time. Thinking of those things, probably those known pension investors are thinking. Pension investors, which are more restricted, you know, one restriction is a department of labor, they have announced the ESG investing is not contradict or it's not by rate the fiduciary duties of the pensions.

So therefore, pension investors started considering ESG factors. But at the same time, those fiduciary duty things are not really specifically talking about, what risk to be considered? What risk not to be considered? So therefore, in my read, some of the pension fund, like a relatively large public pension fund in New York City and California, they probably continue to invest in a way what they're really believing to do so right now.

But I think some of the states are putting a pressure on some of the asset managers who have supported or pushing the ESG investing. I think that the elections or that incidents Maybe increasing, that's how I think, but I think by the end of the day, what I'm really saying is, of course, you know, regulatory change or regulatory pressure or pressure from the public sector will definitely happening during the next administration, but it's not going to be kind of eliminating the analysis of ESG factors from the investment decision of all asset managers.

[00:28:24] Chris Battaglia: I think we view it as risk and risk needs to be measured and accounted for at its fundamental level. I'm going to hit you with another question, which will probably lead us into another podcast series at some point. So we'll agree that this will be our last question, at least for this podcast, and if you agree to have episode two with me, I'd be very grateful, because it's a big topic and an important one for Japan, and also for all the listeners that we have at the Global Fiduciary Symposium and also Advisorpedia, is that the role of the individuals.

So we have IDECO and, and NISA in Japan, and Japan is slowly but surely thinking about transitioning from its legacy Pay as you go defined benefit system to a defined contribution system at many levels, both at a corporate level, an institutional level, and also at an individual level, like we have in the United States with IRAs and Roth IRAs and so on and so forth.

And we've seen massive growth in the United States and other parts of the world with regard to retirement readiness and security through a defined contribution system through individuals, and individuals are consumers. And consumers have a different way of looking at risk and, and thinking about things as you were alluding to. What are the implications for more individual investors being active participants in their savings and investing in Japan as it relates to the future of ESG.

[00:29:56] Keiko Honda: Okay, well, first of all, I think the pension system, you know, the national pension system was introduced in Japan in the early 1960s. Since then, Japanese people started to kind of, and now I think living 20 years longer.

[00:30:12] Chris Battaglia: Incredible.

[00:30:12] Keiko Honda: It's incredible. So, so therefore, you know, I, I cannot really bring the system. In other words, pension cannot really fulfill the old financial needs. If we start, if we actually retire at the age of 60 or 65. So in other words, each of us have to prepare for it. So each of us need a little bit of more money that we received from the pension. So that was now, I think, well understood by the people. That's in Japan is called 20 million yen program.

[00:30:55] Chris Battaglia: That's right.

[00:30:57] Keiko Honda: So, but that, that's a good thing. I think that's a wake up call. So therefore people really preparing for it. At the same time, unfortunately Japan's economic growth rate is significantly lower than the U. S. and even Europe or India, of course, and China. So, therefore, just putting your money in a saving account is not going to solve our 20 million yen problem. That's well understood. So therefore, people kind of started investing from relatively early days where we can take more risk. And at least like the last several years, Japanese stock market is performing significantly better than fixed income market, which likely to continue since interest rate probably is going to little improve from the current situation. So therefore now people, you know, all people, not necessarily all of them, but the relatively large portion of the people in Japan do realize the risk.

That we are facing, which is longevity risk, or possibly kind of not have enough money, although we are still healthy and living. And, and then I think therefore, they actually, I think pouring money into the investment world that we are living.

[00:32:22] Chris Battaglia: But will they be able to move the needle with regard to ESG, right?

As individuals now that have choice, And that or as you, as you well point out, there's an acknowledgement that they need to to meet that goal of the 20 million yen gap. They are well aware of risks, at least longevity risks and what they need to do. How much will they make a difference?

When it comes to ESG and investments that are focused with a sustainable development goals and, and these kinds of things that will, that should have a quote unquote consumer appeal provide some return. And also allow investors to feel as though they're helping to solve a problem.

[00:33:02] Keiko Honda: Yes, because I think, you know, the Japanese people's needs is more like a long term needs.

It's not like cash and use the next year and year after. So, therefore, we have to look for long term cash flow impacts on the corporates and so forth, where the ESG investing, you know, comes in a bit better way. So, therefore, several degree, the people should really think about it, you know, ESG factors when they make an investment.

I'm not really saying only think about ESG investing, but consider ESG factors in investment decisions. Also, at the same time, I am not saying make an investment which has a social impact. But even if we only think about the financial impact of, you know, our personal assets, we need to consider ESG factors. To make our investment decision for long term.

So we're declaring.

[00:34:00] Chris Battaglia: Alongside all the other risk factors. Keiko Honda, I really appreciate the time that you've given us, and I hope you agree to do another podcast with us. I feel as though there's a whole lot more to talk about, particularly on the individual side and those characteristics in Japan around the world.

You're a great contributor here to this community, and I want to thank you sincerely for your time and for your efforts. And your book now is only in, in, in Japanese, but hopefully at some point, it could be available to others in English language, and we really look forward to having you on stage next week at the Global Fiduciary Symposium and I'm sure that the listeners at Advisorpedia have a lot to learn about your view on on ESG. Thank you again for joining us.

[00:34:47] Keiko Honda: Chris. Thank you very much for having me. It's my honor.