CCI Sustainability Stars: It's Really All About Corporate Governance - Japan Pension Fund Association's Ken Hokugo

(Marsha J. Vande Berg is CEO of MJVGlobal Insights, consulting to corporate and investment executives about sustainability, governance and political economies. As CEO of Pacific Pension and Investment Institute, she worked closely with global pension executives, particularly in the Asia Pacific. A Stanford Distinguished Careers Fellow, she teaches, writes for international publications and is a frequent forum and webinar speaker. Reach her on LinkedIn or Twitter.)

SAN FRANCISCO (Callaway Climate Insights) — Ken Hokugo is director of governance and co-head of hedge fund investments at the Pension Fund Association (PFA) in Tokyo, one of Japan’s largest public pension funds. 

Despite, or perhaps because, PFA was an early signatory of the UN-supported Principles for Responsible Investment (PRI) and known widely as a champion of Japanese corporate governance reform, Hokugo stands out. He is an exacting critic of the progress (or lack thereof) to date of Japan’s governance reforms, requiring proof of fundamentals over optics before he’ll waive any banners.

We asked him how he sizes up the G in ESG practices in his part of the world that also ranks third after the U.S. and Europe in sustainability capital investment. He replied speaking individually and not as a PFA representative:

“Sustainability, as well as ESG, might be a noble cause, but the lack of consistency both in the measurement of ESG factors and its application to corporate strategy, raises questions,” Hokugo said. “On the one hand, there are shortcomings in the available tools for measuring and disclosure. On the other, the application of ESG factors varies widely from corporate culture to corporate culture and even country to country. The E factor, for example, may be straightforward but not every company uses the same scale to measure its carbon footprint. By the same token, not every country will have the same potential when it comes to natural disasters.”

The S factor can be more complicated, he went on. While Covid-19-related labor issues can be readily identified, it’s not so easy when the issue is human rights abuse and the issue is investing in a plant or a company for profit-making purposes, conveniently overlooking the S factor. A case in point might be what appears to be a good investment is in a country that is otherwise known to run counter to human rights. 

Also, when applying the G in an ESG strategy, the definition or idea of governance can vary considerably. For example, in Japan, residual ‘allegiant’ share-holding remains part of corporate life despite recent reforms to the Companies Act, a Stewardship Code and a revised Corporate Governance Code.  

“It is likewise a mystery just how one can measure or quantify a company’s corporate governance in a country where that company, by law, is under the thumb of government control regardless of global rules and an emphasis on competitive fairness,” he said. 

“Then in the West, if a company caps its R&D, for example, that can be a red flag that shareholder favoritism tops that company’s priorities and may likewise indicate a disregard for stakeholder interests across the board.” 

Until there’s greater consistency — which may be possible only when measurement and disclosure regimens are standardized — Hokugo will continue to raise questions and identify ESG more as a “tail risk” than a “noble cause,” which, for the moment, according to Hokugo, has nothing to do with asset owners’ fiduciary duty.

Our Q&A with Hokugo:

What prompted you to question ESG?

Hokugo: Intuitively, it will always be difficult to quantify E, S, and G because getting to a globally acceptable methodology is difficult. Not only will it take a very long time for a methodology to establish a long enough track record to be credible, scoring and indexing based on existing — and unverifiable methodologies stand in the way. 

And expecting that all countries or regions will agree to the same concepts when it comes to ESG is likewise not realistic. It’s clear the E of ESG is important, but when it comes to S, it gets complicated. On the one hand, it’s unrealistic to expect investors to deploy money in the name of social justice. It also can’t be justified as part of asset owners’ fiduciary responsibility.

On the other, S is critical when we think about what is needed in a better world. But again the question is how to ensure ESG advocates recognize the real issues — diversity, women on boards, child labor. These are the real issues. Human rights is also a real issue, but human rights violations are happening in countries even as we speak and yet foreign investment pours in.

The word hypocrisy comes to mind. 

What would you like others to learn as a result?

Hokugo: That government regulation can be more effective than investors provided it takes into account the big picture. There also needs to be a transparent, independent international body that serves as watchdog ensuring countries do what they say they will do. 

It is shortsighted to rely on private money when it’s politics that must be held accountable. 

Also, G is the most important of the three factors. Good G will result in good E and S. So start with the G. An accountable, qualified board of directors will bring about good E and S because it understands that both are critical for long-term sustainable growth. Forget the E and S as individual factors and work extensively on the G. That will be a step to solving ESG issues.

What should change in the world of investment and business to drive sustainability in a positive direction?

Hokugo: What is needed are good, qualified boards of directors and good, qualified management teams who understand that sustainable, long-term growth depends on a sustainable earth together with true peace. If both are in place, they will adopt and execute on strategies that make a difference. But it’s important to start with the G.  E and S without G will only bring about a short-term results.

Investors for their part want to work with companies to accomplish better returns. At the end of the day, that is an asset owners’ fiduciary duty unless the people for whom asset owners manage money say they want social justice as an investment objective. Current approaches won’t save the planet. Investing is not charity.