Creating a Virtuous Cycle of Growth and Distribution from a Global Viewpoint

Koike In 2022, we launched Project BRIDGE to promote the appeal of Japanese stocks internationally. I have had conversations with CEOs of various companies and I am looking forward to hearing your perspectives, given your expertise in corporate engagement. Recently, the government has announced its "Doubling Asset-based Income Plan" and its aims to make Japan a "a leading asset management center". As you are a member of the "Council of New Form of Capitalism Realization", how do you think these initiatives will change Japan?

Shibusawa How it will change is yet to be seen, but the reason why it is necessary is to realize the long-discussed transition "from savings to investment". In discussions of the new capitalism, the ideas related to creating a virtuous cycle of growth and distribution, and unleashing bank deposits towards investments is recognized as a key driver. But I was concerned that the virtuous cycle of growth and distribution had only a domestic perspective at the beginning of the discussions. It is necessary to create a virtuous cycle globally where Japan invests overseas and contributes to global growth, and the fruits of this growth flows back into Japan.
I started an investment company in 2007 (renamed Commons Asset Management in 2008) and established a long-term mutual fund in 2009, investing in Japanese companies. Some of the stocks we included at the time achieved high growth rates by taking advantage of overseas growth through global expansion, with stock prices rising by more than 10 times.
The new capitalism is not a denial of capitalism, but instead incorporates externalities left behind such as environmental and social issues. In the last two years, discussions have progressed on improving human capital, particularly on labor market reforms that encourages seamless mobility of workers internally as well as outside of the company.

Koike The investment field includes various stakeholders, including individual investors, institutional investors, and asset managers. For example, it will be difficult to achieve the government's "Doubling Asset-based Income Plan" if these stakeholders continue to think and act as they have been, and each of them will need to make changes. Do you see any issues in that regard?

Shibusawa ESG (environment, social, and governance) investment initially started with a focus on governance. This was because the metrics for measuring governance are relatively easy, such as ROE, the number or ratio of outside directors or female directors. However, it is not the asset owner or asset manager that actually create value, but rather the company that responds to the needs of consumers and other stakeholders. In the end, the ultimate asset owner is the individual. I would like to see an approach where stakeholders are seen as partners, with whom companies co-create value together.

Creating a Space in the Capital Market for Expressing Individual Values

Koike The government's wording of a "leading asset management center" is somewhat ambiguous. The wording suggests that Japan needs to develop as a nation. One way of thinking about this is that we can envision how we should be able to generate both inbound and outbound financial cycles based on financial technology. What kind of conditions do you think are appropriate for a "leading asset management center"?

Shibusawa I think we need to be careful about the term "Enhancing Asset Management".
A solid foundation is necessary before any enhancements. Individual investors need to understand the basic concept of risk, return, and time value, which are the basis of any investment, before building on top of that. In the development of any nation, I believe that creating new value must be done from foundations. That leads to the question of what corporate value is. Sometimes people confuse the "value" and "price" of a company. Prices change, and for a public listed company, there's only one correct answer at any given moment, that is where the buyer and the seller meet. However, for value, there is no one correct answer at any given point in time. Definitions of value depends on the seller or buyer, whether it is economic value, environmental value, social value, or long-term value. I believe that a robust capital market is only possible when various values are involved at the same time at any given point in time. I believe that the existence of a place to express any given value is the key to nation building.

Koike As an asset management company, we are also expected to improve our engagement activities. We established the Engagement Department in 2021. The purpose is not only to exercise voting rights in accordance with existing standards, but also to proactively promote initiatives that achieve changes in corporate value through dialogue. What challenges do you see in the engagement activities of investment managers?

Shibusawa Since the launch of the Commons Asset Management, we have emphasized the need for "dialogue" with companies to mutually learn new perspectives. It was a novel idea at the time to engage in dialogue to better understand non-financial value, but we believed it was our mission. In English, "engagement" can also mean a step on the path to marriage. When we get engaged, we have deep discussions to get to know each other, but when once we get married, we sometimes rely too much on non-verbal forms of communication. The asset management company can play a vital role as a facilitator for the asset owner to engage in dialogue, but it cannot do so unless the asset owner is interested to have a dialogue in the first place. In that sense, I think it is important to strengthen the foundations which I referred to earlier.

Corporations, not Investors, are the Leading Role in Impact Investing

Koike As we work toward becoming a "leading asset management center", I believe impact investing will be a significant theme.

Shibusawa I participated in a webinar on impact weighted accounting the other day and I was surprised to see a large turnout of about 800 participants. The term "impact investment" was originally coined by the Rockefeller Foundation around 2008, in order to encourage the flow of funds to startups that established themselves to solve social issues. In 2013, the United Kingdom used the concept of "impact" to encourage the private sector to participate in the financing of public services that could not be covered by the government budget alone. This spread to Japan as a G8 platform in 2014.
The genesis of ESG was reactive for companies, since it was the investors and regulators demanding disclosure of non-financial information, and it was the investors who made their decisions regarding ESG activities of a company. On the other hand, the essence of impact investment is the intent to provide solutions to environmental and social issues, with financial returns. "Intent" means that the company should be in the driver seat, and communicate their intent through impact measurement to investors who are believe that this value creation is important.

Koike You recently traveled to Africa, and I get the impression that you are focusing on impact investment as it applies to the Global South and healthcare.

Shibusawa In fact, for about 20 years, the Japanese government stressed a diplomatic strategy of providing access to healthcare to the countries in the Global South, and several years ago I headed a committee under the Ministry of Foreign Affairs to incorporate the concept of impact, to create a new flow of money for the SDGs. On the other hand, the "S" (Society) in the ESG's always faced the difficult issue of finding a common metric, like the "E" or the "G", because of the diverse nature of the various cultures and geographies. Healthcare, on the other hand, has scientific-based numbers, and health creates value globally, regardless of culture or geography. The Japanese government has been promoting "health management" for more than 10 years, and I believe Japan is trying to pave the way for a global standard of promoting impact measurement into healthcare. The G7 Hiroshima Summit endorsed this approach of impact investing in global health, and "Triple I for GH" (Impact Investment Initiative for Global Health) was officially launched as a side event of the UN General Assembly in September, where I was appointed as Co-Chair. If Japan advocates globally and acts as a leader in impact investment in global health, it will lead to the further enhancement of asset management.

Disclosing Human Capital Information is an Opportunity for Self-Promotion

Koike Since March 2023, the 4,000 companies that release securities reports are obligated to disclose human capital information.

Shibusawa Regarding disclosure of human capital information, this kind of information is the responsibility of the human resources department, which traditionally has had no contacts with external stakeholders in the capital markets. Therefore, the value of people, which is a company's greatest asset, is hard to see from the capital market. Even if a company is uncomfortable with the current level of human capital engagement and is hesitant about disclosure, for a long term investor, it is more about setting targets milestones to increase expectations for future value creation. By expressing their values in a unique way rather than waiting for guidelines, companies have a great opportunity to showcase their appeal not only to the capital market, but also to society, consumers, and potential future employees.

Koike You have advocated for the establishment of TPFD (Task Force on People-related Financial Disclosures), in reference to the TCFD (Task Force on Climate-related Financial Disclosures) and the TNFD (Task Force on Nature-related Financial Disclosures). Could you share some details of the background behind this?

Shibusawa About a year and a half ago when I had discussions with the ISSB (International Sustainability Standards Board), they asked us what theme should they undertake after greenhouse gas emissions, and I answered human capital as a disclosure topic. After the TCFD and TNFD, I thought it would be interesting for Japan to recommend the establishment of a "TPFD," a task force for the disclosure of people-related financial information. There have always been many companies that say, "our company's greatest asset is our people." In that case, human capital should be expressed on the balance sheet in some fashion, not just a cost on income statements. On the other hand, an "asset" is an expression of ownership, and companies do not own the people. Rather people are inputs for value creation, hence capital, much like needing shareholder capital for value creation.

Koike In closing, do you have any thoughts for Nomura Asset Management?

Shibusawa I would like Nomura Asset Management to focus on strengthening active investment. For example, if we compare the top 100 listed companies in terms of market capitalization in Japan with any other country, I think we will find that they are comparable in terms of information disclosure, including governance.
In terms of engagement, I hope that we can convey to the world that there are many great companies regardless of their size.

Koike Through Project BRIDGE, we are trying to promote understanding of the appeal individual companies and cause investors to reevaluate active investment. I will do my best to meet your expectations. Thank you for your precious time today.

Nomura Asset Management joined the "Triple I for GH" initiative in September 2023. The initiative was launched at the United Nations General Assembly on September 21, 2023 with the aim of promoting the flow of private funds, in addition to public funds, towards the global health sector and contributing to the achievement of universal health coverage*1 and the SDGs, mainly in developing countries.

For more information on "Triple I for GH", please click here.
Please refer to "Announcement of the Impact Investment Initiative for Global Health at the G7 Hiroshima Summit" by the Health and Medical Care Strategy Office, Cabinet Secretariat, May 22, 2023.
*1: The state where all persons have access to appropriate preventative, therapeutic, and rehabilitative health services at an affordable cost.