Keiko Honda, WG’89, is Adjunct Professor and Adjunct Senior Research Scholar of Columbia University’s School of International and Public Affairs, where she teaches environmental, social and corporate governance (ESG) investing to graduate students. She also serves on the boards of two iconic Japanese firms — Mitsubishi UFJ Financial Group and AGC — and is on the member of the United Nation’s’ Investment Management Committee.
Keiko remembers growing up in the countryside of Kyushu, in southern Japan. Her first big decision came as she considered college. Although she loved singing, she chose not to attend music college, but instead to study consumer economics at the celebrated Ochanomizu University. Upon graduation in Tokyo, she chose to work at Bain Consulting and then applied to graduate school at Wharton. By the time she was 21, she hadn’t traveled outside of Japan. Imagine having your first foreign language experience as taking statistics at Wharton!
Keiko spent 24 years at McKinsey & Company, advising financial institutions on corporate finance and strategy and business development, rising to become the first woman senior partner in Asia/Pacific. Most recently, she spent eight years as Executive Vice President and CEO of the Multilateral Investment Guarantee Agency (MIGA), the political risk insurance and credit enhancement arm of the World Bank Group.
What were the key impacts of the Multilateral Investment Guarantee Agency?
During my tenure at MIGA, we were able to provide access to power for 50 million people, through hydroelectric, solar and natural gas facilities. We supported the creation of 170,000 full-time jobs, and provided $3.5 billion in tax revenues to local governments. MIGA does not fund projects directly. Rather, it insures the political risk of projects.
What are the prevalent types of political risks that MIGA insures?
Before 1992, most development projects were financed with official development assistance, including through the World Bank as one of the multilateral banks. Since 1994, every G-20 country agreed that more private money needs to be leveraged. Thus, the World Bank began figuring out what was the best combination of private and public money. The World Bank understood that its primary role should be to underwrite projects and cover political risks that private investors would encounter. The World Bank has leverage to motivate the governments of developing countries to keep their word.
MIGA promotes sustainable foreign direct investment into its developing member countries. It does this by providing political risk insurance against certain noncommercial risks to cross-border investments. These are the four prevalent types of political risk that MIGA covers:
- Currency inconvertibility and transfer restriction coverage protects against losses arising from investor’s’ inability to legally convert their capital, interest, principal, profits, etc. from the local currency into dollars, euros or yen — and to transfer hard currency outside the host country if a situation results from a government action or failure to act.
- Expropriation coverage protects against losses arising from government actions that may reduce or eliminate ownership of, control over or rights to the insured investment. Outright nationalization and confiscation, as well as “creeping” expropriation, are covered.
- War, terrorism and civil disturbance coverage insures against losses from, damage to or disappearance of tangible assets or total business interruption caused by politically motivated acts of war or civil disturbance in the country.
- Breach of contract coverage protects against losses arising from a government’s breach or repudiation of a contract with an investor.
Can you talk about a favorite project you were involved in?
During my eight years, MIGA operated in 140 countries, but mostly in developing markets. Key countries I worked in were Côte d’Ivoire, Kenya, Namibia, Bangladesh, Solomon Islands and Egypt. In 2018, we undertook the world’s largest solar power generation project at Benban Solar Park. Because it was near the Aswan Hydroelectric Dam, there was already huge transmission capacity to Cairo. Of course, there is intense sunshine there. We brought many different private investors. Scatec Solar sponsored and completed the project, which generates 390 MW of power.
Do you recall a personal experience?
Many bilateral organizations, such as the African Development Bank, had to leave Côte d’Ivoire (Ivory Coast) because of a civil war in 2011. MIGA was one of the first organizations to return in 2013 to guarantee investments for the expansion of a power generation plant. I have an interesting story about the private investors who took risks to enter this environment. They were careful about how they would work with the community. It is a delicate thing to gain trust. They tried to do something for the community, such as making a childcare facility. When I went there, I asked one of the investors, “Why are you building this center?”
He told me, “I was able to do this because my mother did similar work to support our family — and I know these women are working to support their families.”
What was the value of MIGA when working in Egypt and Côte d’Ivoire?
MIGA’s key role was, fundamentally, to facilitate the project to take place by mitigating those political risks. If a company participating in a project incurs a loss, that loss is covered. This gives companies the confidence to work in developing countries. That is because, if for example, there is a default, then they have priority over firms that did work without a multilateral bank.
What are the social factors you deal with?
Child labor in Africa and Bangladesh is still a major issue. The main suppliers may be OK, but one needs to oversee the suppliers of suppliers. Dust in the air and fire safety are also issues. Women went on strike for workplace safety and no hiring of people younger than 14 years old.
MIGA is instrumental to foreign direct investments funding these major infrastructure projects in developing countries, but seems to act in the background. Does MIGA prefer its role to be understated?
It’s a fair point that MIGA’s role may not be widely understood. At one of the projects, in Egypt, during my tenure, MIGA enabled 50 million people in Egypt to receive power, which is the population of Spain. When you consider that, you can appreciate the powerful results we created there. Although it may not be covered in the press, world leaders do know the impact it is creating.
Today, you teach at Columbia on the subject of environmental, social and corporate governance investments. What are the key ideas that you convey on ESG investments?
We study how private investors can generate excess returns by investing in companies that forward the purposes of ESG. Another key concept is how companies disclose the data on their ESG performance, and on the efforts that many voluntary organizations are making to establish those standards. The degree of disclosure is up to the company, and investors have a difficult time assessing the facts. We need a global solution vs. a local solution, because financing is global.
U.S. investors invest globally and not just in the U.S. We need a gold standard so that we can compare apples to apples. It’s interesting that the finance function was not disrupted during the COVID-19 pandemic. Commercial banks kept working. Banks in the U.S., Japan and India continued money transfers, and cross-border equity investments continued without interruption. This infectious disease reminds us of the nonfinancial factors of corporations. There was a huge negative impact on restaurants, manufacturing, logistics and airlines, so it is a good time to assess ESG for corporate performance.
As a result of your work, do you see a need for character education today?
We need to educate people to follow the rules — such as why we should not steal. At the World Bank, we developed rules and guidelines in consultation with 189 countries. Every project must go through the board. That makes it more compelling for member governments to comply.
What kind of returns can investors expect of ESG companies today? What are the prominent approaches to their valuations?
If we look at 27 major financial institutions, pension funds, insurance companies and banks whose aggregate assets under management surpasses $20 trillion and that invest in companies practicing ESG, the majority expect these to generate a higher return than the market.
How would you know if a company is following ESG?
Some key areas are:
- Exclusion of certain industries, such as coal-fired power plants.
- Positive themes, such as providing renewable energy (wind, solar, biofuel, nuclear and hydroelectric).
- ESG integration factors. These companies don’t use child labor, respect equality and do not support wrongdoing.
What are your observations as a board member of a prestigious international firm?
A key role of board members is in hiring the CEO. Senior management today has to fulfill the higher expectations of stakeholders. Companies need to not only generate more profits and cash flow, but also manage their employees, keeping in mind the social impacts of their organizations. There are more regulations that they need to navigate. The role of independent board members is increasing.
You were the first woman senior partner in Asia/Pacific for McKinsey. What is your advice to young alumni entering the professional workforce?
McKinsey was a great company. I enjoyed every moment there. I was so lucky to have wonderful clients and team members, and to learn so much from them. I never needed to think about how to motivate my staff. They were open to making changes, and they were intellectually curious. When I graduated from college, not many companies gave opportunities to women. McKinsey was willing to provide women opportunities, as gender and race didn’t matter much. McKinsey tried to be very fair, tried to respect everyone and gave opportunities to speak up.
In working with corporate clients in various industries, I’ve found that you need to build trust. If you deliver clients a little bit more than expected on a project, then even if the result of a subsequent project is slightly disappointing, clients will give you the benefit of the doubt and give you time to recover. I would say to young alumni to deliver more than expected to the client and to their teams. We have meetings for McKinsey alumni, and I have to say that I really miss them.
What did you learn at Wharton that you applied in your career?
I appreciated that I didn’t need to reinvent the wheel of corporate finance, but I could learn solid theory that I could then figure out how to apply. My favorite professor, whom I still keep in touch with, was Franklin Allen who co-authored the latest version of Principles of Corporate Finance.