Korea urged to spur ESG efforts for sustainable growth

[能田]

(The Korea Times Finance Monday March 15 2021)

Korea urged to spur ESG efforts for sustainable growth

Updated : 2021-03-15 08:55

This article is the first in a four-part series highlighting the importance of ESG criteria in management and making suggestions for Korea's financial, industrial and public sectors to come up with better ESG strategies for sustainable growth. ― ED.

Concerns remain over greenwashing, poor corporate governance

By Park Jae-hyuk

It looks quite obvious that the term "ESG" has become indispensable for Korean businesses to represent their management strategies for this year and beyond.Standing for the environmental, social and corporate governance standards used to measure sustainability and the societal impact of investments, these values-based principles are now considered essential to attracting global institutional investors. Domestic firms in the financial, industrial and public sectors have therefore been busy lately issuing press releases on every single ESG effort and going after exemplary global investors.Those who have studied the criteria for many years before it became the hottest issue here, however, point out that Korea still has a long way to go to catch up with this global trend."Domestic companies have just started paying attention to the ESG," said Choi Hee-nam, CEO of the nation's sovereign wealth fund, Korea Investment Corp. (KIC), which established a basic framework for ESG investments two years ago.He mentioned the difficulties of making accurate assessments of each Korean company's ESG practices, saying the lack of a unified standard has sometimes made it difficult for investors to judge whether or not those practices are merely "greenwashing."The deceptive use of environmental marketing has emerged as one of the major concerns about ESG criteria in Korea, because domestic companies have tended to focus more on the "E" among the three criteria through initiatives such as divesting from coal-related businesses, promoting their eco-friendly products and issuing "green bonds.""The reason why businesses are focusing more on the environmental factors is that such efforts are more intuitive and tangible than the efforts for other two factors," said Yoon Jin-soo, head of the ESG business division at the Korea Corporate Governance Service (KCGS), the nation's leading proxy advisory institution.He also said that global initiatives like "Carbon Neutrality by 2050" have made it easier for businesses to draw up company-wide strategies to improve their environmental factors, such as the reduction of carbon emissions.From that standpoint, Samsung Securities analyst Kim Eun-ki emphasized that efforts to prevent greenwashing have become more important for domestic companies."If an unprepared company is swayed by the trend of issuing ESG bonds, it may actually cause a problem for the company," he said. "Businesses need to design their ESG bonds with consistent indices and standards, taking into account management systems, the use of funds and performance reports."

Financial Services Commission Chairman Eun Sung-soo, front row second from left, Minister of Environment Han Jeoung-ae, front row center, and representatives from financial companies hold the declaration of supporting "climate finance" to achieve the carbon neutrality by 2050 at Glad Hotel on Yeouido in Seoul, March 9. Yonhap

Governance regarded as an Achilles' heel

Another concern among ESG experts here is of chaebol being reluctant to take appropriate actions to improve their corporate governance structures. Their relatively insufficient efforts for "G" have been mentioned as an Achilles' heel that will make them more vulnerable under this ESG regime.The KIC CEO, who is worried about greenwashing for the "E," did not rule out the importance of "G," saying the mismanagement of governance can also bring huge risks.Christian Sealey, the CEO of Morrow Sodali Asia Pacific, saw that activist funds in the Korean market have more demands in terms of corporate governance, compared to environmental and social factors."Corporate governance has been regarded as a weakness of many Korean companies for a long time," the executive of the world's leading provider of corporate governance advisory services said, adding their operation of boards of directors is still some distance away from meeting global standards.McKinsey & Company Senior Partner Richard Lee also said the "G" issue will be a tough challenge for domestic businesses, agreeing with the view that activist funds are aiming at the vulnerable corporate governance of Korean companies.HI Investment & Securities Analyst Lee Sang-heon picked "G" as the most important factor among the ESG criteria in his report."While most listed companies in Korea are still managed directly by founders or their descendants, the U.S. has far fewer such companies because its capital market with a longer history enabled the evolution of governance structures," the analyst wrote. "It seems that the Korean stock market has entered the phase of heated debate over the governance reform issue."For better governance structures, he advised domestic companies to sell their stakes in affiliates irrelevant to their businesses, saying unnecessary stocks and real estate are assets damaging their returns on investments."There is little incentive for chaebol owners to make efforts that are highly probable to weaken their managerial rights," Yoon said. "Employees are unable to reform the governance structures of their companies, unless owners of their companies take action. This is why Korean companies have hesitated to reform their corporate governance structures over the past few decades."

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ESG?