By Kim Sung-woo
Carbon emissions; renewable energy; and environmental, social and corporate governance (ESG). These are three key topics I wrote about back in February 2019. In the same month, I also published a report titled, "What Does the Task Force on Climate-related Financial Disclosures (TCFD) Mean to Korean Companies?"
While the TCFD was in the spotlight overseas at that time, Korean society was not so familiar with the term, "ESG," let alone the TCFD. As expected, however, the ESG storm hit Korea in 2020, and ESG has become one of the most popular buzzwords in Korea.
For the past two years, the COVID-19 pandemic has increased the level of health risk associated with the "E" factor (environmental), exposed our society's vulnerability to the lack of job security and inequality, which relate to the "S" factor (social), and revealed the importance of business management's response to investors' demands related to E and S ― i.e., the "G" factor (governance).
Accordingly, global asset managers, pension funds and state-owned investment funds have been taking ESG as the key criteria in making investment decisions. The recent growth of the ESG bond market also confirms this trend. According to the NN Investment Partners acquired by Goldman Sachs, the global ESG bond market grew by 80 percent for the past eleven months in 2021, reaching 1.8 trillion euros in size.
As the investment size increases exponentially, assessments of a company's ESG performance and whether the company is included in one of the "ESG indices" have begun to impact the valuation of companies in many cases.
In early 2021, Blackrock, one of the largest asset management companies, with $9 trillion under management, officially demanded in a letter from its CEO that boards of directors of its investment target companies disclose their ESG targets and put together implementation plans to achieve the targets, indicating that Blackrock would engage in more rigorous shareholder action than before.
They signaled that ESG issues can no longer be left out of core business functions, such as financing and stock price management.
Korea has been no exception. As of September 2021, 70 percent of the 99 listed companies affiliated with the "top 10" conglomerates in Korea have formed dedicated committees for ESG (called "ESG committees"). The ESG committees, most of which were newly formed in 2021, monitor the management and shape of the decision-making process from an ESG standpoint. The formation of the ESG committee seems to be a meaningful stepping stone for responding to ESG demands, which require collective efforts from various teams within a company.
In 2022, putting ESG management into practice will be a key to success in sustainability. Here are a few tips. First, a company's organizational structure needs to be fine-tuned to increase the efficiency of ESG practices. Consider including an ESG expert as part of the board and increasing the diversity of the board members. Forming a working-level task force to assist with the ESG committee and assigning roles and responsibilities to relevant teams within a company are also helpful.
Second, consider prioritizing the various ESG issues faced by the company, as demands from various stakeholders can sometimes be vague and come in various shapes and forms.
Third, management should carefully determine the level of the company's response to ESG demands. It would be ideal to monitor relevant regulations and norms around the world closely, and then make a decision as to what extent and how rigorously the company will accommodate the ESG demands.
Importantly, investors will not want their investment target companies to "bite off more than they can chew" ― i.e., an ESG strategy that does not suit the company's capacity and even undermines the company's sustainability. In this regard, it would be helpful to keep communication channels with current and future investors on their ESG strategies.
Fourth, responding to ESG demands from various stakeholders can serve as an opportunity for the company to diagnose the sustainability of its business from an objective standpoint. Note that meeting ESG demands is one of the means of doing business, not the ultimate goal of the company.
Lastly, the potential liability of directors in the ESG committee must be taken into account. On the issue of the board of directors' ("BOD") responsibility for internal control and management, a Korean court has decided that whether the company had any organizational defect or risk-management system in place may be taken into account when determining damages for the liability of directors on the BOD. This legal case echoes many ESG stakeholders' demands, which are to hold the companies ("G") accountable with regards to addressing "E" and "S" issues.
Having just started taking the initial steps for implementing ESG practices, Korean companies may find it difficult to follow the companies at the forefront of ESG management in the EU (some of them are already in the process of quantifying the ESG risks per asset). As a small and open economy, the Korean market is very susceptible to external demands from global investors.
In terms of putting ESG practices into action, companies without their own, clear visions may be dragged into them due to demands from various stakeholders abroad. Note that Blackrock, which is the largest shareholder of Microsoft and McDonald's, is also the second-largest shareholder of the top three financial holding companies in Korea and the third-largest shareholder of more than half of the KOSPI-listed companies.
From Korean companies' perspective, putting ESG practices into action in a way that meets stakeholders' demands and also fits their own business models ― rather than blindly following overseas precedents ― will be critical.
Kim Sung-woo is the head of Environment & Energy Research Institute at Kim & Chang.
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While the TCFD was in the spotlight overseas at that time, Korean society was not so familiar with the term, "ESG," let alone the TCFD. As expected, however, the ESG storm hit Korea in 2020, and ESG has become one of the most popular buzzwords in Korea.
For the past two years, the COVID-19 pandemic has increased the level of health risk associated with the "E" factor (environmental), exposed our society's vulnerability to the lack of job security and inequality, which relate to the "S" factor (social), and revealed the importance of business management's response to investors' demands related to E and S ― i.e., the "G" factor (governance).
Accordingly, global asset managers, pension funds and state-owned investment funds have been taking ESG as the key criteria in making investment decisions. The recent growth of the ESG bond market also confirms this trend. According to the NN Investment Partners acquired by Goldman Sachs, the global ESG bond market grew by 80 percent for the past eleven months in 2021, reaching 1.8 trillion euros in size.
As the investment size increases exponentially, assessments of a company's ESG performance and whether the company is included in one of the "ESG indices" have begun to impact the valuation of companies in many cases.
In early 2021, Blackrock, one of the largest asset management companies, with $9 trillion under management, officially demanded in a letter from its CEO that boards of directors of its investment target companies disclose their ESG targets and put together implementation plans to achieve the targets, indicating that Blackrock would engage in more rigorous shareholder action than before.
They signaled that ESG issues can no longer be left out of core business functions, such as financing and stock price management.
Korea has been no exception. As of September 2021, 70 percent of the 99 listed companies affiliated with the "top 10" conglomerates in Korea have formed dedicated committees for ESG (called "ESG committees"). The ESG committees, most of which were newly formed in 2021, monitor the management and shape of the decision-making process from an ESG standpoint. The formation of the ESG committee seems to be a meaningful stepping stone for responding to ESG demands, which require collective efforts from various teams within a company.
In 2022, putting ESG management into practice will be a key to success in sustainability. Here are a few tips. First, a company's organizational structure needs to be fine-tuned to increase the efficiency of ESG practices. Consider including an ESG expert as part of the board and increasing the diversity of the board members. Forming a working-level task force to assist with the ESG committee and assigning roles and responsibilities to relevant teams within a company are also helpful.
Second, consider prioritizing the various ESG issues faced by the company, as demands from various stakeholders can sometimes be vague and come in various shapes and forms.
Third, management should carefully determine the level of the company's response to ESG demands. It would be ideal to monitor relevant regulations and norms around the world closely, and then make a decision as to what extent and how rigorously the company will accommodate the ESG demands.
Importantly, investors will not want their investment target companies to "bite off more than they can chew" ― i.e., an ESG strategy that does not suit the company's capacity and even undermines the company's sustainability. In this regard, it would be helpful to keep communication channels with current and future investors on their ESG strategies.
Fourth, responding to ESG demands from various stakeholders can serve as an opportunity for the company to diagnose the sustainability of its business from an objective standpoint. Note that meeting ESG demands is one of the means of doing business, not the ultimate goal of the company.
Lastly, the potential liability of directors in the ESG committee must be taken into account. On the issue of the board of directors' ("BOD") responsibility for internal control and management, a Korean court has decided that whether the company had any organizational defect or risk-management system in place may be taken into account when determining damages for the liability of directors on the BOD. This legal case echoes many ESG stakeholders' demands, which are to hold the companies ("G") accountable with regards to addressing "E" and "S" issues.
Having just started taking the initial steps for implementing ESG practices, Korean companies may find it difficult to follow the companies at the forefront of ESG management in the EU (some of them are already in the process of quantifying the ESG risks per asset). As a small and open economy, the Korean market is very susceptible to external demands from global investors.
In terms of putting ESG practices into action, companies without their own, clear visions may be dragged into them due to demands from various stakeholders abroad. Note that Blackrock, which is the largest shareholder of Microsoft and McDonald's, is also the second-largest shareholder of the top three financial holding companies in Korea and the third-largest shareholder of more than half of the KOSPI-listed companies.
From Korean companies' perspective, putting ESG practices into action in a way that meets stakeholders' demands and also fits their own business models ― rather than blindly following overseas precedents ― will be critical.
Kim Sung-woo is the head of Environment & Energy Research Institute at Kim & Chang.
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