ESG investing gaining traction in Korea

Financial firms rush to issue sustainable bonds amid COVID-19 pandemic

By Anna J. Park

Environmental, social and governance (ESG) investing is strengthening its foothold in Korea, as more investors are becoming conscious about the long-term effects of their investments, whether it be bonds, loans or exchange traded funds (ETFs).

ESG investing means investors take into consideration a wide variety of long-term factors such as climate impact, green technology, natural resources, human rights, labor relations, management structure and ethics in addition to traditional financial considerations.

The global volume of ESG investing has significantly increased over the years, reaching $30.7 trillion in 2018, up from $13.2 trillion in 2012. The sustainable-minded investment market has especially increased in the U.S., Europe and Asia. Singapore and Japan in particular are showing a growing interest in the market.

Specifically, the total amount of assets invested in ESG-themed ETFs has increased to about $52 billion as of 2019, which is a more than a 10-fold increase over the past decade.

A recent report by Meritz Securities Korea stated that one of the main reasons behind the rapid growth of the investments is a widespread perception of shareholder activism, since the 2008 global financial crisis, which has put a larger emphasis on a socially responsible approach towards investment and its consequences.

In addition, a survey by the Morgan Stanley Institute for Sustainable Investing showed that 85 percent of millennial investors in the U.S. expressed interest in sustainable investing strategies.

In Korea, the rising popularity of the ESG-conscious strategy is clearly seen in the category of mutual funds.

According to the nation's financial market tracking portal FnGuide, 37.7 billion won ($31 million) newly flowed into 34 socially responsible investing (SRI)-themed mutual funds during the past three months. As of June 11, the total amount of assets under management (AUM) stands at 355.6 billion won. In the same three-month period, 7.53 trillion won flowed out of equity funds, while 2.57 trillion won left bond funds.

ESG-themed bonds market is another area that's witnessing a burgeoning growth in Korea. Last week, state bourse operator Korea Exchange (KRX) signed a partnership with Deloitte Korea to invigorate the issuance of the ESG bonds market. The joint partnership aimed to successfully spur the stable operation and audit of the ESG bonds market.

Korea Development Bank (KDB) issued ESG-principled social bonds last month worth one trillion won, and the money raised through the bond issuance will be used to meet social needs, such as supporting small and medium-sized businesses or stabilizing employment during COVID-19.

Shinhan Bank also issued social bonds of $50 million for financially supporting local businesses in March, followed by KB Kookmin Bank's social bonds of 400 billion won in April for meeting similar social needs.

An industry source said that the issuance of ESG-themed bonds will continue, as the bonds could raise companies' brand awareness among consumers, while effectively providing financial support where it is needed.

The application of ESG principles are also expanded to granting loans. Shinhan and KB Financial Groups are trying to adopt ESG factors in assessing and granting company loans. This trend of reviewing ESG benefits when making decisions regarding company loans is prevalent among global major banks; firms can gain benefits in loan interest or credit ratings if they're proven to have abided by ESG principles.

"One of the noticeable trends of ESG investing is an increased usage of big data and AI analysis approaches, especially in cases of global financial institutions," Kang Bong-joo, analyst at Meritz Securities Korea, wrote in his recent report.

"That's because ESG factors are basically harder to quantify than other financial data like valuation or profitability. Thus, various AI and big data tools like text mining, web mining, and natural language processing, are used to systemically gather and assess information about each company, ranging from the firm's reports, news, interviews, as well as customers' company reviews on SNS," Kang added.

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