INTERVIEW MSCI urges Korean firms to improve diversity

MSCI Managing Director and Head of ESG Research Linda-Eling Lee

This article is the fifth in a series of interviews with ESG experts intended to make suggestions for Korea's financial, industrial and public sectors to come up with better ESG strategies for sustainable growth. ― ED.

Global ESG research head concerned about governance issues

By Park Jae-hyuk

MSCI's environmental, social and governance (ESG) indices have been frequently mentioned in recent months among Korean companies that are trying to attract global investors by promoting their relatively higher ratings than their local rivals.

The Federation of Korean Industries confidently said in May that the lobby group would provide data on domestic firms' exemplary ESG practices to MSCI to overcome the “Korea discount.”

MSCI Managing Director and Global Head of ESG Research Linda-Eling Lee, however, did not hesitate to mention that many Korean companies are still new to ESG and most of them have problems with their corporate governance structures.

“On the whole, Korean companies are lagging even behind their emerging market peers,” the managing director told The Korea Times in a recent interview from New York.

As the person who leads researchers of the world's largest provider of ESG indices, Lee noted there were a number of areas in which Korean companies could make a lot of improvements over the next couple of years.

She especially called on Korean businesses to improve the diversity of their boards through dialogue with their investors regarding this issue.

Despite recent efforts for ESG, companies here continue to face criticism for only focusing on environmental factors, without reforming their governance structures nor allocating board seats to minorities.

“One real concern would be the corporate governance structure: Who sits on the board and controls companies in Korea is much more concerning than in other markets, including emerging ones,” she said. “It is extremely not diverse. It's among the least diverse markets that we cover certainly.”

Seen is the cover image of “The Role of Capital in the Net-Zero Revolution.”

Potential for achieving carbon neutrality

The top ESG researcher advised Korean firms to make more efforts for diversity, if they want to take advantage of their relatively greater potential for achieving carbon neutrality.

MSCI, which announced its own commitment to the goal of net-zero emissions before 2040, published “The Role of Capital in the Net-Zero Revolution” report in April to urge capital markets participants to take specific steps to achieve a net-zero economy by 2050.

In particular, companies were asked to set emissions targets to reach net-zero no later than 2050; articulate credible and specific strategies to achieve these reductions; and incorporate best practices when reporting and disclosing data and initiatives undertaken.

Lee was optimistic about Korean companies' potential for achieving these goals.

“One of the bright spots for Korean companies, when it comes to ESG, is the fact that there seems to be quite a lot of focus on research and development innovation around green technologies,” she said. “When you look at the share of low-carbon patents that Korean companies hold versus companies across the world, they are really among the top holder of low-carbon patents, so that means that these companies have a lot of potential, more than their peers in other markets, to actually profit from the transition to a net-zero economy.”

However, the ESG expert added holding patents is just “potential.”

She emphasized that Korean firms need to have the “right kinds of capital and creativity” to commercialize their opportunities.

Pension funds' roles in de-carbonization

When making the call for the “Net-Zero Revolution,” MSCI asked sovereign wealth and pension funds to reallocate capital to less emission intensive investments and to green systems aligned with accepted warming scenarios; target a year-on-year de-carbonization of portfolios that allows for a reduction in the world's total emissions by 10 percent a year; and transition to a policy benchmark to help portfolios move toward net-zero.

From that standpoint, Lee said it is “admirable” that the National Pension Service (NPS) and other asset owners here are trying to take steps to more holistically and systematically consider ESG issues, including climate risks, in their investment processes.

Although some environmental activists are calling for the state pension fund to conduct immediate divestments from firms using coal, she stressed the importance of knowing a lot of different approaches.

“There is a tendency to jump to divestment as the solution, but that is not necessarily the only thing that we have seen asset owners take,” she said. “There are others who are quite committed to engagement. They have beefed up their engagement approaches, including through proxy advice.”

As an example, she cited the California State Teachers' Retirement System which was engaged in a resolution to replace directors at ExxonMobil to substantially change their businesses, instead of divesting from the world's largest oil company.

“Different institutions have to find their own way,” she noted.