ESG investments lose steam in Korea
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Interest in environmental, social and corporate governance (ESG) investments seems to be waning in Korea due to a worsening economic outlook and continuing high interest rates. The trend becomes evident in both money flows observed in domestic exchange-traded funds (ETFs) on the theme of ESG investment, and the funds' returns during the past months.
According to data from Koscom, the country's IT solutions provider for the financial investment sector, 12 ESG-themed domestic ETFs saw approximately 10.9 billion won ($8.2 million) of outflow during the past three months from Aug. 14 to Nov. 13. Only two ETFs — KODEX 200 ESG and WOORI AI ESG Active — saw net influxes of money during the same period.
The trading volume of ESG-themed ETFs was also low. According to the Korea Exchange (KRX), the product trading volume among the 12 ESG ETFs with the highest trading volumes in recent month stood at about 6.2 billion won.
The meager amount accounts for only about 1 percent or 2 percent of the trading volume of other popular ETFs themed on secondary batteries or semiconductors. During the same period, TIGER Secondary Battery Materials FN ETF recorded over 1 trillion won worth of trading volume, while KODEX Secomiconductor attracted over 360 billion won.
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Market watchers, however, forecast that the current trends toward responsible investment will not die down in the foreseeable future, despite the current temporary slowdown in the growth rate of ESG investments. They cite major countries' continual efforts to revise and improve both legal and infrastructure frameworks of ESG-related investment standards.
Kim Dong-yang, senior ESG analyst at NH Investment & Securities, pointed out that major institutional investors, like the National Pension Service (NPS), will serve to support the expansion of responsible investment, leading to the further growth of the overall ESG investment trend.
"The size of domestic ESG public funds has been stagnant at around 2 trillion won since the second half of 2021. Yet the NPS has continued to increase the portion of responsible investment in its investment portfolio, serving as the driving force behind the spread of responsible investment," Kim said.
"Although the introduction of mandatory ESG disclosure has been postponed until 2026, the number of companies voluntarily publishing sustainability reports has increased rapidly to more than 310," the analyst added.
Another sustainable investing analyst, Lee Kyung-yeon from Daishin Securities, also highlighted that major countries, including the U.S. and the U.K., have been strengthening regulations and guidelines on ESG investment to prevent so-called ESG-washing — conveying false impressions or misleading information about a company’s ESG activities.
"The worldwide mandatory disclosure of ESG information and the establishment of ESG classification systems (taxonomy) aims to promote ESG practices and to prevent ESG-washing. ESG-washing is likely to occur, especially during transitional periods before regulations and systems are fully established," Lee said.
"As major countries' regulatory authorities have been beefing up regulations rigorously when it comes to ESG investment, it is anticipated that such ongoing regulatory moves will contribute positively to more carefully supervised and implemented ESG funds."