[Open Forum] As the ESG Investment Craze Grows, Institutional Reforms Are Urgently Needed

The paradigm of management is shifting beyond the pursuit of profit alone toward consideration of the social role of corporations as well. The emergence of ESG is a clear reflection of this trend.

It is difficult to view ESG as merely a passing fad. Neglecting ESG is making it increasingly hard to be optimistic about a company’s future. For Korean companies to pursue sustainable management in line with global standards, ESG management can now be said to be not a choice but a necessity.

ESG is an acronym for the non-financial factors of Environment, Society, and Governance. Environmental issues include climate change and carbon reduction; social issues include industrial safety and fair competition; and governance includes shareholder rights and audit systems.

The biggest reason we must pay attention to ESG is that the movement to evaluate it and reflect it in investment decisions is growing beyond the stage of voluntary corporate action. Global ESG investment now stands at approximately $30.7 trillion, up about 34% from $22.8888 trillion in 2016, and interest in related bonds and equities is also steadily increasing.

In addition, Larry Fink, CEO of BlackRock, the world’s largest asset manager, declared that “going forward, sustainability will be the standard for our investment decisions,” and ESG has consequently become a core investment principle in the capital markets as well.

Large corporations at home and abroad are also actively adopting ESG management. Apple and Google have already achieved the goal of the “RE100 campaign,” which pledges to use 100% renewable energy for the electricity needed in their operations.

In Korea, LG Chem became the first company to join in 2020. SK Group has been the most proactive domestic company in adopting ESG, forming a dedicated team and accelerating its transition to ESG management.

Financial institutions are also positive about adopting ESG. Three major domestic banks joined the Equator Principles and announced measures to restrict lending and investment to companies that undermine social values such as environmental protection and respect for human rights. The National Pension Service also introduced the Stewardship Code two years ago and expanded socially responsible investment. It has announced that by 2022 it will increase ESG investment to around half of its total fund assets.

At the same time, as ESG has become a factor affecting financial performance and investment, concerns are also growing among small and medium-sized enterprises and the manufacturing sector, which are having difficulty adopting ESG. If fundraising becomes more difficult, then it will also be hard to improve eco-friendly facilities and transition to renewable energy, both of which require upfront costs, leading to concerns that ESG may become a barrier to corporate growth.

As ESG, which is attracting attention as a new investment method, continues to gain popularity, there are also questions about whether ESG investing can really achieve both social value and financial performance. Of course, non-financial values are reflected in investment decisions for many investors, including individuals and institutions, but there is still insufficient clear evidence that this leads to actual investment performance.

Riding the wave of enthusiasm for ESG investing, various rating indices are pouring out, but there remains much to be improved, as they often show completely contradictory results even for the same company.

For example, electric vehicle manufacturer Tesla received a lower score than a gasoline vehicle manufacturer in FTSE Russell’s ESG assessment, but MSCI gave Tesla a strong ESG rating, taking into account the carbon emissions and environmental innovation of the vehicles it produces.

In fact, according to an analysis by State Street Global Advisors, the correlation between the ESG scores of MSCI and Sustainalytics was only 0.53, which is quite low. As the number of ESG rating agencies worldwide has reached 125, the inconsistency of scores and evaluations has continued to be pointed out as a problem.

For ESG to take root in Korea, biased evaluation standards must also be improved. Even the ESG ratings of the Korea Corporate Governance Service, which are the most widely used in Korea, have been criticized as being overly weighted toward governance and insufficient in their evaluation of environmental and social factors. In particular, inadequate institutional support in the environmental sector is making it difficult to implement ESG in practice.

For Korean companies to adopt ESG management, institutional supplementation by the government is necessary. In the United States and Europe, active government-led structural reform has made renewable energy trading easier, and on that basis they are actively putting RE100 and ESG into practice.

In Korea as well, implementation measures such as the purchase of Renewable Energy Certificates (REC) and third-party Power Purchase Agreements (PPA) are being discussed, but whether they will actually be implemented remains unclear. Therefore, to create an environment conducive to smooth ESG management by companies, the government should work to improve the relevant systems.

Sieun Choi, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] '투자'확대되는 ESG열풍... 제도 보완 절실

Author: Si-eun Choi

Date: 2021-03-04

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=12&idx=23546