[Open Forum] How Businesses and Governments Should Respond to Climate Change

Abnormal weather has been occurring frequently in recent years. As climate change advances, society is increasingly recognizing the importance of the environment. For the coexistence of nature and humanity, companies are adopting ESG management, and the government is implementing carbon neutrality policies. However, if the government imposes excessive regulations on businesses in order to achieve its carbon neutrality goals, it may make it difficult for firms to pursue profits—their essential purpose—and could ultimately hinder our country’s economic development.

Examples of abnormal weather include the torrential downpours that fell in a short period during the 2020 monsoon season, the massive Australian bushfires of 2019, and the whitening of coastal sea beds around Jeju Island, which is currently threatening the marine ecosystem. To respond to such climate change, all kinds of efforts are being made around the world. The Paris Climate Agreement was concluded, and the IPCC presented a goal of achieving carbon neutrality by 2050. In the United Kingdom, the COP26 Glasgow summit was held, where officials from various countries gathered to discuss ways to curb global warming.

ESG in the corporate sector and the government’s carbon neutrality policy of reducing greenhouse gas emissions to zero by 2050 are both in full swing. Both ESG and carbon neutrality are essential to slowing climate change. However, if the government applies rigid evaluation standards to businesses in the course of implementing environmental policy or imposes excessive ESG-related regulations, ESG management—which originally emerged from companies’ voluntary efforts—could be distorted and lose its original purpose.

The National Pension Service has set a plan to invest 50% of its total assets in ESG-related companies by 2022, and the Financial Services Commission has announced that domestic ESG disclosures will become mandatory starting in 2025. In response, the Korea Employers Federation (KEF) expressed concern over moves to make ESG implementation fully mandatory for businesses, stating, “If the government intervenes excessively and evaluates ESG management in a state-led manner and pursues regulation-focused policies when Korean companies are not yet fully prepared for ESG, firms will end up focusing only on meeting standards tailored to the government’s preferences.”

Then should ESG really be left entirely to companies without government intervention? In order to faithfully fulfill governance, the “G” in ESG, companies are voluntarily establishing ESG committees or operating compliance oversight committees and are making internal efforts to build sound governance structures. In fact, the Korea Economic Research Institute (KERI), through its report “Improving ESG Governance and Corporate Value,” assessed the governance improvement performance of Korean companies as relatively superior to that of global companies. Therefore, an environment that guarantees corporate autonomy is necessary.

At the government level, efforts are underway to achieve carbon neutrality by 2050 through the greenhouse gas emissions trading system and the Framework Act on Carbon Neutrality. These policies are one way to respond to climate change, but they clearly also carry side effects. In a press release, the Bank of Korea presented two transition risks arising from the government’s carbon neutrality policy. First, if the negative spillover effects of greenhouse gas emission regulations exceed the positive spillover effects of low-carbon technological development, the credit risk of financial assets related to high-carbon industries could rise, and market risks such as stock price declines could also increase, thereby undermining the soundness of financial institutions holding such assets and negatively affecting financial stability. It also projected that a decline in the value of financial assets related to high-carbon industries would act as a factor lowering the BIS ratios of domestic banks.

Where there are gains, there are also losses. ESG and carbon neutrality policies are tools devised by businesses and governments to respond to climate change, but from an economic perspective they can also generate various costs. First, as companies make dramatic changes to their manufacturing infrastructure in order to produce environmentally friendly products, production costs rise. Higher production costs reduce corporate profits and may lead to increases in the prices of goods and services, which in turn can add inflationary pressure. This may lower households’ real purchasing power and dampen private investment. In addition, greenhouse gas emission regulations by major trading partners, such as carbon border taxes, may worsen Korea’s terms of trade and hurt exports; given the export-oriented structure of the Korean economy, this raises concerns about losses to economic growth.

It is said that although the global economic growth rate fell by about 5.2 percentage points due to the COVID-19 crisis in 2020, greenhouse gas emissions decreased by only 5%, which suggests just how difficult the path to carbon zero is. Rather than monitoring or evaluating businesses in order to realize carbon neutrality, the government and related institutions should play a supportive role so that ESG can be led by the private sector and become more active. Rather than rushing to impose excessively stringent standards in the name of responding to climate change, if we ensure that nature and humanity can continue to coexist within limits that do not infringe on corporate autonomy, we will take a step toward a better world.

Ina Lee, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 기후변화에 대응해야 할 기업과 정부의 자세

Author: In-a Lee

Date: 2021-12-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=10&idx=24382