KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

Ⅰ. Backgrounds and Purposes

▶ Necessity of Disclosure of Related E.S.G. Information 

○ There is a growing awareness that corporate sustainability is not only affected by financial performance such as external growth or profit, but also non-financial performance such as environment, social, and governance (E.S.G.). 

○ Since the UN's Principles for Responsible Investment (PRI) were established in 2006, institutional investors have focused their attention on non-financial information, including E.S.G., and corporate sustainability. The investment principle that seeks to maximize long-term investment returns by integrating financial factors and non-financial factors represented by E.S.G. into the investment process is spreading among investors.

○ The 'Recommendations of the Task Force on Climate-related Financial Disclosures' (TCFD) announced by the Financial Stability Board (FSB) include governance, strategy, risk management, indicators and reduction targets. Since the Recommendation was published, more than 1,500 companies and institutions have expressed support for the TCFD Recommendation. Nearly 60% of the world's 100 largest publicly traded companies support TCFD or make disclosures according to TCFD recommendations.

 

Ⅱ. Major Content 

▶ The need for E.S.G. evaluation and the role of government 

○ The need for E.S.G. evaluation

- E.S.G. is not a goal to be pursued by itself, but can be used as an indicator to manage the non-financial risks faced by companies, and can be used as information that enables investors to consider non-financial risks in advance when constructing have an investment portfolio. 

- Through the discussion on E.S.G. a consensus was formed that it is necessary to evaluate various corporate activities through detailed data, and discussions about the direction of evaluation and evaluation indicators are being actively conducted to make the evaluation more objective.

○ E.S.G. Evaluation factors

- The essential purpose of E.S.G. evaluation is not only to impose additional expenditures or burdens on the environment, society and governance, but also to recognize the social value of the company and create long-term profitability through securing domestic and international competitiveness. It is about laying the groundwork.

- Despite the positive views on E.S.G. evaluation, it is not easy to institutionalize the development and evaluation of E.S.G. indicators. Key factors to consider in institutionalizing E.S.G. evaluation include adequacy of quantification, reliability of evaluation, and objective standardization.

▶ The role of government on E.S.G. 

○ E.S.G. information disclosure and the role of government

- It is unreasonable to expect that managers who have the burden of pursuing corporate performance and profits will voluntarily conduct business activities in consideration of social values. There is also a limit to leaving an attempt to create a foundation for a company to pursue social responsibility only to the voluntary will of the company.

- Since E.S.G. is closely related to government policies, such as carbon emission regulation, industrial safety and product safety reinforcement, and the establishment of a fair economy, it is not a situation to dismiss E.S.G.-related policies as government interference. From the government's point of view, one of the effective means to induce each economic agent to realize value through E.S.G. is to legislate it to disclose information on the realization of corporate social value to the outside.

○ Legislation of E.S.G. Information Disclosure

- Discussions on the institutionalization of E.S.G. information disclosure will be further accelerated in the future. The Financial Services Commission is promoting a plan to promote voluntary disclosure of sustainability reports and to gradually expand the number of companies subject to disclosure of corporate governance reports. Another way is to amend the Capital Market and Financial Business Act to require companies to disclose E.S.G. information in their annual business reports.

- Another way is to amend the National Pension Act so that the National Pension Fund must consider E.S.G. factors, or to provide a basis for preferential investment in companies that have disclosed E.S.G. information. The amendment of the law itself may create a basis for responsible investment through E.S.G., but since many investors refer to the investment portfolio of the National Pension Fund, it is possible to legislate in the direction of inducing investment based on E.S.G. evaluation.

▶ Possibility of E.S.G. evaluation under the current law and evaluation index by institution

○ Possibility of E.S.G. evaluation under current law

- In January 2021, the Financial Services Commission made it mandatory for all KOSPI-listed companies to disclose corporate governance reports by 2026 through the ‘Comprehensive Improvement Plan for the Corporate Disclosure System’ announced the plan. According to the Financial Services Commission’s policy to expand mandatory corporate governance reports, it will gradually expand within a few years, but the number of companies subject to disclosure is still limited.

- Sustainability reports are subject to voluntary disclosure, and only those companies that publish reports have no choice but to take a selective approach. About 100 companies publish sustainability reports every year, but only 20 of them actually disclose them on the exchange. Even in the form and content of the report, it is difficult to objectively evaluate it because it depends only on the report content of the company concerned without separate standards or verification.

- Even if the contents of corporate environmental information are disclosed, if the objectivity and reliability of the information are not guaranteed, it is unlikely that the sustainability report will be actually used for E.S.G. evaluation and investment.

○ Analysis of E.S.G. Evaluation Indicators by Evaluation Institutions

- The E indicator of the National Pension Service and KCGS captures the quantitative performance of corporate activities such as greenhouse gas emission, energy consumption, chemical use, water use, and waste emission. However, KEJI's environmental management items consist of environmental management reports, environmental investment results, environmental certifications and awards, and specific pollution/ organic material pollution. Therefore, it is difficult to grasp the quantitative performance of actual corporate activities.

- Overseas evaluation indices such as the Dow Jones Sustainability Index (DJSI) and Carbon Disclosure Project (CDP) also include specific results such as reduction of greenhouse gases emitted through corporate activities. Direct and specific evaluation elements need to be supplemented.

○ Analysis of environmental indicators under the current law 

- Considering the elements of item E suggested by evaluation agencies, it can be divided into two areas: management and management in consideration of the environment. Environmental management items may include environmental management system/organization, green marketing, environmental information, environmental performance evaluation, and environmental education. In addition, environmental management items may include greenhouse gas (including pollutants, chemicals, and wastes) emission, energy (including water) consumption (use and reuse), process and supply chain (clean production management system, eco-friendly product certification) management, etc.

▶ How to link E.S.G. evaluation indicators with the current system

○ How to link environmental indicators with the current system

- For efficient and sustainable responsible investment, E.S.G. indicators must be able to collect and analyze measurable information for each business site and company. Furthermore, the information should be quantified through evaluation indicators so that comparisons can be made for each business unit or company in the same industry. For this, the information distributed in individual laws must be able to be collected through the integrated information network, and the evaluation agency must be able to access this information.

- Rather than constructing a third integrated information network that integrates the information network according to each individual law, the information network according to individual laws is maintained and functioned according to the purpose of the relevant laws, and information corresponding to the E.S.G. indicator is converted into the environmental information network of the Framework Act on Environmental Policy.

○ Considerations when composing indicators of environmental information

- Regardless of the purpose or purpose of evaluating a company's E.S.G.-related activities, if the collection and analysis of the information imposes a heavy burden on management or the E.S.G. evaluation result does not guarantee profitability for the company and investors, the sustainability of responsible investment is not will be considerably lower. It is necessary to approach the legislative approach of the E-indicator in terms of providing an opportunity to identify, analyze, and avoid or resolve the environmental risks facing the enterprise, rather than to investigate the negative aspects of the evaluation index.

- The fact that it is related to ‘E.S.G.’ does not prove that it is liked to non-financial information. Statistics on energy input and greenhouse gas or waste emission are actually the input and output of financial factors, as well as the degree of response to climate change and the environment revealed through the company's activities, and the system suggested by each environmental law. Therefore, it is necessary to closely examine whether companies are properly implementing these factors. In addition to the simple greenhouse gas emission or energy use for the current year, the evaluation of each company's efforts to reduce greenhouse gas/waste emissions or reuse energy compared to the previous year or a specific period should also be added.

 

Ⅲ. Expected Effects

○ It analyzes the E.S.G. information disclosure and the key indicators that make up its contents, and suggests ways to strengthen the linkage with the current environmental laws and regulations.

○ This study intends to review the necessity of E.S.G. information disclosure and reorganize the components of the index by focusing on the environment (E) field among evaluation indicators, and to suggest legal improvement measures to be considered in the future so that it can be used for corporate social responsibility.