KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

Ⅰ. Backgrounds and Purposes

○ There have been many academic and practical discussions regarding social values and how it should be regulated, measured, and implemented, but as social issues, that have significant impact on people’s lives, evolved into matters that include poverty, wellbeing, education, gender equality, environment, ecosystem, and health, the perspectives of social value also evolved from the values pursued by organizations, corporations, and government into values other than that of economic growth and they also expanded from a certain social class to society in general.

○ In September of 2015, the United Nations (UN) proposed an agenda of “Sustainable Development Goals (SDGs)” that is based on practical views, and defined sustainable development as “a development that meets the needs of the present, without compromising the ability of future generations to meet their own needs”. In order to achieve such develop, the proposal emphasizes that it must be developed in “its three dimensions – economic, social and environmental – in a balanced and integrated manner.”

○The environmental, social, and governance factors that are comprehended inside the framework of social values have long been critical compositions of the values. Although, different factors were emphasized and converged as different social values were pursued, the fundamental values remain.

○ It is critical to analyze how E.S.G. –which is emphasized as the practical issue of social values - is evaluated and utilized because the value circulation mechanism such as creation, distribution, and the sharing of social values that include factors of E.S.G. is actively discussed in corporations, one of the elements that constitute a society, and it also influences stakeholder both directly and indirectly. Additionally, discussions regarding practical approach are needed in estimating the sustainability of future society.

○ This research aims to analyze how corporate activities and outcomes are rated, assessed, and disclosed through case studies of corporate sustainability reports which include measurement, evaluation, and verification of E.S.G. Also, by analyzing how the disclosure framework led by global institutions and initiatives, disclosure standards, and the third-party assurance system are implemented, the research seeks to define topics and issues of E.S.G. in social value creation as value mechanism of institution and corporations.

 

Ⅱ. Major Content

▶ There are limitation due to the intrinsic uncertainty pertaining to social values, regardless of the many approaches concerning the measurement of social values and the development of social responsibility index.

○ In the midst of increasing awareness of social values, the values are regarded as “goodness” and as a means to pursue coexistence and cooperation, and many top- ranking companies are leading efforts to achieve these values.

○ Although corporate social value introduced new roles of corporations in the society through sustainability reports of large enterprises, in financial perspective, the ambiguity within social values makes it difficult for it to be analyzed and rated, a challenge that corporations must overcome. 

○There were demands for reevaluation of social values in investors’ perspectives because of limitations in the scientific approaches. As result, the concept of social responsible investment (SRI) became redefined and it developed another terminology, ‘E.S.G.‘, which provides a framework for quantification and measurement of non-financial risks of corporations. 

▶ Active processes of social consensus among stakeholders on the ratification of social values ​​through the measurement of E.S.G.

○ Currently, there is a social agreement E.S.G., on which data to use for which factor’s index, allowing well converged indexes to be applied. Although there are some differences, there are many consensuses that overall, each index deals with factors such as environment, consumers and stakeholders, corporate governance, and sustainability, and that each index measures the non-financial risks of each factor. 

○ As E.S.G. became a mainstream in the capital markets, the legislation for E.S.G. disclosure standard emerged as the hottest issue. According to Sustainalytics, in 2018, there were over 600 institutions for E.S.G. standard legislation, data supplier, and rating. 

○ In January of 2020, the EU Commission published an agenda that called for the development of standards of non-financial disclosure. Concurrently, there was a motion that there should be standards in non-financial information for enhancement in comparability and reliability like financial information.

○ Meanwhile, in S. Korea, the Financial Services Commission obligated the disclosure of corporate E.S.G. information, sustainable management report, and corporate governance report. Such obligatory measures are likely to facilitate the prevalence of disclosure duties.

▶ Examining perspectives and reporting capabilities in the sustainability reports of companies that understand E.S.G. from analysis of E.S.G. evaluation cases in domestic corporations

○ The measurement of E.S.G. is widely becoming a new standard that reflects non-financial factors, which affect corporate sustainability, on corporate value evaluation. Analyzing corporate data on E.S.G. is an effective way to identify intangible assets that is not disclosed in accounting records. 

○ Through E.S.G. activities, corporations can experience enhancement of values of intangible assets such as costs of direct capital financing,    improvement of brand imaging, and improvement of social reputation, and such enhancements are reflected in stock prices. It is thus important to understand E.S.G. activities as the beginning, the process, and the result of value chains which can increase values.

○ This research aims to analyze, through business values created by E.S.G. ecosystem and case studies of the outcomes, in the perspective of corporations and their efforts to reduce risks that they may impose on the environment and the society, and their efforts to maintain and develop corporate sustainability, how corporate E.S.G. activities affect corporate management in general and how these influences are regarded by stakeholders. 

○ The sustainability reports of object companies of case analysis are in accordance with global disclosure frameworks such as IIRC, TCFD, and UNGC, and are disclosed by following the global disclosure standards of GRI Standards, ISO26000, and SASB. The sustainability reports are then verified by global assurance standard, AA1000AS, procuring public confidence through separate third-party assurance institution. 

○According to the analysis of sustainability reports in domestic corporations, they comply with the global disclosure frameworks but some corporations have shown inconsistency in the compliance of the disclosure frameworks and standards such as leaving out some indexes from the disclosure or disclosing irrelevant indexes with information that are different from what is required in frameworks and standards. 

○ Especially, the 40 topics (7 general standard disclosure and 33 specific  standard disclosure) and the 144 specific indexes of the GRI Standard that all of 12 corporations follow show significant differences in each corporation. Furthermore, corporations produce reports in each uniquestyle with different forms and ways of expressions, such as producing a report that includes mixture of more than one index. 

○ Corporations vary in their compliance with the framework’s principles, guidelines, and standards even if important E.S.G. information in their sustainability reports are all in accordance with the same disclosure frameworks, standards, and assurance. Likewise, each sustainability report shows its own unique characteristic.

▶ Domestic corporations gradually regarded E.S.G. as one of the critical issues of the society and they tried, for a certain amount of time, to record corporate activities and outcomes in“sustainability reports”. However, because of the global disclosure frameworks and disclosure standards, they are restricted from reporting “genuine social values” and instead forced to comply with the system that stakeholders from all across the world want and need. 

○ The evaluation of E.S.G. reports can vary depending on how subjects who produce the sustainability report (people, teams, organizations who are in charge) understand E.S.G. and what they decide to record in the reports. 

○ Even in the same sectors, there can be varied explanations and analysis about a certain index from each corporation and there can be different interpretations depending on how information is explicated, and such  interpretations influence decision making. 

○ In the selection process of report topics and indexes, certain procedures such as the selection of a topic, collection of data and examination, identification of domestic and foreign trends of the same industry, and convergence of stakeholder’s opinions help to explain the methods and approaches that the corporations employ and also help to identify the subject, scope, and content of the convergence of opinions through materiality evaluation. However, it is controversial whether it is appropriate to report just the E.S.G. indexes of the information.

○The discrepancy of contents and interpretation of the sustainability report severely impacts the quality of that report and the causation of such difference can be found in the shortcomings of the subjects who produce the sustainability report (people, teams, organizations who are in charge). Those subjects may have failed to fully understand the guidelines and the concept of E.S.G. in non-financial perspectives or failed to properly prepare for the content of the report. 

○ The third-party assurance of sustainability report is conducted to obtain public trust by objectively verifying the reports that corporations produced autonomously, the information and data within the reports, and the interview results of the subjects who produced the reports. However, there are no other institutions or initiatives that guarantee the credibility of assurance institutions and also it is ironic that the independent institutes that verify credibility choose to keep their own assurance systems private. 

 

Ⅲ. Expected Effects

▶ To achieve genuine understanding of E.S.G. and its implications through case studies of E.S.G. (Environment, Society, and Governance) which constitutes the fundamental concept of “social values.”

○ This research will analyze the components of the E.S.G. ecosystem which operates global frameworks and standards established to measure non-financial information, mainly through analysis of E.S.G., the new approach to social value. Also the research will examine the direction of future changes in E.S.G. ecosystem.

○ In order to devise a strategy for domestic corporations to cope in the global changes related to E.S.G., case studies will be conducted on sustainability reports of 12 domestic corporations and the E.S.G. indexes and contents in the global disclosure frameworks, disclosure standards, and third-party assurance will be analyzed to understand the implications of reported indexes, non-reported indexes, and the assurance system. 

▶ To present considerations of the disclosure subjects so that information can be properly and valuably provided to stakeholders regarding the activities, results, and performances of organizations or corporations with inclusive issues of environment, society, and governance. 

○ E.S.G. performances from sustainability reports of the 12 domestic corporations can be compared by converting into CDP climate change  scores, MSCI E.S.G. ratings, and Sustainalytics E.S.G. risk ratings. Also the major contents and structural limitations of sustainability reports can be examined through analysis of E.S.G. related reported indexes and non-reported indexes based on the 144 indexes of the global disclosure standard, GRI. The considerations for the application of E.S.G. that is relevant to the selection of E.S.G. topics and indexes, interpretation of the reports, and third-party assurance can be derived from such analyzation. 

-The selection of topics and indexes of the reports must be in compliance with reporting principles for defining content and quality. The structure of the reports must be reorganized in favor of stakeholder’s perspectives, so that the 4 principles for defining content and 6 principles for quality are organized topic wise or index wise. 

- There should be discussions for operating a specialized organization and personnel that have the credibility and authority needed to prepare the reports so that the report may enable the stakeholders to make reasonable evaluations and appropriate measures.

- The public trust of the sustainability report should be announced internally and externally and the assurance of the annual sustainability report should be expanded from a single year to multi-years to objectively show how the changes of activities and performances of E.S.G. influence the changes in corporate social values, so that the non-financial information regarding E.S.G. provided to various stakeholders can be usefully applied.