KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

Ⅰ. Background and Purpose of Research

▶ The EU member states have been legislated relevant EU non-financial information disclosure principles of 2014 and 2019, respectively. Not only the E.S.G. disclosure scope but only the non-financial information disclosure obligations are expanding through the Corporate Sustainability Reporting Directive (CSRD), which will be applied from January 2024.

○ According to the CSRD, it aims to significantly expand the target companies that are responsible for the non-financial information disclosure required by the previous EU NFRD, and to disclose the information from January 2024.

▶After showing a relatively passive reaction on E.S.G. to the institutionalization of disclosure, the U.S. House of Representatives, in June 2021, surprisingly passed the 「Corporate Improvement and Investor Protection Act」, including 「ESG Disclosure Simplification Act of 2021」.

○ In November 2021, the establishment of the standard “IFRS Sustainability Disclosure Standard” is in progress by the International Sustainability Standards Board ('ISSB') established under the International Financial  Reporting Standards ('IFRS').

○ Most of all, the IFRS specifies the scope of ‘climate-related’ disclosure information for  Scope 1 and Scope 2, which means clarifying that the most urgent and important task to solve among sustainability-related non-financial information is ‘climate.’

▶ In Korea, as of June 24, 2022, the 「Financial Investment Services and Capital Market Act」 with the main focus on making E.S.G. disclosure mandatory to all listed companies, are proposed.

○ For domestic discussions, on January 14, 2021, the Financial Services Commission announced the “Comprehensive Improvement Plan for the Corporate Disclosure System” and the Korea Exchange announced the 「E.S.G. Information Disclosure Guidance」, announcing the necessity of information disclosure and the principles of preparation.

○ In December 2021 and January 2022, respectively, the Ministry of Trade, Industry and Energy (MOTIE) released the「K-ESG Guideline v.1.0」followed by the Ministry of SMEs and Startups’「ESG Management Implementation Guide for Small and Medium-sized Enterprises」earlier this year. 

○ However, there is still a lack of social consensus for institutionalizing E.S.G. disclosure in our society, and it is necessary to prepare specific disclosure indicators or secure systemic consistency with the existing corporate disclosure system.

 

Ⅱ. Contents

▶The U.S. 「Corporate Improvement and Investor Protection Act」 consists of a total of 11 distinctive titles plus stipulates various disclosures required from the point of view of investor protection.

○ In particular, the「E.S.G. Disclosure Simplification Act of 2021」(Title I) and the「Climate Risk Disclosure Act of 2021」(Title IV) are currently under discussion that it is crucial to pay attention to the institutionalization of disclosure in the U.S.

○ As the「Corporate Improvement and Investor Protection Act」regulates a wide range of matters, including political transparency of shareholders and reinforcement of pay responsibilities, investment in the labor force, prevention and response to workplace harassment, and disclosure of diversity, heavy attention is being paid to future legislative trends.

○ Main contents of the「ESG Disclosure Simplification Act of 2021」

-The Act has the effect of amending Section 14(節) (15 U.S.C. 78n) of the「Securities Exchange Act of 1934」and the E.S.G. Indicators (metrics) and companies that are required to submit annual reports are E.S.G. obligation to disclose a description of the relevance between indicators (metrics) and long-term business strategies.

-However, E.S.G. The specific details of the indicator (metrics) have not been determined yet, that it is supposed to be confirmed through enactment of subsequent laws based on CFR (Code of Federal Regulations).

- On the other hand, the Sustainable Finance Advisory Committee, E.S.G. recommendations on indicators must be submitted to the Securities and Exchange Commission, that there is room to reflect the global disclosure standards for E.S.G. information disclosure.

○ Main contents of「Climate Risk Disclosure Act of 2021」

- This bill directs the U.S. SEC to promulgate climate-related risk disclosure rules that are “specific to industries within specific sectors of the economy” and “requires the estimating and disclosing of direct and indirect greenhouse gas emissions by covered issuers and their affiliates”, including reporting standards.

- In addition, prior to the institutionalization of disclosures related to climate change risks, it regulates related definitions, disclosure targets, scope and composition of information to be disclosed, and stipulates overall management and reporting obligations of related information.

▶ If passed, the Act has the effect of simplifying the complex corporate disclosure, plus E.S.G. related information. It seems to have the meaning of establishing governance for disclosure as well.

○ Nevertheless, it is true that the prospects for enactment of this law are not bright, and even after the enactment of the law, specific E.S.G. subsequent legislation is still required to establish disclosure indicators and governance.

▶Although the prospect of passing this law in the Senate is somewhat low, the U.S. SEC has released a draft disclosure related to climate change first, and the IFRS also plans to finalize the standards for disclosure on climate change for S1 and S2 by the end of this year of 2022.

○ This move by IFRS and SEC, suggests that the global trend of disclosure is more likely to be established according to the ‘single materiality’ standard by IFRS (and the U.S.) rather than the double materiality led by Europe.

○ Domestically, it is also necessary to prepare for the institutionalization strategy of E.S.G. disclosure that it is desirable to establish a step-by-step response plan for disclosure.

▶The current amendment bill to the「Capital Market Act」of Korea, which is currently pending in the National Assembly, makes it mandatory for listed companies over a certain size to include environmental, social, and corporate governance related matters in their business reports from 2024, and specific disclosure matters are entrusted to the Presidential Decree.

○ This institutional initiative is based on E.S.G. and it is undoubtedly one of the subjects that can be reviewed in the institutionalization of disclosure, but a balanced approach is required for the economic and  normative burdens that the mandatory description of sustainability reporting on business reports will bring to companies.

○ In addition, E.S.G. Specific indicators of disclosure need to be prepared for each type and size of industry, and it is urgent to establish a climate change-related disclosure standard based on a single materiality criterion that conforms to global trends rather than domestic standards.

 

Ⅲ. Expected Effects

▶ Understanding the general principles of E.S.G. disclosure and the main contents of the Act (draft) that establishes a disclosure system related to climate change risks in the United States. 

○ This study is meaningful in moving the perspective of international trends related to the disclosure of non-financial information, centered on the European Union to the recent U.S. and IFRS strategies, and introduces the contents of the bill in detail.

▶ Under the current law, in order to secure the systemic consistency of disclosure, it is necessary to keep an eye on the recent global trends, which are rapidly developing centering on the U.S. and IFRS on E.S.G. disclosure. 

○ Currently, domestic corporate sustainability reports are subject to voluntary disclosure in principle, and mainly some information from the GRI indicators is mainly selected and disclosed.

○ However, IFRS and U.S. SEC recently announced E.S.G. Indicators are limited to major indicators related to climate change (S1 + S2), and future global E.S.G. seems highly likely that the disclosure trend will be institutionalized first in a direction consistent with this trend.

▶ It is necessary to draw major issues in the preparation of the E.S.G. disclosure system in Korea, not to mention to seek countermeasures in three major issues below: 

○ First, seek ways to secure efficiency, rationality and systemicity with various corporate disclosure systems borne by companies under the current law.

○ Second, among global standards, in the short term, E.S.G. Standards that can respond to disclosure standards should be established.

○ Third, it is urgent to prepare an appropriate regulatory system in consideration of the prevention of E.S.G. washing, and at the same time to prepare measures to strengthen publicity in order to establish a highly relevant external verification (third party verification) system.