KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

I. Background and Purpose of Research

▶ This study is a follow-up to the 2023 research titled “E.S.G. Legislative Basic Study (Ⅲ) - How to Improve Domestic Legislation to Ensure Alignment with Global Sustainability Disclosure -”.

○ This research aims to examine the compatibility of the domestic legal framework with social (S) and governance (G) categories. On October 16, 2023, the Financial Services Commission announced a provisional delay in implementing mandatory E.S.G. disclosure in Korea until ‘after 2026’, making the future of Korea’s sustainability disclosure system increasingly uncertain. As a result, there is a significant need for a comprehensive legal analysis across all areas to establish a robust E.S.G. disclosure system based on domestic law, yet previous research on this topic remains insufficient.

 

Ⅱ. Contents

▶ This study compares the social (S) and governance (G) categories of the <K-ESG Guideline Ver.1.0> and the <Supply Chain Response K-ESG Guideline>, which were used as analytical standards in previous research. Additionally, it conducts a comprehensive analysis of domestic laws related to these specific indicators to assess their relevance and applicability under the current legal framework.

▶Through empirical analysis, this study has identified a significant lack of systematic understanding and information regarding the legal obligations that must be adhered to within the current legal framework, as well as the specific laws and relevant clauses that provide the legal basis for these obligations.

▶In the case of social (S) indicators, both the <K-ESG Guideline Ver.1.0> and the <Supply Chain Response K-ESG Guideline> present identical standards for categories such as ‘diversity and gender equality’ and ‘information protection’. However, in areas such as ‘labor’, ‘industrial safety’, and ‘human rights’, the <Supply Chain Response K-ESG Guideline>-which is specifically targeted at small and medium-sized enterprises (SMEs)-provides more detailed subcategories compared to the general K-ESG guideline.

○The study analyzes how certain common indicators—such as ‘proportion of regular employees’, ‘protection of freedom of association’, ‘female workforce ratio’, ‘female wage ratio’, ‘disability employment rate’, ‘occupational health and safety management system’, ‘human rights policy development’, ‘strategic social contribution’, and ‘personal data breach and redress’—are linked to current legal regulations. 

- It investigates the legal basis for these indicators within existing laws and evaluates their relevance to corporate sustainability disclosures. This approach aims to clarify the extent to which these indicators contribute to transparent and accountable sustainability reporting by corporations.

-In particular, the study offers recommendations for potential improvements in the implementation of current laws regarding key indicators such as ‘protection of freedom of association’, ‘disability employment rate’, and ‘occupational health and safety management system’. Despite existing legal provisions, there may be gaps or challenges in practical enforcement that need to be addressed. These suggestions aim to enhance the effectiveness of these regulations, ensuring they better align with corporate sustainability goals and contribute more meaningfully to the development of comprehensive sustainability disclosure frameworks.

▶In the case of governance (G) indicators, aside from the disclosure of ‘ethical violations’, there are no common indicators across the guidelines. Specific governance-related items such as ‘board composition’, ‘board activities’, and ‘shareholder rights’ are only outlined in the <K-ESG Guideline Ver.1.0>. These indicators are absent from the <Supply Chain Response K-ESG Guideline>, highlighting a difference in the governance focus between the two guidelines. 

○This discrepancy underscores the need for a more harmonized approach in establishing comprehensive governance metrics in sustainability disclosures.

-In contrast, the <Supply Chain Response K-ESG Guideline> does not require the same level of disclosure for governance indicators as found in the <K-ESG Guideline Ver.1.0>. However, when it comes to ‘ethical management’, the disclosure requirements for small and medium-sized enterprises(SMEs) are more detailed and extensive. This indicates a stronger emphasis on ethical governance practices for SMEs, with the guideline calling for a more granular approach to how these businesses manage and disclose ethical compliance compared to larger enterprises.

▶ Additionally, this study introduces some key elements of the "Korean Sustainability Disclosure Standards Draft" published by the Korea Accounting Standards Board. It focuses specifically on Draft No. 101 and aims to identify legal challenges related to ensuring consistency within the domestic legal framework. 

○The sustainability disclosure standards proposed by the Korea Accounting Standards Board (KASB) are naturally focused on providing information to investors, which aligns with the primary function of the institution. However, relying solely on this investor-centric approach raises concerns about the country's ability to adapt flexibly to the rapidly evolving sustainability discourse, particularly in Europe.

○European regulations, which are being established at an accelerated pace, mandate that sustainability information be disclosed to a broad spectrum of stakeholders, including labor unions, civil society, and    non-governmental organizations. In contrast, Korea’s framework remains focused on a narrower range of stakeholders, primarily investors.

○This disparity highlights the urgent need for Korea to fundamentally reframe its roadmap for building an effective E.S.G. system. A comprehensive strategy must be developed through interagency cooperation to address the broader range of stakeholders, as seen in European models. 

-Such a strategy would ensure that Korea’s sustainability disclosure regime remains competitive and aligned with global trends, while addressing the diverse needs of various stakeholders beyond investors.

 

Ⅲ. Expected Effects

▶ This study highlights critical issues related to the compatibility of the domestic legal framework with the adoption of a global disclosure system that incorporates double materiality in the social (S) and governance (G) domains. 

○The concept of double materiality recognizes not only the financial impact of corporate actions but also the wider societal and environmental impacts. The study underscores the necessity for further discussions and the establishment of a robust legal foundation to support the integration of such global standards into Korea's sustainability disclosure system. 

-It also emphasizes the importance of aligning the domestic legal system with international expectations to ensure that Korea can effectively implement comprehensive sustainability reporting practices.

▶This study not only offers significant value as an accurate and empirical analysis of detailed indicators based on domestic guidelines, but also provides a thorough examination of relevant domestic laws and key issues associated with each indicator. 

○It aims to establish a solid foundation to address potential conflicts in future legal applications, particularly where existing legal frameworks may clash with these guidelines. 

-Furthermore, it identifies areas that have not been sufficiently reflected in current guidelines, proposing ways to enhance and supplement them for a more cohesive and legally sound sustainability disclosure system. This approach ensures that both the legal and practical aspects of E.S.G. reporting are aligned with broader regulatory requirements.

▶ Furthermore, through this project, the study seeks to foster public discourse on the institutionalization of sustainability in Korea. It aims to identify the legal limitations and inconsistencies that domestic industries may encounter during the adoption of global disclosure systems. 

○By highlighting these challenges, the research seeks to drive legislative and policy improvements, ensuring that Korea’s legal framework aligns with international standards while addressing the specific needs of the local industry. 

-This approach is intended to encourage a well-informed, inclusive dialogue that promotes the development of a robust and globally competitive sustainability disclosure system.