[ESG Talk] Expediting Korea’s ESG capacity

South Korean corporates and government authorities are dynamically reorienting toward environmental, social and governance factors. Yet, this enthusiasm can quickly turn into a myopic facade if not channeled effectively. To establish truly impactful ESG practices, a deep-thought approach to transforming the individual lifestyles of consumers is necessary. Achieving this change is possible only if companies and governments align business and policy priorities that cater to the fundamental needs of Korean society.

Korea’s ESG challenge

The Paris Agreement, which entered into force in 2016 and was adopted by 195 parties at the United Nations Framework Convention on Climate Change, is a legally binding international treaty. Under this agreement, the parties resolved to prevent global temperatures from rising more than 2 degrees Celsius, and preferably no more than 1.5 degrees Celsius, compared with preindustrial levels.

Despite a few challenges along the way, the effort has prompted countries to formulate more proactive and specific policy initiatives. The joining member states were required to submit particular plans called nationally determined contributions. Long-term greenhouse gas emission development strategies were voluntarily submitted the same year, in 2020. Korea has only submitted its nationally determined contributions.

In the updated nationally determined contributions, published Dec. 30, Korea stated its target to reduce its emissions by 24.4 percent from the 2017 level by 2030. Korea also indicated its intention to use the emissions trading scheme, which covers 73.5 percent of greenhouse gas emissions, to reach this target.

The problem in Korea is that not many people are aware of the seriousness of this issue. The media show public figures raising their voices about how the world should be greener, yet the gravity of why and how is told in different tones with various priorities.

Not many Koreans are aware of how global institutions ridicule Korea as a climate villain. Korea is the eighth-largest contributor of emissions globally, emitting less than Germany and Iran but more than Indonesia and Canada. The news media rarely pay attention to this.

Catching up on ESG

Companies and governments in the West have started to implement regulatory measures first, with the finance sectors adopting stricter ESG investment systems. Fortunately, Korean companies and governments are doing what they do best -- studying quickly and catching up.

Companies have diligently established internal ESG committees and set active ESG targets. Out of the top 10 conglomerates, eight had done so by the first half of 2021. SK formed an alliance with seven other companies, investors and schools to accelerate ESG startups. Also, SK has initiated a campaign called “Happy Habit” with several franchise brands to encourage upcycling (reusable) disposable cups to reduce waste generation in Korea.

Major banking and financial institutions in Korea are also acting speedily to introduce ESG to the capital market. The investment banks began to publish market analyses focusing on ESG elements. A good example is the Blue Book series on ESG, published by Shinhan Investment, which analyzed companies’ stock information based on the three ESG factors. These reports can influence shareholders’ decision-making process by helping the investors visualize how ESG issues would matter for the company they are investing in.

5 stages to empower ESG

Korea has always been good at catching up. Although Korea faces unique challenges in ESG, it nevertheless has great potential given how rapidly companies respond to the market and global ESG demands. By benchmarking the five textbook steps other ESG leaders have taken, companies can expedite their ESG capacities and reduce risks.

The first is to focus on risk management by meeting industry-specific compliance requirements. Whether industry- or company-specific, ESG problems and solutions vary in weight. To tackle these, the company should first look to the leaders to study their ESG disclosure systems. Then, it should assess what these companies are doing to prevent risk. It’s always more cost-efficient to focus on risk prevention, so conduct ESG due diligence and seek advice on how the company may manage current and future risks.

The second is to create the company’s differentiated ESG practice. This process is called internalization. Align the company’s ESG values, internal communication, and general practices altogether. The company can first work with outside experts to facilitate communication and train its employees on establishing its unique legacy in ESG practices. Gradually, the company will accumulate experience that turns into its ESG asset and expertise.

The third step is to become a knowledge provider in the industry. Based on the accumulated experience gained from its internalized ESG practices, the company possesses industry-specific ESG knowledge. The company can now actively contribute through its ESG expertise. The company should work with governments and civic organizations to find efficient solutions to social problems in its industry area. At this stage, the company may engage more stakeholders beyond its consumers and shareholders. Many cases show that new business opportunities are found at this stage while social problems are discussed with immediate stakeholders.

Fourth is to establish an ESG brand that empowers the company. ESG branding is more than a marketing scheme. With the sincere trust earned from society, the company brand can benefit from a good reputation and positive image based on its ESG practices across services and regions. At this stage, the company must ensure that its business mission aligns with its social aim. At this stage, more systematic operation of ESG across firms and business units is critical to retaining and reinforcing the company’s ESG branding.

By the final stage, the company is recognized as a true lifestyle transformer. ESG may seem abstract, but it’s really about transforming an individual consumer’s lifestyle choices. The purpose of this final stage must be evident from the very early stage of ESG management. ESG is often referred to as purposeful business. In the end, it really comes down to transforming culture -- the lifestyles and values of the company’s immediate clients, stakeholders and society.

Companies can do this through their products, services and business operations. Governments can facilitate ESG by building hard and soft infrastructure for companies and future generations through financial and systematic incentives. Too many regulatory punishments or negative screening may discourage the market.

A critical step for Korea is to build domestic consensus and present it to the international community. ESG includes many stakeholders and takes careful understudies. It is difficult to undo regulations and laws once enacted, unlike risk-taking, entrepreneurial business strategies. Therefore, benchmarking global ESG standards requires a much more attentive and careful approach. It must become more tailored to the domestic condition through more active public discussion and consensus.

Lee Yeon-woo
Lee Yeon-woo is an expert adviser at Korean law firm Bae, Kim & Lee. -- Ed.

By Korea Herald (koreaherald@heraldcorp.com)