Assessment system for ESG lacks consistency: FKI

Appraisals for ESG -- the management trend that focuses on environmental, social and governance factors -- tend to lack consistency as different rating agencies apply different standards, a major business representation here said Monday.

According to a report by the Federation of Korean Industries, about 40 percent of businesses witnessed a conspicuous variation in the ESG ratings they have received from key evaluation agencies.

The given study included 55 companies among the nation’s top 100 in revenue that have had their ESG rating announced by all of the three ESG evaluators -- Morgan Stanley Caapital International, Refinitiv, and the Korea Corporate Governance Service.

The corresponding companies saw ratings deviate by an average of 1.4 levels and 22 of them saw a deviation of three levels or more, indicating a lack of evaluation consistency. The ESG rating system comprises seven levels in total.

Global businesses were no exception. According to a survey by the world’s largest asset manager BlackRock, a similar deviation was observed among the 217 companies that constitute the ESG exchange trade funds.

The problem is that each agency adopts its own evaluating and value weighting system, according to the FKI.

For instance, MSCI takes into account factors such as climate change, natural resources, pollution waste and environmental opportunities when assessing environmental aspects. The KGS, on the other hand, focuses more on environmental strategies, related organizations, and achievements. Refinitiv places value on eco-friendly product innovation and waste emission.

The FKI also claimed that global agencies tends to discriminate businesses according to their nationality, suspecting a so-called “Korea discount” in ESG evaluation.

“Regarding the wide deviation and lack of consistency in ESG evaluations, each company should stipulate their benchmarks and indexes, based on the direction and goal of their respective ESG policies,” the federation said.

South Korean government is working to introduce a standard ESG index for local firms.

The Ministry of Trade, Industry and Energy last week unveiled a draft version of the envisioned index, which has four main categories -- transparency, environment, society and corporate governance -- and has total 61 subcategories. It is expected to be finalized in the second half of this year.

By Bae Hyun-jung (tellme@heraldcorp.com)