New Korean equity fund bets on ESG momentum

South Korean investment firm Truston Asset Management said Wednesday that it is establishing a fund to invest in companies that have room for improvement in their environmental, social and governance standards, and to make changes through shareholder activism if necessary.

The company, which managed assets worth 9.3 trillion won ($8.4 billion) as of end-2020, aims to raise some 500 billion won from public distribution channels in the nation, where unorthodox family business succession plans to avoid taxes are commonplace and where anti-competitive practices such as intragroup transactions have a long history.

Weak governance of Korean companies is “entrenched and detrimental to shareholder value,” Hwang Sung-taek, chairman and chief investment officer of Truston, told reporters at a virtual press conference.

“No matter how much tax burden they face, listed companies that cut corners in governance structure cannot justify itself to shareholders,” said Hwang in his first media appearance in 12 years.

Truston’s new ESG equity fund, set to be launched Thursday, is targeting companies in which ESG improvements can lead to higher profits. Its investment decisions will be influenced by Truston’s in-house ESG evaluator unit.

The open-ended fund is designed to turn away from companies with integrated ESG scores of “B” and above from external evaluators. Instead, the fund will invest in stocks or bonds issued by listed companies with scores lower than “B” but with the potential to improve.

“We believe in the value that a momentum from a spontaneous corporate change can create,” Hwang said.

“But to tackle a weak governance structure that harms shareholder value, an engagement as a minority shareholder is inevitable to ensure the company’s cash flow and enhance its social value.”

Hwang added that Truston’s ESG equity fund would differentiate itself from other Korean ESG funds, which tend to show uniform performance largely by blindly tracking large-cap stocks that tend to have high ESG grades. Such Truston‘s philosophy led it to decide to manage the fund without a set benchmark and to aggressively search for small-cap portfolios -- a rare move among Korean asset management firms.

Truston has a track record of shareholder engagement for Korean-listed companies, including legal action against construction firm Halla’s public offering of new shares worth 200 billion won to its car part maker affiliate Mando in 2012.

Truston was founded in 1996 as IMM Investment Management and was rebranded in 2008. The new ESG fund is Truston’s first publicly raised fund in three years.

By Son Ji-hyoung (consnow@heraldcorp.com)