[#WeFACE] How ESG is changing the ratings game for financial giants

Financial soundness, capital size, and business potential have long been the criteria of measuring the value of financial companies here, but a new method, though subjective and somewhat abstract, is changing the assessment game.

Since the pandemic, financial firms have been expanding services and products conscious of environmental, social and governance values while investors keep a close eye on whether business decisions of banking firms, stock brokers, card issuers or insurance firms run against ESG criteria.

Investors are scrutinizing behavior such as labor exploitation or if financial firms support conglomerates whose owners maintain management control via illegal practices.

“Past corporate evaluations have been mainly focused on the financial aspect, and such business evaluation models are not enough to show the true value of a business since they fall short of gauging the non-financial side,” said Yu Ko-eun, a senior researcher at the Korea Corporate Governance Service, a proxy advisory firm that evaluates companies’ ESG initiatives.

“The coronavirus pandemic, which started early last year, has changed the landscape of the financial market,” the researcher added.

Not to be outpaced in the global ESG trend, players in local financial firms, including banks, securities firms and insurance companies, have been jumping on the ESG bandwagon.

According to the KCGS’ recent report, five out of 47 financial firms were rated an A+ grade, the second highest after an S rating, in its overall ESG evaluation. The KCGS’ evaluation measures companies’ ESG performance on a scale of D to S, with D being the lowest. No company scored an S rating.

The five companies that earned the A+ rating are Shinhan Financial Group, KB Financial Group, BNK Financial Group, DGB Financial Group, and JB Financial Group.

Six financial companies, including Samsung Fire & Marine Insurance, Hyundai Marine & Fire Insurance and Mirae Asset Securities, scored an A while 12 companies, including Hanwha Life Insurance and NH Investment & Securities, earned a B+.

In 2019, there were only three A+-graded firms -- Shinhan, KB and BNK -- and three A-rated companies -- JB Financial Group, Hana, and Samsung Fire & Maritime Insurance.

According to the KCGS criteria, companies graded an A+ or A are those that keep making contributions to communities where they run operations and to the environment, while trying to improve shareholder rights and forming a director board in a proper manner. Whether companies treat employees and contractors fairly is also an important evaluation indicator.

Those rated lower grades B, C or D, on the other hand, fall short of meeting the ESG criteria.

Among the companies that scored the low ratings were Samsung Card, Kyobo Securities, Mirae Asset Life Insurance, and KTB Investment.

“In order to score a good rating in ESG evaluation, the first thing that a financial firm needs to do is to report accurate filings on a regular basis,” the KCGS researcher said.

The KCGS said the growing ESG awareness in the market and changing business trends helped more Korean firms across different industries receive higher grades, A+, A or B+, last year than the previous year. The number of companies rated a B+ or higher stood at 242 last year, up from 193 in 2019. 

Although there has been some improvement in adopting ESG values among financial firms, there are still many companies, including large conglomerates, which only pretend to conform to ESG guidelines, according to some market watchers.

“In order to prevent ‘green washing,’ a tendency for companies to pretend to be environmentally-friendly, ESG rating firms try to take multilayered approaches, utilizing various resources like filings or press releases, and interviewing employees in charge of handling ESG matters,” an official from a credit rating firm in Seoul said.

“One size does not fit all particularly in terms of governance issues as some companies have owner families while others do not. Therefore, ESG rating agencies also utilize slightly different metrics depending on companies’ ownership structures.”

Global credit rating and research firms are also coming up with their own measures to evaluate ESG efforts made by companies to offer information on investment risks.

According to data provided by global investment research firm MSCI, many Korean financial firms on its ESG list were given average ratings between BB and A.

Shinhan Financial Group is the only company that received an AA rating, on a scale from CCC to AAA, while KB Financial Group, Samsung Fire and Mirae Asset Securities received an A grade. Ratings for Meritz Securities and Korea Investment Holdings came in at B and CCC, respectively.

MSCI evaluates companies by analyzing data on whether they support controversial activities, such as use of weapons, tobacco, and gambling, and if they have sustainable solutions for energy, education and health.

The report, however, does not state why companies receive high or low ratings.

The world’s largest proxy advisory firm ISS has recently carried out its own evaluation on Korea’s four large banking conglomerates, Shinhan, Woori, KB and Hana Financial Group. It gave all the four companies the highest grade of 1 on a scale between 1 and 10.

The ISS evaluated the firms in four categories -- board structure, compensation, shareholder rights, and audit and risk oversight.

Although Shinhan received the top grade overall, it underperformed in the shareholder rights and audit and risk oversight segments presumably because of its involvement in a recent hedge fund fraud.

Some global credit rating firms, including S&P Global, are also preparing to come up with evaluation methods to measure ESG performance of financial firms while local companies are trying to meet the rising global ESG demand by setting up their own guidelines.

“Receiving a poor ESG grade will not immediately affect a company’s credit rating, but it can become an extra pressure, especially when the company’s businesses are struggling,” Park Jun-hong, corporate ratings director at S&P Global, said in an online ESG seminar in March.

Auto financing firm Hyundai Capital established what is called a sustainable financing framework to improve transparency in operating funds raised via the issuance of green bonds in the US market.

By Kim Young-won (wone0102@heraldcorp.com)