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Philippe Noirot (BNP Paribas South Korea) |
ESG, the environmental, social and governance aspects of a company, has rapidly emerged as one of the hottest topics in the corporate and financial sectors in Korea. With the urgent need to combat climate change and social inequality, companies are gearing up to make positive changes.
Among the reasons for the emergence of this trend is the realization that companies have a key role to play in ensuring a sustainable future for all, beyond their financial obligations to their shareholders.
This realization is also related to the fact that more and more externalities -- defined as companies’ cost to society at large -- are visible in today’s world. Climate change is no longer a theoretical concept, and companies’ impact on society is more and more visible.
Lastly, a strong corporate governance is increasingly recognized as a key lever to ensure that companies take a balanced, holistic view towards different stakeholders.
Investors are clearly turning to ESG worldwide. At our recent ESG seminar, we saw how the scale of ESG investment is expected to increase to $45 trillion by the end of 2021, which amounts to 50 percent of total global assets under management.
In line with this global trend, the Korea National Pension Service recently announced its plan to increase up to 50 percent of its investment in ESG assets by 2022.
To meet investors’ ESG requirements, companies are accelerating to incorporate ESG management and issue ESG bonds, while asset managers are launching ESG funds. According to the Korea Exchange, Korean private sector’s ESG bond issuance volume has increased by 28 times in the first quarter this year compared to the same period last year.
ESG bonds issued in the global market last year were worth approximately $494 billion, which was an increase of about 80 percent compared to 2019.
It’s clear that the importance of ESG bonds is growing. In the early phases of the ESG bond market, issuers focused on green bonds. However, there are now not only green bonds but social bonds, sustainability bonds that have characteristics of both green and social bonds, and sustainability-linked bonds, otherwise known as SLBs. Issuers are testing a wider range of ESG bond labels.
However, we see the need for the market to stay focused with existing labels to deepen the quality around ESG performance and disclosure by issuers as a greater priority, especially in the SLB market.
There are many companies who still approach ESG from a mere promotional mindset. This strategy will become increasingly risky from a reputational perspective, as superficial reactions to ESG concerns can lead to accusations of “green washing.”
Recent research questions whether ESG-related investments produce better returns. While the argument has yet to be decided definitively, this question also misses the point, for two reasons.
First, as mentioned above, ESG-related investments are aimed partly at capturing the broader costs of operating and the benefits of doing it in a sustainable way. Measuring this correctly must be done over decades, rather than years, and can’t be accurately reflected in a traditional investment return analysis.
Second, the question for investors is less: “What is the additional return on my ESG investments,” and more: “What is the hidden cost of non ESG-operating companies?”
As stranded costs become more and more visible, the tide is turning on companies that are not embracing this change. This can be seen very clearly in some sectors, such as oil and gas, where the costs of exploration and refining assets is increasingly burdened by environment-related costs.
These companies must adapt quickly and fundamentally, or risk having massive amounts of so-called stranded assets. Of course, this requires a change in society as a whole, how we operate, and what we consume.
Due to the prolonged COVID-19 pandemic, interest in environmental and social issues has grown and South Korean companies are more and more active on the ESG front.
It’s a compelling opportunity for Korean companies to become leaders in the technologies of tomorrow. This is obvious in the area of electric vehicle batteries, in which many Korean companies are investing.
But it is also the case in steelmaking, where new, less polluting technologies are being tested and launched to produce steel, thanks to hydrogen instead of coal. Consider the case of dual-engine ships, which are less polluting than diesel-only ships. Or in social bonds or loans, for which proceeds are directed towards disadvantaged and disenfranchised members of society. So ESG should not be seen as a constraint, but rather as a chance to develop profitable and sustainable new business models.
BNP Paribas has been supporting clients to issue ESG bonds, and in 2020 achieved the world’s No. 1 position in the Sustainability Bonds and Social Bonds issuance categories.
At BNP Paribas, we emphasize ESG both internally and externally, to the point where ESG-related goals are included in the key performance indicators of BNP Paribas executives. These goals are set in consideration of social and environmental performance of the bank.
As the leading global financial group in the eurozone, BNP Paribas has committed to exiting the coal industry completely by 2040 worldwide.
Furthermore, to achieve carbon neutrality, we stopped financing nonconventional hydrocarbons such as shale gas and oil sands.
Also, BNP Paribas plans to increase loans to companies that directly contribute to the achievement of the United Nations Sustainable Development Goals to 210 billion euros ($255 billion) by 2022.
Most recently, we joined the Net-Zero Banking Alliance as a founding member. This pledge, which was launched by the United Nations Environment Programme Finance Initiative, commits BNP Paribas to align our lending portfolio to make it compatible with a net-zero GHG trajectory.
In Korea, we have actively participated in the development of the ESG-related market, managing the issuance of a large number of green, sustainable and social bonds, and other social Asset Backed securities in recent years. We have also worked very closely with a large car manufacturer to finance one of the world’s first hydrogen-based truck fleet in Switzerland.
BNP Paribas is also actively promoting ESG to its employees.
In 2018, BNP Paribas launched Green Company for Employees, a global environmental program for BNP Paribas employees, to contribute to reducing our direct environmental impact. The program focuses on educating our employees to change their daily habits such as reducing single-use plastic usage.
As a result, single-use cups and plastic bottles have been fully removed from BNP Paribas premises, and our staff are very supportive of this change.
BNP Paribas is also putting a strong priority in workplace diversity and inclusion, in line with the governance objectives of ESG. The group has set a target of reaching a 40 percent representation of women on its executive committees as well as its top 100 senior manager positions by 2025. In Korea, female representation in the bank’s management committee reached 25 percent since two years ago.
ESG is both a challenge and a great opportunity to mobilize all stakeholders around fundamental objectives for companies and for society at large.
As an expert in ESG solutions, BNP Paribas is there to help its clients incorporate ESG into business management for the benefit of all.
Philippe Noirot is head of territory for BNP Paribas South Korea -- Ed.
