[Contribution] Conditions for becoming a sustainable company

By Lee Young-suk

Head of sustainability management, SK Inc.

The ongoing global liquidity tightening, high interest rates causing economic recession and geopolitical tensions are increasing uncertainties in business management. As a result, governments and companies worldwide are relentlessly focusing their resources on reviewing policies and strategies to overcome crises. At this point, as we navigate through significant challenges, I would like to revisit the essence of “sustainability” from an entrepreneur's perspective and discuss the conditions that create a long-lasting corporate history.

Looking at companies with over 100 years of history by country, Japan has about 30,000, and the US and Germany have about 10,000 each, while South Korea has only about 10. While various factors, such Korea's short history of capitalism, contribute to the relatively small number of long-lived Korean companies, it is also fundamentally due to the rarity of robust companies. Sustainable companies must have solid fundamentals that remain unshaken despite unpredictable internal and external environments. To achieve this, companies must have a portfolio structure that reinforces their corporate value in unpredictable business environments.

Danaher Corporation of the US has successfully grown through an aggressive merger and acquisition strategy and strategic spinoffs since its establishment in 1984. Initially, it entered the manufacturing business and diversified its portfolio by acquiring life sciences and diagnostics companies in the 2000s, doubling its corporate value. It has recently expanded into the new drug development sector. This is a case of continuously strengthening its portfolio structure and securing fundamental competitiveness by changing and reorganizing business domains.

SK Group, where I work, is also pursuing proactive and fundamental changes in response to the new transition era. As part of our strategy to focus and concentrate, we are currently rebalancing our portfolio. For example, to enhance the financial stability and synergy of the green and energy business for the sustainability of SK Innovation, we are promoting a merger with SK E&S.

Although there may be growing pains in the process of change, innovation that prepares for the future and maximizes growth potential from a mid- and long-term perspective is a necessary process for a company to acquire fundamental robustness.

From a sustainability perspective, the significance of environmental, social and governance lies in affecting corporate value through risk protection and value creation via business innovation and improvement, thus ensuring a premium in the market's evaluation of the company. Understanding and systematically responding to stakeholders in the ESG ecosystem is another essential condition for becoming a sustainable company.

Observing the trends among major stakeholders, investors' perspectives are changing first. Investment directions are shifting from “companies promoting ESG” to specifically “climate change and energy transition areas.” For example, BlackRock's pre-2023 letters mentioned the necessity of carbon neutrality in the context of ESG risks, while from 2023 onwards, they emphasize investments in decarbonization and energy transition. This concretization at the execution stage is noticeable. In fact, global investments in energy transition have been growing continuously at an average annual rate of 9 percent since the COVID-19 pandemic.

Another stakeholder, rating agencies, also focus on various factors affecting corporate value rather than a simplistic ESG evaluation. ESG ratings directly and indirectly impact corporate value and positively influence the inflow of investment funds, necessitating company-level management.

Additionally, the establishment of nonfinancial information disclosure standards and the enforcement of mandatory disclosure by each country reinforce the global ESG trend. The International Sustainability Standards Board has established sustainability reporting guidelines, and the European Union European Financial Reporting Advisory Group also mandates that companies operating in the EU disclose ESG issues that have a financial impact on corporate value. The US Securities and Exchange Commission has also set regulations for disclosing climate-related financial impacts for listed companies in the US.

Ultimately, the attitude towards ESG is not a matter of choice but a necessary stance for sustainability.

Summarizing the two conditions presented earlier, it is crucial for sustainable companies to balance economic and social values in their decision-making processes. They must be economically sustainable through business competitiveness and minimize the damage to corporate value through ESG improvements to secure stakeholder choice in the mid- and long-term. From this perspective, if the current portfolio meets both aspects, it can be judged that the company satisfies the conditions for sustainability.

Lee Young-suk is head of sustainability management at SK Inc. The views expressed in this column are his own. -- Ed.