ESG Management Needs Institutional Support, Not Regulation

ESG management is a global hot topic. Non-financial values such as the environment and society, not just profitability, have emerged as major variables in management. In particular, changes such as the COVID-19 pandemic and the global trend of low growth are demanding new roles from businesses. Originally, the purpose of a company was to maximize profits, but voices have grown stronger insisting that companies must go a step further by leading social change and fulfilling their social responsibilities. ESG management has now become more than a matter of risk management; it has become one of the growth engines through which companies create new value.

Companies, too, are responding quickly to these changes. They are taking a wide range of stakeholders into account and are beginning to consider not only contributions to society but also the sustainable development of humanity. Through innovation, they are striving to protect the environment, safeguard customer information, and recognize employee diversity. Consumers and investors are also increasingly responding positively to companies that incorporate ESG into management as part of sustainable management.

Multinational corporations abroad have already successfully incorporated ESG into management on the basis of strong technological capabilities, producing especially outstanding results in the environmental field. Some companies, such as Apple, have achieved 100% renewable energy use, while others, such as Microsoft, have pledged to become carbon negative and even manage indirect emissions. The problem is that, as these companies demand the same environmental standards from their suppliers, factors such as carbon emissions and renewable energy use have become important standards in the global trade order.

In response to these changes in the global trade order, domestic firms are also demonstrating new entrepreneurship and voluntarily introducing ESG into management. SK Group is expanding its use of renewable energy and accelerating ESG management through revisions to its articles of incorporation and board regulations. Samsung Electronics has also encouraged even its partner companies to participate in ESG management and announced a goal of using 100% renewable energy in the United States, Europe, and China by 2020. LG Electronics, meanwhile, has introduced an internal carbon tax to reflect environmental burdens in financial value, and Hyundai Motor plans to reduce greenhouse gas emissions by 26% by 2030 while making large-scale investments to achieve that goal.

However, it is deeply concerning that there are moves to confine these voluntary corporate efforts within a regulatory framework. The Financial Services Commission is pushing to make disclosure of sustainability reports reflecting ESG mandatory, and the Ministry of Trade, Industry and Energy is seeking to create K-ESG indicators and use them to evaluate companies. Attempts to quantify the results of ESG management, which often cannot be reduced to numbers, are likely to become yet another form of regulation for businesses. If related regulatory provisions are later enacted by the National Assembly, they could impose an even greater burden on companies.

Even in the United States, disclosure of information on ESG management is not yet a legal obligation. The U.S. Securities and Exchange Commission (SEC) recently tried to mandate related disclosures, but even companies such as Google and Microsoft, often regarded as model ESG performers, pushed back. In the environmental field, estimates inevitably rely on uncertain calculations, and making disclosure mandatory would increase uncertainty in corporate management and expose firms to greater risks such as legal litigation.

It is reasonable for companies to reflect ESG in management voluntarily. Since each company’s financial situation differs and the areas in which it can produce results vary depending on its technological capabilities, it is difficult to apply a uniform regulatory standard. Moreover, if a company operating in a poor business environment were to strengthen ESG management to the point of going out of business, the resulting strain would affect the broader economy, including workers, consumers, and investors. Even without compulsion, companies have stepped forward to declare ESG management because, under current circumstances, it is necessary for corporate survival. Care must be taken to ensure that this voluntary movement, begun with good intentions, does not end up being applied to businesses as unnecessary regulation.

To strengthen ESG management among our companies, institutional support at the government level is also necessary. The issue should not be approached from the standpoint of regulation; rather, companies should take the lead, and the government should play the role of creating institutional conditions that can facilitate those efforts. It would be better to help companies decide autonomously in which areas and to what extent they will pursue ESG. For ESG to be implemented in line with its original intent and purpose, each company must find its own solution. We hope to see legal and informal regulatory burdens eased and active efforts made to support and revitalize businesses through institutional backing.

Eun-kyung Kwak, Head of Corporate Culture Division, Center for Free Enterprise (CFE)

---

Original title: ESG경영, 규제가 아닌 제도적 뒷받침 필요

Author: Eun-kyung Kwak

Date: 2021-10-07

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24305