How Businesses Can Meet ESG Expectations

The paradigm of corporate management is changing. Alongside the economic value of profit-seeking, ESG factors such as environmental value, social value, and social contribution have emerged as major variables in management. This is because social awareness is growing that not only the results of management activities, but also the process, must be taken into account.

This trend is also reflected in the growing number of indicators that assess companies’ non-financial performance, such as World’s Most Admired Companies, Best Companies to Work For, and Green Companies.

In the business world as well, there is a growing trend of introducing ESG management in ways suited to real conditions. Companies have begun to consider non-financial performance by looking beyond profit generation to various stakeholders and by making efforts toward social responsibility and environmental protection.

This is because consumers and investors are also responding positively to companies with outstanding non-financial performance. Companies that protect the environment through innovation, safeguard customer information, and recognize employee diversity also tend to achieve strong economic performance.

In addition, strengthening a positive image through ESG also promotes investment. ESG management, which had once amounted to little more than declaratory and voluntary corporate action, has now become one of the conditions for corporate survival.

ESG Becomes a Condition for Corporate Survival

ESG began with the “ethical consumption movement” led by consumers and civic groups. A representative example is the RE100 campaign, launched during Climate Week NYC in 2014 by the international nonprofit environmental organization The Climate Group.

It began as a global campaign in which companies pledged to use renewable energy for 100% of their electricity consumption, but now more than 270 companies worldwide have joined, and it has come to function as a trade norm exceeding even those of the World Trade Organization (WTO). In this way, ESG is driven by the private sector and takes the form of voluntary participation by companies and stakeholders.

Global investment firms are paying attention to ESG as a solution for generating sustainable investment returns. They have concluded that profits can be created only by investing in companies that respond sensitively to environmental issues (E), faithfully fulfill social responsibility (S), and maintain sound governance (G)—that is, through ESG investing.

Larry Fink, CEO of BlackRock, the world’s largest asset manager, has declared that “going forward, corporate sustainability will be a standard for investment decisions,” thereby emphasizing ESG as a core investment principle. In fact, in 2020, ESG assets accounted for 50% of the funds managed by global asset managers, totaling 45 trillion, and this figure is expected to rise steadily in the future.

Countries around the world are also focusing on ESG as a matter of national competitiveness amid prolonged low growth and the COVID pandemic. Unlike Trump, who dismantled environmental regulations, the Biden administration in the United States has adopted a strategy emphasizing active environmental policy.

It has rejoined the Paris Agreement and pledged to achieve carbon neutrality (Net Zero) by 2050 in order to build a clean energy economy. There has also been discussion of introducing a carbon border adjustment policy in order to establish an international trading system related to greenhouse gas emissions. The EU’s environmentally friendly agenda is also gaining speed.

The EU announced its Green Deal with the goal of becoming the first carbon-neutral continent and raised its 2030 greenhouse gas reduction target from 40% to 50%. It plans to expand its emissions trading system to the maritime, land transport, and building sectors, and from 2023 it intends to introduce a carbon border adjustment tax on imports. It will begin with steel, aluminum, fertilizer, cement, and electricity, and later expand the carbon border tax to all imports.

This new trade paradigm of environmental friendliness can be a rational strategy for the countries leading it. For the United States and the EU, which already enjoy technological and institutional advantages in the green sector, it offers an opportunity to secure the practical benefit of “fostering domestic industries” while putting forward the justification of “environmental justice.”

Countries are using eco-friendliness as a central banner, investing large budgets to create jobs, and making it an opportunity to build new growth engines. In fact, countries are putting ESG at the forefront, investing heavily to create jobs, and laying the groundwork for new engines of growth.

During the presidential election, U.S. President Biden promised to invest more than $2 trillion over four years in electric vehicles, secondary batteries, and renewable energy. The EU likewise announced investment on the scale of 1 trillion euros under the banner of ESG.

Korea’s position is different. These changes pose a major threat to the Korean economy, which has an export-oriented industrial structure. Companies in the United States and the EU are achieving outstanding results in environmental fields on the basis of superior technology.

Some companies, such as Apple, have already achieved 100% renewable energy use, and others, such as Microsoft, manage even indirect emissions and have gone so far as to declare carbon negativity. For such firms, the paradigm shift toward environmental friendliness is not a major problem.

However, changes in trade policy—such as the U.S. carbon adjustment tax and the EU carbon border adjustment tax, which impose tariffs or charges on companies that fail to meet environmental standards, or encourage the use of renewable energy—will immediately cause cost increases and undermine Korean firms’ key strength of cost competitiveness.

Already, heightened environmental regulations in the United States and the EU have led global companies to demand the same environmental standards from their suppliers.

Since 2018, global companies such as Apple and BMW have required even Korean export firms to use 100% renewable energy in the parts they supply.

Apple’s demand for “100% renewable energy” directly affected SK hynix, which supplies adhesive tape for smartphone displays to Apple. BMW also required LG Chem and Samsung SDI to use renewable energy as a condition for supplying electric vehicle batteries, and LG Chem, which failed to meet the requirement, ultimately could not supply BMW.

The transition to a low-carbon society raises concerns about weakening the price competitiveness that has been a strength of Korean companies, and major domestic industries with high carbon intensity, such as petrochemicals and steel, face unavoidable damage.

At the national economic level, the Korean government needs to present policy goals and establish systems that can reduce side effects. In October 2020, the Korean government declared carbon neutrality, saying it would reduce net carbon emissions to zero by 2050. However, it failed to present a concrete roadmap, targets, or financing plans.

There is also a lack of institutional support at the government level that should precede Korean companies’ efforts to achieve concrete results in the transition to ESG. In particular, the renewable energy issue is likely to become a serious threat to Korean firms in the future.

Export companies, for example, already need to increase their use of renewable energy, yet renewable energy currently accounts for only 6.5% of power generation, and there is not even a market in place for trading it.

This is because the issue has been swallowed up by political controversies such as the nuclear phase-out, preventing even proper discussion from getting underway. There is an urgent need to establish systems, such as reforming the energy market structure so that renewable energy can be produced and traded in diverse ways.

Fortunately, in the business world, major companies are adapting to changes driven by the green trend.

ESG Management Should Not Be Subjected to a Regulatory Yardstick

SK became the first Korean company to declare RE100 and is accelerating ESG management, including eco-friendly initiatives. The Samsung Group has also made its coal phase-out policy clear and is withdrawing from coal-fired power generation projects.

LG Electronics has introduced an internal carbon tax to reflect environmental burdens in financial value, while Hyundai Motor plans to cut greenhouse gas emissions by 26% by 2030 and make large-scale related investments. This reflects the judgment that in a situation where environmental issues have emerged as a new trade barrier, actively responding to the new paradigm is advantageous for corporate investment and survival.

Despite these voluntary corporate moves, there are troubling attempts to confine them within a regulatory framework. The Financial Services Commission is pushing to mandate disclosure of sustainability reports reflecting ESG, and the Ministry of Trade, Industry and Energy is creating K-ESG indicators and seeking to use them to evaluate companies.

It is obvious that attempts to quantify the results of ESG management—which cannot be fully measured numerically—will become yet another regulation for companies. If related regulatory provisions are later legislated at the National Assembly level, they could become a major burden on businesses.

If environmental regulations such as mandatory environmental disclosure, mandatory green investment, and stricter emissions trading standards are introduced first, the burden on Korean companies will inevitably grow even heavier.

Rather than relying solely on regulation, it would be more effective to provide institutional conditions that allow companies to choose ESG management voluntarily. Forcing carbon reduction or pressuring firms to use renewable energy, as in the cases of Apple or Microsoft, is not effective.

Each company has a different financial situation, and the areas in which it can produce results differ depending on technological capabilities, making it unreasonable to apply uniform regulations. At a time when operating profits and sales have fallen due to COVID and the economic downturn, this could become a burden not only on companies, shareholders, and workers, but also on the Korean economy.

When business conditions are unfavorable, improving financial conditions by securing a stable income base must take priority in order for a company to pursue its essential goals.

Even without coercion, companies are declaring ESG management because, under current circumstances, it is advantageous for corporate survival. Care must be taken to ensure that ESG, which began with good intentions, does not end up being applied as an unnecessary regulation to companies rather than remaining a voluntary movement.

Germany’s Nuclear Phase-Out Sparks Controversy Over Carbon Emissions Exceeding the EU Average

Germany, which adopted a nuclear phase-out policy, has come under controversy for emitting more carbon than neighboring countries.

According to a recent report by the British weekly The Economist, Germany’s per capita carbon dioxide emissions from 2000 to 2019 were 43% higher than the average of other European Union (EU) countries that retain nuclear power. They were even nearly twice as high as those of France, which has maintained its nuclear power policy, raising doubts about the effectiveness of Germany’s nuclear phase-out.

In 2019, Germany’s per capita carbon dioxide emissions stood at 8.52 tons, nearly double France’s 4.81 tons. France generates more than 70% of its electricity from nuclear power. It was found that the reason Germany emits more carbon than neighboring countries under its nuclear phase-out policy is its reliance on coal-fired power generation.

Last year, coal-fired power accounted for 23.8% of total power generation. Coal is Germany’s second-largest source of electricity after wind power. Nuclear power, which accounted for 22% of total power generation 10 years ago, shrank to 11.4% last year.

According to research by the American Economic Association, the decline in electricity resulting from Germany’s nuclear phase-out was replaced by coal-fired generation and imported electricity. The resulting social cost amounts to $12 billion annually (about 14 trillion won). As the economy recovers from the downturn caused by COVID-19, Germany is increasing coal use even further.

According to a report by the German think tank Agora Energiewende, Germany’s carbon dioxide emissions this year are expected to increase by 47 million tons from last year. This would be the largest increase since 1990. The Economist pointed out that “as long as Germany insists on a nuclear phase-out, it will be difficult to achieve its goal of carbon neutrality by 2045.”

Eun-kyung Kwak, Director of the Corporate Culture Center, Center for Free Enterprise (CFE)

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Original title: 기업이 ESG에 부응하려면

Author: Eun-kyung Kwak

Date: 2021-09-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24219