Recent ESG Trends in Korea

In the first half of 2023, ESG trends in Korea have continued to be dynamic as in the past few years. The Federation of Korean Industries (FKI) conducted a survey on the “2023 ESG Trend” among 100 of the top 500 companies, ranked by sales. 93% of respondents indicated that ESG management would scale up from last year. Key issues of interest were mandatory ESG disclosure, improvement of ESG evaluation, and the response to the EU Directive on Corporate Sustainability Due Diligence. On the other hand, the Korean government is taking steps to strengthen its policies to promote ESG management. To this end, in February 2023, it established the “Private-Public Joint ESG Policy Council,” comprised of relevant government agencies (e.g., the Ministry of Strategy and Finance, the Ministry of Commerce, Industry and Energy, the Ministry of Environment and the Financial Services Commission) and the private sector organizations (e.g., the Korea Chamber of Commerce and Industry and the Korea Federation of Small and Medium Business) and has been holding regular meetings. The key issues in the ESG trend during the first half of 2023 are explained in further detail below.

ESG Disclosure

In January 2021, the Financial Services Commission announced its plan to adopt mandatory ESG disclosure rules for the first time. According to the plan, ESG disclosure, which is currently non-mandatory self-regulation, will become mandatory for KOSPI-listed companies with assets exceeding 2 trillion KRW from 2025 and for other listed companies by 2030. Under the above schedule, we are witnessing the movement towards institutionalization of disclosure by applicable companies, including disclosure items and criteria, in line with the global disclosure trend. With the adoption or announcement of the EU’s European Sustainability Reporting Standard (ESRS), the US SEC Climate Disclosure Mandate, ISSB’s S1 (General Requirements), and S2 (Climate Disclosure), Korea is also preparing its own disclosure standards and timelines for mandatory disclosure by establishing the Korea Sustainability Standards Board (KSSB). The KSSB was established within the Korea Accounting Institute in February 2023 to review the disclosure policy. Further, the Korean government has formed the ESG Financial Promotion Group at the Financial Services Commission.

Key issues in the current disclosure policy include the following:

• Whether to specify the schedule for mandatory disclosure to segment the timing of mandatory disclosure according to the size of corporate assets, and mandate ESG disclosure to KOSDAQ-listed companies
• Whether to operate the public disclosure channel through the Korea Exchange or a statutory public disclosure (corporate report)
• What standards will be established by referring to ISSB, EU ESRS, TCFD, GRI, etc.?
• Whether the disclosure should be made simultaneously with the disclosure of the corporate report, which is fixed for March.
• Whether there should be a mandatory disclosure of Scope 3 greenhouse gas emissions and the level of disclosure requirement

The Financial Services Commission is expected to take a stance on these issues and announce a roadmap for mandatory disclosure late this year.

Taking action on EU Directive on Corporate Sustainability Due Diligence

As the importance of human rights and environmental protection in the supply chain increases, the EU’s supply chain due diligence rule – the Corporate Sustainability Due Diligence Directive (CSDDD) – is expected to be finalized in the near future. This will directly affect Korean exporters, as they are part of the global supply chain ecosystem. In particular, small and medium-sized suppliers are highly concerned about the lack of capacity to respond to the supply chain due diligence.

There are about 18,000 Korean domestic companies (16,000 being SMEs) that export to the EU. Major challenges for exporters in Korea include (i) lack of internal resources to cope with the new rules; (ii) cost of consulting, training, etc.; (iii) lack of information on ESG trends; and (iv) lack of awareness about the importance of ESG management by business partners.

As a result, business organizations such as the Korean Chamber of Commerce and Industry and the Korea Federation of Small and Medium Business have strengthened their joint efforts to respond to the EU CSDDD, while some large companies have begun providing necessary support such as ESG management inspection and consulting to their partners. On the other hand, through the Private-Public Joint ESG Policy Council, companies are submitting various proposals such as expanding education and training for professionals who need to respond to supply chain due diligence, building an ESG data integration platform to reduce the administrative burden of due diligence, and providing consulting support customized for specific industries. The government has announced its support for supply chain due diligence consulting for small and medium-sized companies facing difficulties, as well as educational support for training experts within those companies.

On the other hand, similar to the EU CSDDD, enacting a Korean version of the supply chain due diligence rule for domestic companies and domestic importers is being advocated. In line with the movement, the Bill on Human Rights and Environmental Protection for Corporate Sustainability was submitted to the National Assembly and signed by 15 N.A. Members in early September but it is necessary to monitor the progress of actual legislation.

ESG Assessment Improvements

Similar to the global ESG evaluation agencies like MSCI, S&P, and Sustainalytics, there are several evaluation institutions in Korea, such as Korea ESG Standards Institute (KCGS), Sustinvest, and Korea ESG Research Institute, which are the three leading evaluation institutions. However, domestic and international companies as well as the academia are consistently pointing out that the evaluation results are unreliable and that the evaluation system lacks transparency. These issues are likely to weaken the companies’ motivation to improve ESG performance, and thus, need to be resolved. As a result, the International Organization of Securities Commissions (IOSCO) announced its top 10 recommendations for ESG evaluation in November 2021. OECD is also expected to revise the G20/OECD corporate governance principle in the second half of 2023. Additionally, Japan announced the code of conduct for ESG evaluation agencies in December 2022.

Similarly, Korea has also established a consultative body for ESG evaluation agencies to establish an “ESG evaluation agency guidance” that includes guidelines for internal control of the evaluation agency, data collection and management of private information, disclosure of the evaluation system, and management of conflicts of interest. The guidance has been implemented from September 2023. In addition, the Korean government announced that it will observe the implementation of the guidance and review ways to legislate the guidance if necessary.

Policies to prevent greenwashing

Prevention of greenwashing is also a crucial task for ESG management. Korea regulates labeling and advertising that makes a pro-environment claim under the “Act on Fair Labeling and Advertising” and the “Environmental Technology and Industry Support Act”. Under the Act on Fair Labeling and Advertising, the Korea Fair Trade Commission administers the “Environmental Labeling and Advertising Review Guidelines”. In June 2023, the Fair Trade Commission issued an administrative notice to enhance the effectiveness of the Guidelines by adding various examples.

• Examples of unfair labels and advertisements prohibited by law (e.g., false, exaggerated, deceptive, or misleading statements, slander, etc.)
• Detailed guidelines for examination of specific terms and expressions shall be reorganized during the life cycle of goods (three stages: (i) composition; (ii) production and use; and (iii) disposal and recycling of raw materials or resources)
• Business operators shall indicate goals, plans, or brands they intend to achieve in the future in relation to the environment; materialize standards for advertising, etc.

The Ministry of Environment also announced its plan to amend the Environmental Technology Industry Support Act this year to strengthen its policy to prevent greenwashing by adding a provision on fines, which was previously deemed insufficient.

ESG Framework Act Enactment Move

In order to promote the spread of ESG management, a draft “Framework Act on Environmental Social Governance” (ESG Framework Act) was announced at an open meeting in July under the leadership of National Assembly Member Lee Won-wook. The key point is to reflect ESG in management and to establish a system that can receive various incentives from the government if an agreement on ESG management is signed with the government. It also contains a comprehensive government-level plan to induce corporate ESG management.

Since the draft bill on the ESG Framework Act has no international origin, it attracted the attention of companies, but it is still in the early stages of discussion. Thus, it remains to be seen whether it would be officially proposed and enacted into law. The companies that participated in the debate agreed with the purpose of the bill, which, in theory, is expected to provide incentives to promote ESG. However, they also expressed concerns that it might impose a regulatory burden on companies rather than serving as pro-business legislation.

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