As ESG Investment Grows, Credit Rating Agencies Enter Certification Business One After Another

Bond Issuance Market Reaches 29 Trillion Won... Concerns Over Incorporation into Corporate Credit Ratings

[Asia Economy Reporter Minji Lee] As interest in ESG (Environmental, Social, and Governance) investment expands, domestic credit rating agencies are accelerating their efforts, such as strengthening ESG bond evaluation tasks.

According to industry sources on the 5th, reflecting investors' high interest in ESG, credit rating agencies are actively engaging in bond evaluation businesses. Last month, Korea Credit Rating (KCR) announced that it would be the first among domestic credit rating agencies to enter the ESG bond certification business. KCR plans to evaluate all stages, including whether the bonds issued by companies fall under the ESG bond category and whether the funds were executed according to the plan.

The domestic ESG won-denominated bond issuance market has grown from 500 million KRW in 2013 to 29 trillion KRW as of last year. Last year, companies such as POSCO, Hanwha Energy, Shinhan Financial Group, Hyundai Card, SK Energy, and major public enterprises issued ESG bonds.

NICE Credit Rating also plans to consider entering the ESG-related evaluation methodology and certification business, considering the growth trend of the ESG bond market. Korea Ratings will not enter the certification business but will incorporate ESG factors as evaluation elements.

ESG investment refers to considering non-financial factors such as environment, society, and governance, focusing on corporate sustainability. Globally, as major pension funds engage in ESG investment, the ESG market is expanding. According to data from fund rating agency Morningstar, the amount of new money flowing into ESG funds last year was $20.6 billion, about four times the previous year's $5.5 billion. As of 2018, the global assets managed under socially responsible investment strategies were approximately $30.68 trillion, a 34% increase compared to two years prior. The countries where ESG investment is most developed worldwide are advanced countries such as Europe (46%) and the United States (39%), accounting for more than 80% of the total regional share. In terms of ESG investment growth rates as of 2018, Japan (307%), Australia and New Zealand (46%), and Canada (42%) showed high growth.

Although major global funds are flocking to ESG investment, the domestic market is still in its infancy. Most domestic ESG investments are centered around the National Pension Service (NPS), and as of 2018, the NPS's ESG investment scale was 2.67 trillion KRW, accounting for only 4% of total assets. Accordingly, the NPS confirmed ESG-related factors as a key investment philosophy in its fund management principles last year.

Credit rating agencies are cautious about separately reflecting ESG as a major evaluation factor affecting corporate credit ratings. Yang Jin-soo, head of the evaluation standards office at Korea Credit Rating, explained, "There is no clear correlation proven enough to explicitly include ESG as an evaluation factor in credit ratings," adding, "Until the ESG market grows further, ESG will continue to be implicitly reflected in credit rating evaluation factors."

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