"KCGS ESG Best Practice Guidelines Amendment, a Heavy Burden on Companies"

Delivering a Statement to the Rescue Team

Huh Chang-soo, Chairman of the Federation of Korean Industries / Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Kim Heung-soon] "This is a comprehensive version of corporate regulations related to ESG (Environment, Social, Governance)." "If we try to comply with everything, is sustainable growth really possible?"

These are the reactions from companies regarding the revised ESG Model Code of the Korea Corporate Governance Service, which is currently undergoing a public consultation process. The Federation of Korean Industries (FKI) announced on the 31st that it has submitted an opinion letter on the 'Revised ESG Model Code' containing these points to the Governance Service.

The FKI stated, "We strongly agree with the purpose of sustainable growth through ESG management," but pointed out that "rapidly strengthening ESG standards is a burden for companies with different circumstances." Especially since this Model Code is expected to be reflected in the Governance Service's future ESG evaluation criteria, companies are highly concerned. The FKI also expressed worries that, as global ESG rating agencies have varying evaluation standards, this might just add another standard for companies to worry about.

Disappointment over unilateral regulations without social consensus or case accumulation on stranded assets

The FKI argued that although many companies recently prioritize environmental considerations such as carbon reduction and climate change throughout all stages of corporate activities including product development, sufficient research and time are needed to introduce related systems. A representative example is the newly incorporated concept of 'stranded assets' in this Model Code. Stranded assets refer to facilities such as coal and thermal power plants whose asset value rapidly declines due to climate change, which are pre-classified as stranded assets (risk of depreciation or debt conversion).

The FKI pointed out, "Stranded assets are a concept not yet explicitly reflected in accounting standards such as K-IFRS (Korean International Financial Reporting Standards), and if only certain parts are emphasized and companies are forced to reflect them in accounting, there is a risk of distortion in overall corporate value." They added that in terms of methodology, it is necessary to discuss introduction only after sufficient case accumulation and analysis have established specific methods on how to concretely convert the book value of assets into liabilities, to minimize side effects.

The FKI also noted that the newly introduced internal carbon pricing requires social discussion and consensus. Internal carbon pricing is a system where companies assign a price to carbon emissions to internalize the economic costs associated with greenhouse gas emissions. Regarding this, the World Bank stated, "It is important to carefully plan such policies including carbon pricing and to conduct social consultation processes on the benefits they may bring to local communities, workers, and the environment."

Controversy over introducing unfamiliar regulations from a global standard perspective
Detailed guidelines presented and possible score deductions for non-compliance
Opaque evaluations also cause dissatisfaction among companies

The revised draft also includes a section on human rights management. As related obligations, the Model Code specifies establishing human rights-related operational departments, conducting human rights impact assessments, operating human rights grievance channels, monitoring human rights management, and disclosing the status of human rights management.

The Governance Model Code states, "The board of directors is advised to establish internal regulations related to CEO succession, including setting the duration, responsible parties, and related procedures for each stage of the process." Regarding this, the FKI pointed out that succession regulations are an unfamiliar system even from a global standard perspective, and questioned whether it is realistically possible to set such details in advance.

Meanwhile, the FKI added that the Governance Service's ESG evaluations are also problematic. Companies subject to evaluation find it difficult to review which areas to focus on for improvement beforehand because detailed criteria are not disclosed. They criticized the evaluation as a black box where the evaluated parties cannot know in advance how the evaluation is conducted. An FKI official said, "We plan to actively encourage companies' ESG activities and widely disseminate best practices in the future, but we will also actively voice concerns about imposing excessive burdens on companies."

This content was produced with the assistance of AI translation services.