ESG Warning That Only Looks Plausible on the Surface... "Policy Measures Needed for Prevention"

"ESG Washing May Cause Confusion Among Various Investors"

[Asia Economy Reporter Park Sun-mi] As the scale of ESG (Environmental, Social, and Governance) investments expands, there is a growing call for policy measures to prevent 'ESG washing,' which superficially packages companies or products as ESG-friendly.

Lee Si-yeon, a research fellow at the Korea Institute of Finance, stated in a recent report titled "Increasing Risks of ESG Investment and Policy Implications" that "Concerns about ESG washing are rising due to the opacity of evaluations and uncertainty in investment criteria," adding, "ESG washing refers to the risk that companies or products may be perceived as ESG-friendly merely through naming, promotion, or marketing."

Domestic and international rating agencies have recently strengthened ESG evaluations by enhancing environmental assessments to produce ESG ratings for individual companies. However, ESG evaluations consist of very diverse components, and the evaluation indicators and methods vary significantly between agencies, resulting in low consistency in evaluation outcomes for the same company. Furthermore, even for the same company, the method of combining evaluations across different areas is unclear, which may lead to confusion among various investors in future investments based on the final integrated ESG rating.

Lee emphasized, "For more accurate ESG evaluations, it is necessary to expand the scope of ESG disclosure information by companies while focusing on strengthening regulations and supervision so that investors can transparently understand how rating agencies derive their evaluation grades." He also advised, "It is important to carefully establish public definitions and classifications related to ESG, such as green industry classification systems."

He continued, "There is also a need to establish appropriate financial consumer protection measures regarding the responsibilities of financial investment firms, such as asset managers, in handling ESG investment products," adding, "Supervisory authorities need to strengthen monitoring to ensure that financial investment firms clearly disclose how they reflect each of E, S, and G, and do not neglect their fiduciary duties related to ESG investments."

Meanwhile, movements to prevent ESG washing and strengthen investor protection are also emerging overseas.

Lee explained, "The U.S. Securities and Exchange Commission (SEC) is reviewing compliance with fund naming regulations under the Investment Company Act, which require that at least 80% of the fund's assets correspond to its name, to prevent investors from being misled or deceived by fund names." He added, "The European Securities and Markets Authority (ESMA) has presented to the European Commission that as demand for ESG products increases, appropriate regulatory requirements to ensure product quality must exist, and the need for regulations related to ESG rating issuance and evaluation is growing."

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