ESG Management: Crisis or Opportunity?

Professor Yoo Yusang, Soongsil University Graduate School of Small and Medium Business.

ESG is an acronym combining the first letters of Environment, Social, and Governance, and is recognized as the three core elements for sustainable corporate management. Unlike financial statements, which focus on short-term and quantitative indicators, ESG focuses on long-term and qualitative factors to evaluate the potential for continuous corporate growth. The World Economic Forum emphasized in last year's 'Davos Declaration 2020' that corporate performance should be transparently measured not only by returns to shareholders but also by the achievement of ESG. In Europe, there are movements to use ESG as a non-tariff barrier.

With the prolonged COVID-19 pandemic increasing global concerns about sustainability, and the Biden administration proposing policies aligned with ESG management such as climate strategy, social justice, equality, and corporate transparency, ESG management has emerged as a key corporate keyword this year. National institutionalization is underway worldwide to support corporate ESG management activities, and European companies are already required to disclose non-financial information through the NFRD (Non-Financial Reporting Directive). In Korea, the Financial Services Commission announced that from 2030, ESG information disclosure will be mandatory for all KOSPI-listed companies.

According to research by Deutsche Bank and Oxford University, companies that have adopted ESG find capital procurement much easier, reduce risks, and show positive effects on financial performance as well as stock prices. The importance of ESG management as an essential corporate strategy is gradually strengthening and is expected to become a new differentiating factor leading balanced growth that contributes to the environment and society. However, for ESG management to expand further, global 'standardization' is urgently needed. Since ESG evaluates qualitative factors rather than quantitative numbers, countries around the world understand ESG differently, and there are significant differences in interpretation even among companies. There are over 600 institutions evaluating ESG worldwide, and analyses show that the same company can receive ratings differing by up to five levels depending on the institution.

According to a European Union (EU) report, 42% of companies claim to be environmentally friendly, but these claims are false or exaggerated. This is known as 'greenwashing.' Additionally, many Korean companies interpret ESG as a concept similar to CSR. In this context, the National Pension Service recently declared its intention to become a 'rule maker' by establishing ESG principles that can be globally accepted.

The ESG trend, which started with international organizations, investment institutions, and financial institutions, has rapidly spread beyond large corporations and mid-sized companies to startups, exerting significant influence. BlackRock, the world's largest asset management company, has emphasized ESG since last year and is demanding ESG information sharing and the establishment of global standards from major governments. The three major U.S. credit rating agencies also consider ESG a key evaluation indicator.

The spread of ESG management presents tremendous opportunities for startups but also very serious challenges. Unlike in the past, all financial institutions, including venture capital and private equity, now regard ESG as the most important investment criterion. Recently, ESG startups have been added to major investment targets such as fintech, big data, artificial intelligence (AI), and healthcare. However, without a clear concept or standards, whether companies will merely imitate others reluctantly and engage in 'ESG washing' or turn the COVID crisis into a new opportunity for growth remains our challenge.

Yoo Hyo-sang, Professor, Graduate School of Small and Medium Business, Soongsil University

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