"Companies Consider Profitability in ESG Initiatives... Government Should Avoid Regulatory Approach"

Hankyung Research Institute Reveals Findings on 'Improving ESG Governance and Corporate Value' in Report

Data provided by Korea Economic Research Institute

[Asia Economy Reporter Kim Heung-soon] To secure competitiveness in the global market and pursue qualitative growth, domestic companies need to consider profitability when promoting ESG (Environmental, Social, Governance), and the government should avoid approaching it from a regulatory perspective, according to a recent claim.

The Korea Economic Research Institute under the Federation of Korean Industries stated this on the 18th in its report titled "Improvement of ESG Governance and Corporate Value." According to the institute, global investment amounts using ESG as an investment indicator nearly doubled from $21.4 trillion in 2014 to $40.5 trillion last year. BlackRock, the world's largest asset management company, announced ESG as its top investment priority, and the National Pension Service also declared that it would invest half of its total managed assets in ESG by 2022.

The report evaluated that the governance (G) improvement performance of domestic companies is relatively superior compared to global companies. While global companies emphasize aspects such as executive compensation and diversity in governance, domestic companies are strengthening board independence and transparency by appointing outside directors as board chairs and separating the roles of board chair and CEO.

The Korea Economic Research Institute added that the achievements in governance improvements such as restructuring board composition by domestic companies seem to reflect the strong anti-corporate sentiment in the country, and because concerns about corporate governance were high, the relative performance in governance improvement appears higher than that of global companies.

The report also noted that although companies recognize the importance of ESG from a long-term perspective, they hesitate to adopt ESG because it does not manifest in financial performance. Regarding this, the report explained that research analyzing governance improvement and corporate value shows conflicting results: some studies indicate that ESG management and governance improvements affect corporate value, while others find no significant impact.

Furthermore, while ESG is gaining global attention as a new corporate management policy, the report emphasized that there is no definitive evidence that it guarantees corporate profitability. For example, simply responding to environmental, social, and governance issues through ESG management may reduce profitability and cause financial risks.

Lee Kyu-seok, a senior researcher at the Korea Economic Research Institute, stated, "While ESG can be positive for society as a whole, using ESG as an individual company's profitability indicator is unreasonable," and argued, "Companies need to consider models that link profitability and ESG." He added, "ESG should be encouraged as a voluntary guideline in the capital market and should not be implemented through government pressure or regulatory approaches."

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