[Desk Column] ESG and Efficiency

[Asia Economy Reporter Jeon Pil-su] “Recently, in many areas of society, a culture has developed where inefficiencies are overlooked as long as ESG (Environment, Social, Governance) is prioritized.”

Major economic organizations such as the Korea Employers Federation and the Federation of Korean Industries have publicly opposed the so-called ‘ESG 4 Acts’ introduced by former Democratic Party leader Lee Nak-yeon. These economic groups submitted related opinions to the relevant committees of the National Assembly, stating, “With ESG becoming the biggest issue for companies, businesses inevitably have to consider not only the intrinsic value of ESG implementation but also efficiency as an important factor.”

The ESG 4 Acts are partial amendments to the Act on the Management of Public Institutions, the National Finance Act, the National Pension Act, and the Act on Procurement Business. They require that public institutions’ management activities, the operation of public pension funds, and public procurement procedures must consider Environment (E), Social (S), and Governance (G) factors and reflect the degree of effort in evaluations. Economic organizations pointed out that these bills could undermine core values such as the profitability of fund management and operation, fairness and efficiency in public procurement, and the financial soundness of public institutions.

Simply put, forcibly imposing ESG could reduce efficiency and lead to poor performance, so it is not an issue that should be mandated by law. Taking the National Pension Fund’s investments as an example, it should generate high returns to provide substantial benefits to pension subscribers, but if profitability is sacrificed for sustainability, can it really generate adequate returns?

At first glance, this sounds reasonable. ESG mostly involves increased costs. To improve ESG scores, companies inevitably have to give up some profitability. It is true that ESG can reduce management efficiency. I also agree with the perception that ESG should be a voluntary choice by companies, not something to be enforced by law.

However, the recent public opposition by economic organizations is regrettable in many respects. The ESG 4 Acts apply to public institutions, not private companies. Unlike private companies that prioritize profitability, one of the main goals of public institutions is public interest. The reason ESG has become a key management issue is ‘sustainability.’ The ESG concept arose from the recognition that focusing solely on short-term profits cannot sustain future generations. If public institutions, which should pursue public interest, postpone ESG for the sake of efficiency, the establishment of ESG in our corporate environment will inevitably be distant.

This stance also conflicts with recent domestic and international corporate trends. This year, there has hardly been a day without news related to corporate ESG. Just this month, Lotte, KCC, and Shinhan Financial Group have successively released materials on their ESG achievements and goals. According to the economic organizations’ argument, these companies’ ESG efforts either do not sacrifice efficiency or these companies do not understand management efficiency well.

Shell, the largest oil company in Europe based in the Netherlands, is planning to sell its Texas oil fields, which account for 6% of its annual oil production ($10 billion), to raise investment funds for wind, hydrogen, and solar industries. British Petroleum (BP) declared that it will reduce oil and gas production within ten years and stop fossil fuel development in new countries. Instead, it plans to produce biofuels from sugarcane grown in Brazil and expand investments in hydrogen energy. To those who prioritize efficiency, these actions may seem crazy, but this is the ESG of global companies.

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