The Bank of Korea Excludes Companies Not Meeting ESG Standards from Investment Targets

Basic Direction and Future Plans for ESG Management of Foreign Currency Assets by the Bank of Korea

[Asia Economy Reporter Eunbyeol Kim] Amid growing domestic and international interest in Environmental, Social, and Governance (ESG) issues, the Bank of Korea has decided to establish basic guidelines for managing foreign currency assets with ESG considerations. In particular, it will exclude companies involved in ESG-related controversies from investment targets.

On the 28th, the Bank of Korea stated, "Regarding the management of foreign exchange reserves, there is an increasing demand for socially responsible investments and public responsibility investments such as climate change response within the scope of meeting the safety, liquidity, and profitability requirements of foreign currency assets." It added, "To respond more actively to these demands, we plan to establish basic guidelines for ESG management of foreign currency assets and reflect them in future operations."

Accordingly, the Bank of Korea plans to gradually upgrade from the current stage of investing in ESG products to a stage where ESG factors are broadly applied to all foreign currency assets.

As an initial step in the ESG management guidelines, the Bank of Korea announced it will promote the 'negative screening' strategy, which is widely used and easy to implement among ESG management strategies. The negative screening strategy has the advantage of effectively responding to reputational risks caused by ESG issues by excluding companies involved in ESG-related controversies from investment targets.

In the long term, the Bank of Korea is considering introducing an ESG integration strategy that fully applies ESG factors throughout the entire foreign currency asset management process.

The Bank of Korea plans to utilize externally and objectively verified negative screening indices and pilot operate funds that track these indices through entrusted assets. Based on the evaluation results of the pilot operation, it plans to expand the scope of negative screening application to all entrusted assets. In the medium term (within 2 to 3 years), it will consider establishing its own negative screening system for all foreign currency assets.

Regarding ESG management of foreign currency assets, the Bank of Korea has gradually expanded ESG investments within the scope of meeting the safety, liquidity, and profitability requirements, which are the objectives of foreign currency asset management. ESG stocks were first invested in through entrusted assets in December 2019, based on the judgment that they meet public responsibility demands and contribute to stable management performance of foreign currency assets, and the scale has expanded to $1.22 billion as of the end of June 2021.

ESG bonds have been steadily purchased through direct and entrusted assets in accordance with the management standards amid market expansion trends, reaching $5.9 billion as of the end of June 2021.

The Bank of Korea stated, "At a time when the sustainability crisis such as climate change is intensifying and the need for a societal response is growing, the Bank of Korea’s proactive adoption of ESG management strategies is expected to serve as a model case for other countries."

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