"Major Construction Accidents, Weak Governance... Need for Safety Expert Directors and Shareholder-Friendly Policies"

[Asia Economy Reporter Ji Yeon-jin] Amid ongoing major accidents at construction sites, including the collapse of an apartment building by HDC Hyundai Development Company in Gwangju, an analysis suggests that such accidents stem from vulnerable governance (G).

According to the 'Responsible Investment Strategy from an ESG Perspective' report published by Hanwha Investment & Securities on the 30th, the construction sector is considered a business highly affected by climate change due to the large amount of greenhouse gases emitted from building construction to usage and disposal. In particular, while recognizing opportunities such as improving energy efficiency and renewable energy to enhance competitiveness, it also involves regulatory compliance costs and risks associated with national greenhouse gas emission regulations and physical hazards.

Socially, many violations related to waste management laws, air quality preservation laws, noise, and particulate matter have been found due to the issue of abandoned waste highlighted at many recent construction sites. Since local ordinances vary by jurisdiction across the country, the cost of regulatory compliance is higher compared to other industries.

Repeated administrative actions at construction sites, if escalated beyond fines to work stoppages or construction halts, can lead to additional construction costs (indirect costs) due to extended project periods, necessitating prior efforts to comply with local ordinances and regulations. Safety accidents can quickly escalate into secondary or major accidents due to momentary negligence, making education and monitoring crucial for employees’ awareness and fundamental behavioral changes.

Due to these risks, it is pointed out that the construction sector requires a company-wide control tower role at the board level, including the CEO, to eradicate major accidents related to environment and safety. It is necessary to appoint directors with expertise in environment and safety and review the decision-making system.

Park Se-yeon, a researcher at Hanwha Investment & Securities, stated, "With the enforcement of the Serious Accident Punishment Act and the increasing responsibility companies bear for safety accidents, the importance of ESG and shareholders’ voices are growing, making safety-related risks a valuation discount factor for construction stocks." She added, "The resolution of valuation discounts caused by this ultimately depends on construction companies, which need to establish more thorough safety management and accident prevention measures, and present compensation to shareholders commensurate with related risks." Based on their abundant financial capacity, construction companies are also required to actively expand new businesses (E) or strengthen shareholder return policies (G).

However, Park noted, "Despite the highlighted safety-related risks, it is necessary to consider the sound fundamentals of construction companies. Existing investment points in domestic housing (potential regulatory easing, supply expansion), overseas construction (improved order environment and new contract achievements), and new businesses (investment, contract visibility) are all still valid." She added, "Since construction sector valuations have significantly declined, continuous attention is needed."

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