52.2% of Export Companies Feel Contract Cancellation Risk Due to ESG Deficiencies

Discussion, 52.2% of 300 Export Companies Surveyed Responded
"Possibility of Contract and Order Cancellation Due to Insufficient ESG Levels"

[Asia Economy Reporter Jeong Dong-hoon] As the European Union (EU) Supply Chain Due Diligence Act emerges as a global ESG (Environmental, Social, Governance) issue, more than half of domestic export companies are reportedly feeling a risk of contract/order cancellations from primary contractors due to insufficient ESG management within their supply chains.

According to a survey titled "Status and Challenges of Export Companies' Response to Supply Chain ESG Due Diligence," conducted by the Korea Chamber of Commerce and Industry (KCCI) targeting 300 domestic export companies, 52.2% of respondents felt there is a high possibility that contracts or orders could be canceled by their clients (primary contractors) in the future due to inadequate ESG management levels within their supply chains.

When primary contractors conduct ESG due diligence, preparedness among these companies was also found lacking. In response to the question about their "level of preparedness for ESG due diligence," 77.2% answered "low" (41.3% very low, 35.9% somewhat low), whereas only 22.8% responded "high" (1.2% very high, 21.6% somewhat high).

Specifically, when asked about their "response level at each due diligence stage," more than half (58.1%) answered "no response system," indicating many are completely unprepared, and only 27.5% reported being at the "preparation stage," which is a basic level. This suggests a need to develop support measures for supply chain due diligence targeting partner companies.

Only About 10% of Partner Companies Have ESG Due Diligence Experience...Urgent Need for Support in Diagnosis, Evaluation, and Consulting

Regarding whether primary contractors have conducted "ESG due diligence, diagnosis/evaluation, and consulting experience" for partner companies within their supply chains, only about 10% responded affirmatively across categories: ESG due diligence (8.8%), diagnosis/evaluation (11.8%), and consulting (7.3%), indicating urgent need for policy support.

Cho Young-jun, Director of the KCCI Sustainability Management Institute, stated, "Generally, large corporations, which are the clients, perform ESG management relatively well and systematically manage their partner companies. However, small and medium-sized enterprises (SMEs) and mid-sized companies located in the middle of the supply chain are still inadequately prepared for ESG and face the double burden of responding to clients' ESG demands while managing lower-tier partners."

How much budget can domestic companies allocate for ESG management? According to the survey, respondents most frequently selected "less than 500,000 KRW" for ESG due diligence (29.9%), "between 10 million and 20 million KRW" for ESG consulting (26.7%), and "less than 10 million KRW" for sustainability report production (35.1%).

'Lack of Expert Personnel' and 'Cost Burden' Cited as Difficulties...Prioritize 'Industry-specific Guidelines and Cost Support' as Key Policy Tasks

Companies surveyed identified the most important ESG issues by category as "carbon emissions" (47.2%), "industrial safety and health" (71.8%), and "fair and transparent corporate culture" (66.1%).

In this regard, Professor Lee Jae-hyuk of Korea University explained, "As new generations such as the MZ generation become mainstream, companies are influenced by social trends that emphasize fairness and justice. The introduction of the Serious Accident Punishment Act and the 52-hour workweek system has raised awareness of the importance of safety and human rights in industrial sites, which is reflected in the survey results."

Respondents cited the "biggest difficulty related to supply chain ESG due diligence" as "lack of internal expert personnel" (48.1%), followed by "cost burden for diagnosis, consulting, and education" (22.3%) and "lack of information on supply chain ESG due diligence" (12.3%).

Finally, regarding "policy tasks necessary for smooth implementation of supply chain ESG due diligence," companies most frequently selected "provision of industry-specific ESG guidelines" (35.5%), followed by "support for ESG due diligence costs" (23.9%), "support for partner companies' ESG education and consulting costs" (19.3%), and "financial support for ESG infrastructure and system establishment" (16.3%).

Woo Tae-hee, Executive Vice Chairman of KCCI, emphasized, "With the EU's draft supply chain due diligence standards announced earlier this year and Germany's Supply Chain Due Diligence Act coming into effect from January next year, export companies are on high alert. Companies that manage their supply chains well will gain competitiveness in the global business ecosystem. KCCI will continue to support export companies in supply chain ESG due diligence, consulting, and expert personnel training."

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