[Insight & Opinion] The Future of ESG Management

[Asia Economy] The ESG (Environmental, Social, and Governance) boom that began at the end of 2020 was remarkable. ESG became the top priority in corporate management, and there was a widespread sense of crisis that companies failing to properly implement ESG would face existential threats. Many institutions produced numerous reports related to ESG, and companies busily learned the concept of ESG while simultaneously preparing for ESG evaluations. ESG management strategy launch ceremonies were held almost daily, and ESG-related content began to be added to every homepage. The government also stepped in to establish disclosure standards and evaluation criteria related to corporate ESG.

Two years later, in 2022, ESG remains a hot topic among companies, but many concerns persist. The mandatory human rights due diligence and supply chain management, which are being concretized mainly in Europe, are placing a significant burden on companies. Although the obligations are becoming clearer, many aspects regarding their scope and methods remain ambiguous.

On the other hand, questions are being raised about whether ESG principles are truly justified. It is argued that the reduction or suspension of new mining, resource exploration, and investment due to ESG has increased dependence on a few energy and mineral resource-supplying countries, thereby creating strategic vulnerabilities for the United States and Europe, which led to Russia’s invasion of Ukraine. In other words, ESG management and investment are criticized for failing to consider risks. Amid this situation, criticism and skepticism toward ESG management are emerging.

In fact, the core of ESG management is not about creating “good companies” but about building companies that generate stable profits while effectively managing potential long-term risks. Considering the flow of social change, it was judged that future crises in corporate activities are likely to arise from Environment (E), Social (S), and Governance (G), and this is why the acronym ESG was formulated and presented. It should not be forgotten that fundamentally, ESG management is risk management, and responses should be adjusted as risks change.

Rising energy and raw material prices should be addressed by reducing energy and raw material consumption and improving efficiency, which naturally leads to reduced greenhouse gas and pollutant emissions. Reflecting the demands of increasingly diverse corporate members, represented by the MZ generation (Millennials + Generation Z), is also natural, and this essentially corresponds to the S (Social) aspect of ESG. Resolving the rights gap between major shareholders and minority shareholders during mergers, acquisitions, and corporate splits is also a direction that must be pursued, which ultimately connects to corporate governance.

If these activities are not properly carried out, companies may face operational difficulties due to rising costs as well as social criticism and institutional sanctions. Therefore, effectively managing and responding to these issues is natural and is the core of ESG management.

Taking one’s eyes off complex evaluation criteria and instead contemplating the direction in which companies and society are heading, and what to prepare for while continuously generating profits, is the essence of ESG management. The ultimate goal and challenge for companies is survival, and remembering that ESG is a major risk companies must consider will make the direction and objectives of ESG management clearer and more definite.

Choi Jun-young, Specialist, Yulchon LLC

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