[Public Voices] Companies Need a Proactive Shift to Measurable ESG

In the past, corporate Environmental (E), Social (S), and Governance (G) management had a somewhat declarative meaning, but it is now evolving into a practical direction. As the Earth's average temperature rises and abnormal weather such as heatwaves, floods, and droughts become more frequent, physical and human damages to companies are becoming a reality. Moreover, companies must comply with their assigned reduction obligations to achieve national greenhouse gas reduction targets (NDCs), and to survive in export markets amid the introduction of the European Union's Carbon Border Adjustment Mechanism (CBAM) and supply chain due diligence systems, they must overcome new hurdles known as 'carbon trade barriers.'

Credit rating agencies have begun adjusting credit ratings based on companies' ESG strategies and performance information, and investors have started influencing corporate financing by withdrawing or increasing investments depending on ESG compliance. Additionally, issues related to S and G, which were previously managed at the level of corporate ethics or social responsibility, are now being regulated through laws such as the Serious Accidents Punishment Act and the Labor Standards Act. Furthermore, an increasing number of consumers decide on product purchases based on information about companies' ESG management, and a majority of the MZ generation (Millennials + Generation Z) say that ESG management is important when selecting prospective employers.

This changing situation demands the resolution of information asymmetry among stakeholders, resulting in the European Union (EU) and the United States preparing to implement systems that disclose the financial impacts of climate change-related risks. South Korea is also discussing mandatory ESG disclosures and is about to decide on detailed matters such as implementation timing and phased introduction. If climate disclosure becomes institutionalized, companies that are less prepared to measure carbon emissions during production processes or quantify physical risks, or those that disclose incorrect information, will face legal risks of lawsuits.

According to a survey by the Korea Chamber of Commerce and Industry of ESG officers from 100 domestic companies, even companies that have voluntarily disclosed ESG information express concerns about mandatory ESG disclosure. More than half of the respondents argued that, due to the lack of specific guidelines and standard platforms as well as insufficient internal preparation and capabilities, the introduction of the ESG disclosure system should be postponed. In particular, they find it even more difficult to include supply chain greenhouse gas emissions (scope 3), which have a broader scope and are harder to measure, as a disclosure target. It seems necessary for the government to be cautious about mandating ESG disclosures.

However, considering changes in the global trade and investment environment, companies cannot indefinitely delay building and implementing ESG management systems, including ESG disclosures. As the world moves toward similar ESG goals and comparable investment and business models, rather than being stuck in a fast follower strategy as in the past, Korean companies need to adopt a strategy that maximizes the first-mover advantage in new markets through proactive and preemptive investments.

The establishment and implementation of ESG management systems should be pursued proactively but must be thoroughly quantified and measurable. Companies should practice ESG goals by setting measurable Key Performance Indicators (KPIs) and transparently disclose ESG performance and related information to respond to CBAM, disclosure regulations, supply chain due diligence, and to secure support bases from consumers and investors. Since the amount of information to be managed and disclosed will increase, it is also necessary to build data infrastructure for direct and indirect carbon emissions, energy use, water consumption, waste emissions, and so forth.

While entrepreneurs maximize shareholder value, ESG should be recognized not merely as a compliance measure with laws and regulations but as a goal that can ensure the long-term success of a company. It is time for an active mindset shift to operate companies by reflecting ESG perspectives throughout the entire process of strategy formulation and adoption.

Park Yang-su, Director, Korea Chamber of Commerce and Industry Sustainable Growth Initiative (SGI)

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