Financial Services Commission Vice Chairman: "We Will Enhance Transparency and Reliability of ESG Rating Agencies"

Kim So-young, Vice Chairman of the Financial Services Commission, stated on the 13th at the "Seminar on Enhancing Transparency and Reliability in the ESG Evaluation Market," jointly hosted by the Korea Exchange and the Korea Capital Market Institute, that "we will enhance transparency and reliability through the disclosure of information on the ESG (Environmental, Social, and Governance) evaluation process," and added, "We plan to organize the system for the entire ESG ecosystem, from disclosure to evaluation to investment."

Vice Chairman Kim pointed out, "There are opinions that it is difficult to trust the results because the evaluation outcomes differ among ESG evaluation agencies," and noted, "Excessive differences in ESG evaluation grades may weaken companies' motivation to improve their ESG performance." To increase the transparency and reliability of ESG evaluations, the Financial Services Commission will promote guidance for evaluation agencies and the disclosure of evaluation process information. International organizations such as IOSCO and OECD also require ESG evaluation agencies to strengthen transparency and establish conflict of interest prevention measures, while recommending that governments pay close attention to these issues.

First, internal control standards for ESG evaluation agencies will be established. In particular, there is a position that appropriate measures need to be put in place to prevent potential conflicts of interest between consulting and advisory services and evaluations, as well as conflicts of interest with affiliated company operations. Furthermore, ESG evaluation agencies will be encouraged to sufficiently disclose the entire evaluation process to the market on their own, and the system for the entire ESG ecosystem?from ESG disclosure to evaluation and investment?will be organized. It was also emphasized that the phased mandatory implementation of ESG disclosure will proceed as planned from 2025.

At the seminar, domestic ESG experts attended and discussed matters for the sound development of the ESG evaluation market.

Lee In-hyung, Senior Research Fellow at the Korea Capital Market Institute, who gave the keynote presentation, argued that the introduction of guidance for evaluation agencies is necessary to enhance the objectivity and transparency of the ESG evaluation market. He said, "Currently, both domestically and internationally, the ESG evaluation market faces issues such as differences among evaluation agencies, lack of standardization, and insufficient transparency regarding evaluation criteria," and added, "Guidance is needed on the standards and procedures that ESG evaluation agencies and their employees must comply with when conducting ESG evaluation tasks." He also stated, "The guidance should reflect the establishment of internal operating guidelines, determination of evaluation grades based on objective data, transparent disclosure of evaluation methodologies, conflict of interest prevention systems, and internal control procedures."

While the discussants agreed on the necessity of guidance, they expressed opinions that flexible application is needed since the ESG evaluation market is still in its early stages. Yoon Cheol-min, Director of the Korea Chamber of Commerce and Industry, pointed out, "Companies feel that the lack of consistency and insufficient feedback on evaluation results are the most unfair aspects related to ESG evaluations, so these issues should be clearly reflected in the guidance."

Kim Dong-soo, Director of the ESG Management Research Institute at Kim & Chang, said, "Since there are limits to direct government regulation of evaluation criteria, it is necessary to first consider measures to enhance reliability and transparency by disclosing evaluation methodologies and transaction details with evaluated agencies."

Kim Kwang-il, Director of the Fair Market Division at the Financial Services Commission, mentioned at the seminar that after comprehensively reviewing the discussions, they will prepare and announce measures to enhance the reliability and transparency of the ESG evaluation market.

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