It will be significantly improved after 11 years based on the independent ESG.

The’ESG Best Practices’ enacted in 2010 to guide listed companies’ ESG (environmental, social, governance) management will change drastically in 11 years. Concepts that can have a major impact on corporate management, such as living wages, human rights impact assessment, and intensive voting systems, as well as asset re-evaluation and revitalization of green bonds due to climate change will be introduced.

According to the financial investment industry on the 11th, the Korea Corporate Governance Service recently came up with an amendment to the ESG’s model standards that contained these details and began collecting opinions. The Corporate Governance Service was established in 2002 and is a non-profit organization affiliated with the Korea Exchange. It conducts annual ESG evaluation and analysis of agendas at the general shareholders’ meeting for listed companies. The exchange prepares guidelines related to ESG disclosure, such as corporate governance structure and sustainability management reports, based on ESG best practices. The Financial Services Commission plans to expand ESG disclosure, which is currently only available for some listed companies, to all listed companies in the securities market by 2030.

This revision of ESG best practices reflects the reality that ESG management and investment have become a trend in the global market. In the environmental field, the concept of stranded assets was introduced in which existing assets such as coal-fired power plants were unexpectedly devalued due to climate change. Companies should evaluate and disclose this impact. In the social field, a living wage was specified that pays workers an appropriate wage higher than the minimum wage.

The governance structure recommends the adoption of a centralized voting system that strengthens the authority of minority shareholders to appoint directors.

“Climate change risk, reflect in accounting”… Companies’ ESG responsibilities are much greater
ESG’s best practice standards, revised drastically in 11 years

In the future, listed companies in Korea should classify facilities, etc., whose asset values ​​rapidly decrease in the face of climate change, as’stranded assets’. Financial companies should drastically reduce their investment in companies and sectors that are passive in responding to climate change.

The revised bill of’ESG (Environmental, Social and Governance) Best Practices’ recently prepared by the Korea Corporate Governance Service included a number of contents that could have a great impact on corporate management. ESG Best Practices are a kind of’guideline’ that lists what listed companies should consider in order to conduct ESG management. The financial authorities plan to make ESG disclosure mandatory for all securities market-listed companies in stages by 2030. However, it is expected that companies will protest that if such a system is introduced too quickly, companies do not have time to properly adapt.

○“Climate change risk should be reflected in finance”

The first ESG-related model standards were established in Korea dating back to 1999. At the time, the exchange prepared a good governance structure by accepting the voice of the need to improve the governance structure of Korean companies after experiencing the foreign exchange crisis. In 2010, the Korea Exchange’s Corporate Governance Service established the best standards for environmental management and social responsibility management. Since 2011, ESG evaluations covering the environment, society, and governance have been conducted annually for more than 900 listed companies based on model standards. Based on this, the exchange is calculating the’KRX ESG Social Responsibility Management Index’.

This revision of the best practices focuses on reflecting the latest trends related to ESG in regulations related to environmental and social responsibility. The governance model standards were revised twice in 2003 and 2016, but the environmental and social sectors have never been revised in the past 10 years.

The biggest change in environmental best practices is that the risks related to climate change, such as global warming, are reflected in financial areas such as asset evaluation, financing, and accounting. Companies should be aware of the risk of direct or indirect stranded assets due to climate change. Coal-fired power plants, which were in the spotlight for being able to mass-produce electricity at low prices in the past, were cited as an example of a stranded asset. The purpose of the amendment is that the value of these risky assets should be devalued through asset revaluation in consideration of climate change, and the value of assets related to the development of renewable energy or eco-friendly technology should be increased.

It is also recommended to use eco-friendly measures such as green bonds as much as possible for financing methods. Green bonds are bonds whose issued funds are used for green projects for the purpose of improving the environment.

Financial companies were forced to lower the proportion of investment in businesses that are passive in responding to climate change or in businesses that emit large amounts of greenhouse gases such as coal-fired power plants. Environmental accounting principles were also specified, such as introducing internal carbon prices to respond to climate change. Internal carbon pricing means that companies voluntarily price carbon emissions to internalize the economic costs of greenhouse gas emissions. It also contained a message to sign up for environmental liability insurance in case of violation of environmental laws and environmental accidents.

○ Including the introduction of living wages and intensive voting system

In the social field, human rights policies were prepared so that human rights issues can be considered in all processes of business activities. This includes not only employees, but also various stakeholders such as business partners, customers, and residents of the local community. Human rights impact assessment, which identifies issues related to human rights that may arise in overall business activities and mitigates human rights risks, was also conducted for all stakeholders.

The labor practices were also changed. It was recommended that workers be paid an appropriate living wage that exceeds the minimum wage and reflects the average wage, living expenses, and income before social security. It stipulated that the system for work-life balance should include both fixed-term and non-regular workers such as in-house subcontracted workers.

It established a supply chain management strategy to support shared growth with suppliers, and ordered policies to strengthen suppliers’ competitiveness through various support programs.

In the corporate governance structure, the emphasis was placed on strengthening the rights of minority shareholders to the major shareholders of corporations. The best practice recommended that the intensive voting system be introduced when appointing directors. When a company elects two or more directors, the intensive voting system is a system that allows a small number of shareholders to give voting rights to a specific candidate by giving the voting rights to the number of directors that are elected rather than’one vote per share’.

Reporter Oh Hyeong-joo [email protected]