As uncertainty in the global capital markets rises, shareholders are showing greater interest in environmental, social and governance (“ESG”) issues, in addition to standard financial factors such as revenue and operating income.  In response to this trend, Korean regulatory and financial supervisory authorities are preparing and implementing various policies to create an investment climate that actively utilizes companies’ ESG information and carries out effective ESG-based investments.

1.   National Pension Service’s ESG Evaluation System and Expansion of ESG Investments

Beginning in 2021, the National Pension Service (the “NPS”) will apply ESG criteria when making decisions to invest in domestic stocks and bonds.  Furthermore, it expects to increase its ESG investments up to 50% of its total assets by 2022.  In accordance with this policy, the NPS has mandated a research agency to introduce a new evaluation system that integrates ESG criteria.  Using the results of this research, the NPS will examine its current ESG evaluation system applicable to its holdings of domestic stocks and will establish a new process that includes additional factors and ESG indicators to optimize its ESG processes.  The NPS will also establish an ESG-based evaluation model and indicators that will apply to domestic bonds.  In the future, the NPS is expected to utilize ESG evaluation results to incorporate follow-up measures such as “negative screening” or exercise of shareholder rights, thereby seeking long-term profitability and stability.  
 

2.   Korea Exchange’s New Policy Expanding Disclosure of ESG Information and Facilitating ESG Investment

In 2020, the Korea Exchange (the “KRX”) established a new “ESG team” to review companies’ ESG-related disclosures and to foster an environment conducive to ESG investment.  Additionally, on October 27, 2020, the KRX joined the international “Taskforce on Climate-Related Financial Disclosures.”  As the first Korean securities-related institution to join the Taskforce, the KRX intends to enforce its plan to expand requirements for ESG-related disclosures and facilitate socially responsible investments.  Further, the KRX’s newly formed “ESG Advisory Committee,” comprised of eight outside experts in ESG-related fields, held its inaugural meeting on November 3, 2020.  The ESG Advisory Committee will advise the KRX on policies and systems relevant to ESG-related investing.
 

3.   FSC’s New Policy Expanding Disclosure of ESG Information

At the Financial Policy Advisory’s meeting held on July 24, 2020, the Financial Services Commission (the “FSC”) announced that it will require companies to expand disclosure of ESG-related information, in line with socially responsible investment considerations.  In particular, the FSC will gradually expand the scope of companies subject to mandatory disclosure of corporate governance reports.  While only a limited number of KOSPI-listed companies (only companies with total assets of KRW 2 trillion or more) are currently subject to such disclosure requirements, all KOSPI-listed companies will be required to disclose their corporate governance reports by 2026.  The FSC also intends to establish “Guidance for Disclosure of Environmental and Social Information” by the end of 2020.
 

4.   Proposed Partial Amendment to Financial Investments Services and Capital Markets Act (the “FSCMA”)

In line with the other policy changes at the KRX and the FSC, Korean legislators have introduced new laws or amendments to strengthen ESG-related public disclosures.  Recently, lawmakers have introduced a partial amendment to the FSCMA, which would require listed companies to make additional disclosure of matters pertaining to corporate social responsibility in their business reports.

Implications

Regulatory authorities like the KRX and the FSC, which oversee public disclosure of listed companies, are actively planning to implement and enforce ESG-related disclosures policies and expand the scope of disclosure.  Given the foregoing, we expect a greater number of corporations to be subject to these new disclosure requirements in the near future.  As mentioned above, only a limited number of KOSPI-listed companies are currently subject to the FSC’s revised corporate governance reports.  However, companies listed on other exchanges like the KOSDAQ and KONEX may be subject to further disclosure in the future.  

Furthermore, in light of the NPS’ announcement that it will begin to apply its ESG evaluation criteria and indicators when making investments in domestic shares and bonds starting in 2021, we expect domestic institutional investors and ultimately the general public to increase their interest in ESG-based investments and begin to expect disclosure of related information from companies. 

In light of the expanded requirements, listed companies should be prepared to make ESG-related disclosures.  To this end, companies should establish their own ESG information management systems and create and/or strengthen internal ESG-related policies and regulations.  Finally, companies should continue to closely monitor changes in ESG-related disclosure policies and regulations to ensure they remain in compliance.