The Korea Corporate Governance Service (the “KCGS”) has announced an amended version of the ESG Best Practice Guideline (the “ESG Guideline”) on August 5, 2021.
The KCGS is the only entity in Korea that publishes the ESG Guideline to present guidance for sound ESG (Environmental, Social and Governance) management of Korean companies. The ESG Guideline has been used in the KCGS’s ESG evaluations as well as referenced in Korean listed companies’ own ESG management standards and various governmental policies.
Since its publication in 2010, there has not been any amendment to the environmental and social sections of the ESG Guideline (the “Environment Guideline” and “Social Guideline,” respectively). As for the governance section (the “Governance Guideline”), since its initial publication in 1999, there have been two amendments in 2003 and 2016, respectively. In line with the global trend where the ESG-related disclosures and responsible investments are expanding, the KCGS has announced the draft amendment to the ESG Guideline on March 10, 2021, and has published the finalized amendment to the ESG Guideline on August 5, 2021 after a public comment period and a public hearing.
Major Contents of the Amended ESG Guideline
1. Environmental Guideline
In order to promote a company-wide, comprehensive environmental management, the Environmental Guideline has newly organized its chapters as “Leadership and Governance,” “Risk Management,” “Operation and Performance” and “Communication with Stakeholders,” from the previous chapters consisting of “Planning,” “Implementation,” “Evaluation” and “Improvement.”
Among the three sections of the ESG Guideline, the Environmental Guideline has witnessed the most changes, actively incorporating major aspects of global environmental and climate change guidelines, such as Carbon Disclosure Project and Task Force on Climate-related Financial Disclosures which are voluntary disclosure systems developed in response to the worldwide increase in demand of environmental disclosures.
The following two amendments to the Environmental Guideline are the most noteworthy: (i) a recommendation for companies to quantify their environmental costs and benefits arising from their environmental management activities to implement and employ environmental accounting, and (ii) the introduction of an “internal carbon price” concept as an evaluation criterion in order to take into account the economic costs of internal greenhouse gas emission as domestic and international regulations on greenhouse gas emissions, such as the emission trading system and carbon tax, have tightened.
2. Social Guideline
While previously classified as “Workers,” “Business Partners and Competitors,” “Consumers” and “Local Communities,” the Social Guideline chapters have been re-organized to integrate socially responsible management and existing management strategies. The new chapters are as follows: “Leadership and Governance,” “Non-Financial Risk Management,” “Operation and Performance” and “Communication with Stakeholders.”
The amended Social Guideline emphasizes socially responsible corporate leadership as well as management of non-financial risks. The new guideline has also actively incorporated “sustainable consumption,” which is a concept of generating profits by sustainable means and satisfying consumers’ social needs through the development of products and services that contribute to social values. In particular, the Social Guideline adopted, as a separate evaluation criterion, human rights management, such as installing a division specifically devoted to human rights issues and conducting an evaluation of their impact on human rights, in order to establish human rights protection system with respect to both internal and external stakeholders.
3. Governance Guideline
In an effort to better align itself with international guidelines, the Governance Guideline revised its chapters from “Shareholder,” “Board of Directors,” “Audit Institution,” “Stakeholder” and “Management Monitoring by the Market” into “Leadership of the Board of Directors,” “Protection of Shareholder Rights,” “Audit” and “Communication with Stakeholders.”
Through its evaluation criteria, the amended Governance Guideline asks companies to clearly stipulate the matters subject to the board of directors’ resolution and deliberation in their articles of incorporation. Further, the board of directors of a company that is part of a corporate group is restrained from infringing upon the benefits of the company or its shareholders by the board’s decision-making. Furthermore, the Governance Guideline emphasizes the responsibility and duty of the board of directors by requiring the board to establish a management succession policy and to regularly disclose major matters on management succession.
Especially, it is worth noting that the amended Governance Guideline (i) recommends constituting the audit committee, compensation committee, affiliate transaction committee and outside director candidate nominating committee with outside directors only, (ii) recommends separately appointing the majority of audit committee members from other directors and (iii) requests active disclosure of matters that have or may have material impact on the decision-making of shareholders and stakeholders in addition to the matters required to be disclosed by the relevant laws and regulations.
According to the KCGS press release on August 5, 2021, the KCGS will reflect the amended ESG Guideline to the ESG evaluation process from 2022. The results of the KCGS’s ESG evaluation for each company will be used in the Korea Exchange’s five ESG theme indices (i.e., KRX ESG Leaders 150, KRX Governance Leaders 100, KRX Eco Leaders 100, KRX ESG Corporate Social Responsibility Index (S) and KOSPI 200 ESG Index), as well as in advice on socially responsible investment for major institutional investors.
In order to comply with the ESG Guideline as amended, it would be necessary for companies to first determine what can be, and needs to be, reflected on their management, as well as to incorporate such identified items in their own internal policies.
As the reinforced ESG Guideline is expected to substantially influence the Korea Stewardship Code as well as the Korea Exchange’s Corporate Governance Disclosure Guideline and Sustainability Report Disclosure in the future, the development of the ESG Guideline would merit continued attention from companies.