ESG Ratings to Resume Upward Trajectory from 2023
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Due to the advancement of an evaluation model that fully reflects the revised ESG code of best practices, the overall KCGS ESG ratings for 2022 showed decline. In addition, we see distortion in the correlation between corporate governance core indicator compliance rates and the KCGS ESG ratings. But, ESG ratings should resume their previous upward trajectory going forward through the effects of mandatory disclosure, corporate response to ESG evaluation, and the spread of responsible investment by institutional investors.
ESG ratings drop on revisions to ESG code of best practices
In November, the Korea Institute of Corporate Governance and Sustainability (KCGS) announced its 2022 ESG ratings and analysis. By grade, the portions divide as 0.0% for S, 0.6% for A+, 15.0% for A, 16.1% for B+, 9.8% for B, 25.3% for C, and 33.2% for D. Compared to the previous year, overall ratings decreased and the number of D ratings (which are notably vulnerable to ESG) jumped. We attribute this decline to the impact of upgrades to the evaluation model that fully reflect the revisions made to the ESG code of best practices in 2021.
The relationship between the corporate governance report core indicator compliance rate and the KCGS ESG ratings also changed. The correlation between the corporate governance core index compliance score range and the ESG integrated rating held steady, but the rating in some segments decreased compared to last year. The correlation between the average compliance rate of public companies with total assets of W2tn or more and the average ESG rating is also distorted. Previously, the expected grade through the proportional formula was A (4.73), but the actual result was B+ (4.02).
ESG ratings to resume upward trajectory from next year
We view the decline in the ESG ratings for 2022 as being a temporary phenomenon, believing that the scores will return to their previous upward trajectory going forward. Over the mid/long term, individual companies’ ESG ratings are to trend upwards together, which will likely make it difficult to screen for gems when deploying ESG integrated investment strategies.
We note that: 1) As a result of the mandatory corporate governance report, corporate governance compliance rates are rising and ESG ratings are improving; 2) Responding to ESG ratings is essential in strengthening corporate ESG management systems, and accompanying efforts are expected to improve ESG ratings according to changing ESG evaluation indicators; 3) Responsible investment by institutional investors is also steadily expanding. As the revision of the ESG best practices and the revision of the stewardship code are closely related, we believe that the revision of the stewardship code will further strengthen the corporate ESG management system going forward.