Compliance Rate Improving; Responsible Investment Being Established
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Disclosure of corporate governance reports, an objective evaluation indicator for governance structure, is becoming more smoothly entrenched in Korea. In keeping, we expect the Korean market to enter a virtuous cycle of responsible investment via expansion of ESG mandatory disclosure, the spreading of ESG management systems, and the rapid growth of ESG funds.
Disclosure of corporate governance reports becoming more smoothly entrenched
In order to enhance corporate value by offering uniform and detailed information on corporate governance, Korean firms have been mandated since 2019 to provide corporate governance reports. Their compliance rate with key indicators is highly correlated with ESG ratings, serving as a simple governance (G) rating table.
The disclosure of corporate governance reports is to become mandatory for all Kospi-listed companies from 2026. The mandatory disclosure of sustainable management reports providing environmental (E) and social (S) information is to begin in phases in 2025, before expanding to include all Kospi firms by 2030.
Governance (G) continuing to display quality improvement
The average compliance rate with key indicators among 175 non-financial companies with assets of more than W2tn is 64.5% (10 out of 15 indicators; +5.9%p y-y). SK Telecom (SKT) boasts the highest compliance rate (100.0%) for a third consecutive year, and the average compliance rate for LG Group affiliates has upped (62.9 → 79.0%).
We note that ESG-oriented management practices have been rapidly spreading in Korea, including the separation of board chairs from CEOs, the establishment of ESG committees, the boosting of the number of female executives, and the trimming out of long-serving outside directors. While domestic ESG indices have been underperforming the benchmark, we note that the rapid expansion of ESG funds driven by the NPS’s whole-hearted adoption of SRI should lead to the creation of a virtuous cycle of rising SRI funds, an improvement in ESG indices, and the boosting of ESG integration investment practices.
From 2021, Japan’s corporate governance reports to reveal environmental (E) footprints
During a stock market reorganization process to take place in Apr 2022, the Tokyo Stock Exchange is expected to reflect ESG information publicly disclosed by companies. The main focus of a second set of revisions to the Japanese Corporate Governance Code is to quantify and disclose information related to environmental matters (E), including the disclosure of the financial impacts of climate change. Japanese firms are actively participating in TCFD, RE100, and other initiatives which consider environmental effects as being an important governance issue, and they are responding actively to external assessments by quantifying their environmental footprints.