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Research Report

E.S.G. Utilization Plan to Create Social Value (I) - E.S.G. Disclosure Trends with Prospects for Its Legislation at Home and Abroad
  • Issue Date 2021-07-30
  • Page 206
  • Price 9,000
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Ⅰ. Backgrounds and Purposes
▶ Global Expansion of the E.S.G. Discourse
○ With the spread of COVID-19 that exacerbated in 2020, the world began to pay full attention to non-financial achievements such as E.S.G. (Environmental, Social, and Governance) to maintain corporate sustainability.
   - E.S.G. refers to the environmental, social, and governance as factors that should be considered, along with other financial factors, primarily from an investor's point of view as an investment and key management strategy.
   - Emphasizing corporate E.S.G. realization is equivalent to 'sustainable investment' and 'social responsibility investment.' It may be interpreted as a willingness to associate a corporation's performance and strategy with non-financial factors as a way to establish investment criteria for assessment. 
   - Nevertheless, the concept of E.S.G. is 'in the process of being formed' like the concept of social value, meaning that its external properties are still quite ambiguous and indeterminate to be used as a requirement or a basis of a legislation.
○ In S. Korea, many discussions led by public institutions already took place to legislate social values. More research is needed to examine the effective implementation of social values and E.S.G.
   - This study seeks to bring in the E.S.G. discourse as part of the efforts to legislate social values, introduce domestic and international systems related to the E.S.G. disclosure, and envisage its legislative prospects.
▶ Accelerated Domestic and International Efforts to Require E.S.G. Disclosure
○ On January 14, 2021, the Korea Financial Services Commission (KFSC) announced 「The Comprehensive Improvement Strategy for the Corporate Disclosure System」 to emphasize the importance of establishing the foundation for responsible investment. It also implied that targets would be set for 2026 and 2030 for corporations of a specific size or larger to enhance the E.S.G. disclosure requirements.
   - However, the KRSC’s 「E.S.G. Information Disclosure Guidance」 fails to sufficiently consider the systemic implications of specific E.S.G. evaluation indicators, disclosure principles and procedures, etc. 
   - For proper institutionalization of the disclosure requirements, it is essential to consider the transparent, objective, and effective operation of the system as well as the viewpoints and positions of various stakeholders, including the government, corporations, investors, and consumers, etc.
○ Primarily through the EU, other jurisdictions already legislated the E.S.G.-related non-financial information disclosure requirements in 2014 and 2019. 
○ As there is growing interest in the key legislative contents and the specific ways the domestic translation of this requirement happens within the EU member states,  close attention should be paid to their developments. 
Ⅱ. Main Content 
▶ The EU Directive on the Disclosure of Non-Financial and Diversity Information (2014/95/EU)
○ In order to ensure the consistency of non-financial information disclosed within Europe, and to increase their comparability, the EU has decided to require large-scale business sites to release information on specific non-financial contents, such as minimal environmental concerns, social and employment-related issues, human rights-related aspects, and anti-corruption and bribery issues. 
   - The EU Directive on the Disclosure of Non-Financial and Diversity Information Reporting (2014/95/EU, NFRD) added the non-financial information disclosure requirement to the existing European Accounting Directive 2013/34/EU (henceforth, the 2013 Accounting Directive). 
   - In particular, Article 1 of the 2014 Directive amended the EU 2013 Accounting Directive by revising its Articles 20, 33, 34 and 48 and adding Articles 19a and 29a as a way to include clauses on the non-financial information disclosure. This was the first legislation that established the E.S.G.-related disclosure mechanism. 
○ The EU member states have adopted this Directive through their domestic legislations. For example, France, Germany, and the United Kingdom require the disclosure of E.S.G.-related information for corporations that have over 500 employees, net sales of more than 40 million Euros, or the total asset of 20 million Euros.
○ It is interesting to note that, compared to the aforementioned countries, several other countries such as Spain, Denmark, and Ireland have established a lot more rigid disclosure systems related to E.S.G., such as implementing more stringent domestic legal standards.
▶ The EU Regulation on the Sustainability‐Related Disclosures in the Financial Services Sector (2019/2088/EU)
○ Through amendments, the scope of the EU Accounting Directive has been expanded from the financial services sector to non-financial information.
   - In other words, the EU attempts to minimize information asymmetry  by requiring financial market participants to make continuous disclosures regarding sustainable investment, and seeks to secure the EU economy's long-term competitiveness by implementing a low-carbon, more sustainable, and resource-efficient circular economy in line with its Sustainable Development Goals.
   - For example, it contains the duty to publish written policies on the integration of sustainability risks in the investment decision-making and investment or insurance advisory processes (Article3), information in 'pre-contractual disclosures' regarding how sustainability risks are incorporated into investment decisions, and descriptions of the evaluation results on how these risks may impact the returns of the financial products (Article6).
▶ The E.S.G. Disclosure Institutionalization Trends in the US
○ Unlike Europe, where the governments take a more forceful approach through the legislative enactments, the US has led or actively pursued the E.S.G. discourse in partnership with conscious corporations, which voluntarily participated in this effort. 
○ Nevertheless, the US Securities and Exchange Commission (SEC) announced the Commission Guidance Regarding Disclosure Related to Climate Change in 2010 and discussed the need to strengthen the disclosure requirements on sustainability in a broader sense. 
   - For instance, the SEC announced disclosure rules on diversity in 2009, and the COVID-19 pandemic has triggered societal-level interests in and discussions of race and gender issues around 2020.
   - Meanwhile, the SEC's disclosure rule includes references to governance and other related factors. 
○ The SEC has already required corporations to disclose financially 'material information.' Since March 2021, a full-fledged discussion to legislate the E.S.G. disclosure requirements with a focus on climate change has begun.
   - The E.S.G. Disclosure Simplification Act is currently under review by the Standing Committee following the vote (215-214) by the US House of Representatives that passed the Act in June 2021.
▶ Diverse Statues and Comments in South Korea over the E.S.G. Disclosure
○ Corporations in S. Korea are voluntarily disclosing their E.S.G. information through their sustainability reports, and evaluation agencies such as the Korea Corporate Governance Service (KCGS) assess the corporations' E.S.G. scores based on the information provided by those corporations.
○ Korean corporations - especially those large in size and sales volume - voluntarily disclose E.S.G. information through their ‘sustainability reports.’
   - The sustainability reports released by each corporation tend to differ in their contents and standards. Yet, many tend to use the Global Reporting Initiative (GRI) standard, with an increased demand for SASB and TCFD standards in recent years.
   - Eighty-four percent of the recently published sustainability reports are externally validated, with the AA1000 Assurance Standard being the most widely used standard for assessment. 
○ In Korea, E.S.G. evaluations are conducted mainly by the KCGS, Sustinvest, and the Dashin Economic Research Institute who uses somewhat different evaluation criteria.
   - Recently, the polarization of E.S.G. evaluation results has been observed as there are notable variations in the results reported by different evaluation agencies.
▶ As with the Global Trend, Conversations Aimed at the Expansion of the Mandatory Disclosure of E.S.G. Have Begun in S. Korea
○ S. Korea is also witnessing efforts to improve E.S.G. information disclosure.
   - On January 14, 2021, the Financial Services Commission in Korea indicated in 「The Comprehensive Improvement Strategy for the Corporate Disclosure System」 that it would gradually make the E.S.G. disclosure mandatory.
   - As part of its follow-up measures, the Korea Exchange (KE) released the 「E.S.G. Information Disclosure Guidance」 regarding the necessity of information disclosure, the principles of draft preparation, etc. However, this Guidance does not have legal force, and its contents have been somewhat abstract. Therefore, future legislative trends on this topic need to be separately examined.
▶ Stakeholder Positions on the Institutionalization of Information Disclosure Requirements
○ Although the conversations aimed at expanding the mandatory E.S.G. disclosure requirements have begun early this year in S. Korea, several issues that require further examination still remain. 
   - About 50 related amendments have been proposed in the 21st National Assembly, and respective Ministries are preparing E.S.G.-related indicators and follow-up measures for institutionalization in accordance with these. Yet, more comprehensive discussions are expected to ensure proper implementation of these efforts since such large-scale changes might cause significant confusion in the market.
   - The Financial Services Commission and the Korea Exchange suggested that encouraging the pursuit of E.S.G. through the E.S.G. disclosure guidelines is important, but doing so should be left with corporations to decide on a voluntary basis if possible.
   - Regarding the mandatory or legislated E.S.G. information disclosure, European and American corporations generally maintain that voluntary disclosures are more effective based on the market demands.
   - Most corporations recognize the need for the disclosure of E.S.G. information. Yet, a social consensus needs to be reached on various aspects such as the subjects of disclosure, timing, procedure, and methods; as well as the economic burden associated with the collection, preparation and disclosure of the information needs to be considered in detail. 
○ E.S.G. disclosure requirements may overlap with the pre-existing disclosure requirements imposed on corporations in S. Korea, such as the duty to publish corporate governance reports and disclose information on environmental matters.  
   - Lastly, a much more elaborate discussion is needed on the process and procedures of disclosure and how its contents and outcome may be re-verified.
Ⅲ. Expected Effects 
▶ Understanding and deriving implications from other jurisdictions' efforts to institutionalize E.S.G. disclosure requirements, including their specific contents, procedures, and legislative trends
○ This study introduces the latest legislative trends, main contents, and issues related to the institutionalization of E.S.G. disclosure requirements, which are currently driven by Europe and the US; and draws implications for S. Korea.  
▶ Layering the foundation for its institutionalization by understanding the main contents of the E.S.G. disclosure requirements and the viewpoints of stakeholders 
○ The key points and limitations of E.S.G.-related domestic policies and the "E.S.G. Information Disclosure Guidance" announced by the Financial Services Commission et al. are reviewed, and the significant issues relating to their institutionalization are discussed.
   - Above all, this study helps to ascertain the disclosure index and identify its accuracy, clarity, comparability, balance, verifiability, and timeliness of the information that need to be confirmed for proper institutionalization of the E.S.G. disclosure requirements. 
   -This study helps to layer the foundation for the prospective institutionalization by reflecting the domestic situation based on stakeholder opinion surveys, including the government and private corporate actors.