[Opinion] Sustainable Management and Socially Responsible Investment

'Socially Responsible Investment (SRI)' has been rapidly spreading worldwide recently. As of the end of 2018, the scale of SRI reached 30 trillion dollars and is expected to reach 50 trillion dollars within 20 years. SRI is generally understood as reflecting non-financial factors such as Environment, Social, and Governance throughout the entire investment process, and is also called 'ESG investment.' SRI, which started mainly with public pension funds in developed countries, is applied not only to stocks but to almost all asset classes.

Establishing and implementing corporate management strategies that consider corporate social responsibility under the recognition that a company's survival and development cannot be achieved without the development of the society to which the company belongs is called 'Sustainable Management.' Larry Fink, Chairman of BlackRock, the world's largest asset management company, explained the purpose of sustainable management well in his 2018 open letter to companies and investors by declaring, "To continuously grow and prosper, companies must do more than achieve financial performance; they must demonstrate how they make a positive contribution to society."

Sustainable management and SRI are closely related. SRI includes all investment strategies that simultaneously seek to positively impact society and the environment through investment and improve long-term investment performance as a result. Recent numerous studies and cases report that companies perceived as faithful to social responsibility show superior financial performance. Consumers, especially millennials, are increasingly willing to pay higher prices for products from socially responsible companies, and the fact that these companies are efficient in employee management and raw material supply is identified as a major factor improving financial performance. The superior financial performance of socially responsible companies leads to improved returns on the stocks and bonds they issue, providing momentum for more funds to flow into SRI. As a result, these companies create a virtuous cycle that allows them to raise funds under more favorable conditions. The recent expansion of SRI, mainly among public pension funds, can be understood as this virtuous cycle operating in earnest.

In Korea, SRI is still limited to public pension funds such as the National Pension Service. Since setting up an SRI fund in 2006, the National Pension Service introduced the Stewardship Code in 2018 and announced the 'Plan to Activate Responsible Investment of the National Pension Fund' last November, indicating that full-scale SRI will be implemented. Considering the scale of the National Pension Service and its influence on the asset management industry, this movement is expected to contribute to the activation of SRI in the domestic asset management industry. Meanwhile, in the case of private asset management companies, the scale and performance of SRI are very limited. Among the approximately 4,300 domestic public funds, the number of SRI funds is about 10, and since early 2018, only two funds have outperformed benchmark returns.

Even in developed countries where SRI has taken root, various obstacles exist to the spread of SRI. Although there is broad agreement on corporate social responsibility, strategies and directions to practice this as sustainable management are still being established. SRI, which supports sustainable management, also lacks standardized investment strategies unlike traditional investments. The biggest difficulty is the lack of non-financial information that can be used for SRI and the absence of standardization. This problem is especially severe in Korea, where SRI is in its early growth stage. Some large corporations voluntarily publish sustainability reports, but standardized formats or criteria have not been established. Meanwhile, the Korea Exchange mandates submission of corporate governance reports for KOSPI-listed companies with consolidated total assets of 2 trillion won or more and plans to expand the scope of reports to include environment and social aspects in the future. For qualitative and quantitative increases in SRI-related information, it seems necessary for the government to expand the scope of corporate disclosure obligations to include non-financial information at the policy level.

Shin Jin-young, President of the Korea Corporate Governance Service and Professor at Yonsei University Business School