[Viewpoint] ESG Management and Investment After the COVID-19 Crisis

The year 2020 will be remembered as a year when the entire world struggled to overcome the crisis caused by the novel coronavirus infection (COVID-19). Amid this unprecedented crisis, 2020 can also be regarded as the year when ESG (Environmental, Social, and Governance) management and investment began in earnest within our companies and capital markets. The interest in ESG management and investment that started during the COVID-19 crisis is by no means coincidental. Since COVID-19 was triggered by ecosystem destruction caused by climate change, and the fact that such crises may occur periodically in the future, awareness of the impact of corporate activities on the environment and society has been strongly highlighted.

Since last year, large corporations and financial holding companies have begun to introduce ESG at the management strategy level by establishing ESG committees within their boards of directors or creating dedicated departments within their companies. This is significant in that corporate social contribution, which was previously implemented for image improvement and unrelated to the core management of the company, has now become a mainstream part of management. The difference between ESG and corporate social responsibility (CSR) is that while CSR requires making positive contributions and sacrifices for society, ESG means that sustainability and long-term value enhancement cannot be achieved without clearly considering the impact a company has on society and the environment.

British economist Alex Edmans recently argued that companies must place the purpose of management on creating social value to achieve not only social value creation but also enhancement of corporate value. He cites the multinational pharmaceutical company Merck as an example. In 1987, Merck discovered a treatment for onchocerciasis, a disease that causes blindness and broke out in West Africa and South America. The problem was that the affected countries were too poor to pay for the medicine, and the World Health Organization (WHO) also showed reluctance to support due to budget constraints.

Then CEO Roy Vagelos decided to bear the annual cost of $20 million and all previous research expenses to distribute the drug for free. Thanks to Merck’s ongoing donation of the treatment, many patients have been freed from the disease, and the economies of these regions have been able to recover. His decision was completely contrary to the pursuit of corporate profit, but if the purpose of a pharmaceutical company is to save lives, it was a natural decision. Since 1978, Merck’s average annual stock return has been 13%, exceeding the S&P 500’s average return of 9%, showing that management aimed at creating social value leads to enhancement of corporate value.

The goal of ESG management is not simply to transform a company’s image into a “good” company. It requires clearly setting the social value to be pursued through corporate management as a management objective and consistently promoting it throughout management, including strategy, execution, and performance evaluation, to achieve results. For example, finance can be defined as “the act of facilitating the smooth flow of the economy through the intermediation of funds between fund suppliers who have surplus funds and fund demanders who need funds.” Naturally, the management purpose of financial companies should align with this, and efficiently executing this to achieve social and economic value creation and corporate value enhancement can be called ESG management of financial companies. Looking back at numerous domestic and international cases where customers suffered great damage due to mis-selling and financial companies also experienced huge value losses, it is clear what results short-term performance pursuit without considering customers has brought.

Government policy also plays an important role in creating social and economic value through corporate ESG management. In the process of energy-related companies transitioning to eco-friendly renewable energy, employees and partner companies related to existing fossil fuel production are likely to suffer losses. Without appropriate compensation for them, a desirable transition to renewable energy will be difficult through corporate efforts alone. ESG management aimed at medium- to long-term social and economic value creation will only be possible if supported by government policies that enable appropriate social safety nets and resource redistribution across the economy. COVID-19 has brought us great trials and crises, but if we overcome them well, we start the new year with hope that new opportunities can be created.

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