[Plaza] ESG, the New Normal of the Capital Market

Last January, the annual letter sent by Larry Fink, chairman of BlackRock, the world's largest asset management company, became a hot topic. In both the shareholder letter and the letter to CEOs of invested companies, BlackRock declared that the climate crisis and sustainability are the most important agendas in investment decision-making. In particular, the shareholder letter emphasized the importance of ESG (Environmental, Social, and Governance), stating that considering ESG will become BlackRock's core investment model going forward.

Interest in ESG has lasted longer than expected. This is because analyses began to show that companies with strong ESG capabilities or funds that include such companies in their portfolios have outperformed the market amid the ongoing COVID-19 pandemic. It became a case proving that systematic market risks, such as a pandemic, can be mitigated through ESG management.

The Green Deal, which had been forgotten due to the US-originated global financial crisis, the European debt crisis, and the US political landscape, is now entering a new phase. The area where the strongest cooperation on ESG is currently taking place internationally is climate change. With the election of US President Joe Biden, a massive policy trend centered on Europe, the US, and China has emerged, including climate change response policies.

At the end of 2019, the newly launched European Union (EU) Commission presented the 'European Green Deal' as the first of six top policy priorities by 2024. The Green Deal agenda, aimed at making Europe the first carbon-neutral continent by 2050, includes groundbreaking measures such as a carbon border tax. As the international situation moves toward emphasizing ESG, global institutions have also begun efforts to standardize ESG information. Investors and companies need to understand the direction in which global standards for ESG information disclosure will be integrated. The scope of asset classes considering ESG is also expanding. Not only funds investing in listed stocks but also bonds and alternative investments are experiencing an ESG trend. With the increase in ESG bond issuance and the growing importance of ESG-based investment decisions in alternative investments, benchmarks and indices evaluating ESG performance have emerged.

In the medium to short term, energy transition (E), labor and data ownership (S) in platform businesses, and strengthening shareholder rights (G) are ESG issues that can immediately impact the corporate environment. Regarding energy transition, the new climate regime under the Paris Agreement came into effect this year, and 65 countries worldwide have declared their intention to achieve carbon neutrality by 2050. Ultimately, to meet greenhouse gas reduction targets, energy transition from fossil fuels to renewable energy is inevitable.

Secondly, in platform businesses, the emergence of new work styles allowing workers to freely choose their working hours and amounts has cast a shadow of declining worker status. It is expected that a reasonable system will need to be established through social consensus to maintain employment flexibility while protecting workers from risks and uncertainties in their work environment. Additionally, as user data generated by platform companies grows exponentially and the value and importance of data increase daily, there is a growing need to establish IT management systems that include data management policies, guidelines, standards, strategies, and organizations and services capable of managing data.

Lastly, regarding the strengthening of shareholder rights, legislation and regulations related to corporate governance are planned, and beyond these institutional changes, an increase in shareholder engagement activities centered on institutional investors is expected in the market.

Seokmo Yoon, Head of Samsung Securities Research Center