[Viewpoint] How Should Companies Prepare for ESG Management?

Professor Choi Guk-hyun, Chung-Ang University Business School

The world after the COVID-19 pandemic will undergo many changes compared to before. The beginning of these changes is already appearing in various aspects of politics, economy, and society. Politically, a new order between the United States and China, comparable to the post-World War II global order restructuring, may emerge. Economically, the reorganization of global supply chains is becoming prominent. The United States and China are each attracting companies from around the world to build regional supply chains within their own countries. Additionally, companies are being required to play more meaningful roles as members of society by establishing Environmental Responsibility, Social Responsibility, and appropriate Governance, beyond just focusing on performance and capital primacy.

Meanwhile, corporate ESG (Environmental, Social, and Governance) management has been implemented in corporate management since the 1900s, alongside theoretical models, encompassing both positive aspects and concerns regarding the roles of each component. This shows that the sustainability of ESG management in corporate management depends on the performance of each ESG component.

Empirical evaluations of ESG components and corporate value and performance have shown mixed results. This is because corporate environmental responsibility, social responsibility, and balanced governance often conflict with the interests of various stakeholders. Recently, the French food company Danone set ESG as its management philosophy and consistently practiced it, but due to continuous performance decline, its management was replaced. Therefore, ESG management can become a comprehensive management (total management) where society and companies coexist harmoniously only if eco-friendly management reduces costs, social responsibility management enhances brand value, and balanced governance leads to increased corporate value.

Furthermore, the practice of ESG management should be accompanied by institutional mechanisms at the national and societal levels. In South Korea, ESG-related disclosure regulations are being introduced one after another, and for listed companies, ESG disclosure has been mandated by 2030. However, in the absence of appropriate global guidelines for evaluating ESG, the mandatory nature of these disclosure regulations can pose a considerable burden on the practice of ESG management. As in the example of the French company Danone mentioned earlier, continuous performance decline raises serious doubts about the sustainability of ESG management.

Companies are a complex collection of contracts with various stakeholders. These include contracts with shareholders, creditors, and employees, as well as explicit or implicit contracts with customers and members of society related to the company. The criteria for evaluating ESG management sometimes align and sometimes conflict among these contracts. Just as no regulation is suitable for every situation, it is difficult to have evaluation criteria that benefit all parties. However, if the burden is excessively placed on a particular party, such management will be difficult to sustain. For ESG management to take root, guidelines that accompany social causes and the insights of companies as the implementing entities regarding the ESG environment are necessary.