[Inside Chodong] The Era of Good Investment

[Asia Economy Reporter Song Hwajeong] ESG (Environment, Social, Governance) is the trend. Nowadays, it is impossible to talk about management or investment without mentioning ESG, as interest in ESG is very high.

ESG is a coined term derived from the initials of Environment, Social, and Governance, meaning eco-friendly practices, socially responsible management, and governance improvement. It aims to pursue sustainable development. Investors evaluate corporate value not only based on financial factors but also on these non-financial factors. Instead of simply looking at how much a company earns, they assess and invest based on whether the company practices environmental protection, fulfills social responsibilities, and maintains transparent governance for sustainable growth. It marks the era of good investment in good companies.

ESG management and investment began to receive serious attention when institutions presented them as important investment indicators. BlackRock, the world's largest asset management company, declared ESG as the top priority in investment decisions and excluded companies with more than 25% of their revenue from fossil fuels from investment targets since last year. The National Pension Service announced a policy to invest 50% of its total managed assets in ESG companies by 2022.

ESG-related investments are rapidly increasing. According to the Federation of Korean Industries, the global ESG investment asset size grew from $13.3 trillion (about 14,876 trillion KRW) in 2012 to $40.5 trillion in 2020, more than tripling in eight years. Domestic investment size is also increasing, with the National Pension Service's related investment growing fivefold from $4.9 billion in 2012 to $25.5 billion in 2019. The Socially Responsible Investment (SRI) bond segment operated by the Korea Exchange surpassed 100 trillion KRW in listed SRI bond balance this month. This represents about a 77-fold growth compared to 1.3 trillion KRW when SRI bonds were first listed in 2018.

As ESG has become mainstream, the financial investment industry is responding quickly by offering various related investment products. Securities firms have been issuing ESG bonds one after another this year and have introduced equity-linked securities (ELS) linked to ESG indices. Asset management companies are launching ESG funds in succession. The Korea Exchange is also promoting the expansion of the capital market's role in leading industrial paradigm changes such as ESG as one of its five core strategies. The Exchange plans to continuously develop and supply ESG-themed exchange-traded funds (ETF) and exchange-traded notes (ETN).

For investors to make investments, transparent information disclosure is most important. To this end, financial authorities have decided to mandate ESG disclosures for listed companies with assets exceeding 2 trillion KRW starting in 2025. However, there are criticisms that it is too late to require disclosures only by 2025 when ESG investments are already surging. In Europe, the Sustainable Finance Disclosure Regulation (SFDR) was implemented for financial institutions starting from the 10th of last month. The UK announced plans last November to mandate ESG information disclosure for all listed companies and aims to enforce this by 2025. Japan is also expected to include an ESG mandatory disclosure system in its national growth strategy to be finalized this summer.

Since ESG is a non-financial factor, it is not easy for investors to evaluate. Therefore, accurate information disclosure is crucial. As good investment has become the trend, related institutional improvements such as transparent information disclosure should be expedited.