[Square] The Era When the Term ESG Disappears

Partner Jaehum Park of EY Hanyoung, Leader of CCaSS (Climate Change and Sustainability Services)

Worldwide, interest in ESG (Environmental, Social, and Governance) is unprecedented. It is rapidly penetrating beyond regulations into investments, disclosures, mergers and acquisitions (M&A), and even consumer trend changes. Truly, it is the heyday of ESG.

However, the concept of ESG is not entirely new. It gained momentum in the early 2000s with the establishment of the United Nations (UN) Principles for Responsible Investment (PRI), aiming to quantify ESG for use in the investment sector. This period marked a turning point when similar management paradigms and terms began to spread among executives and the public. Although interest and investment in ESG perspectives in corporate management have been steady since then, it is worth reflecting on the actual level of progress.

In a competitive society where companies strive to have their competitiveness recognized in the market, they have tended to focus on external evaluations or inclusion in global indices. However, it is questionable whether these truly reflect the genuine ESG level of companies. We are now facing a time when it is necessary to move beyond celebrating every new management paradigm and decorating all business activities with related rhetoric, toward genuinely more substantial actions and changes.

A recent notable change is the increase in trade-related technical barriers. A prime example is the "carbon border tax." According to a recent EY Hanyoung report, the carbon border tax payable to the United States, European Union (EU), and China is expected to be about 610 billion KRW in 2023 and increase to 1.87 trillion KRW by 2030. Domestic industries must now invest in strengthening environmental improvement capabilities through scientific assessments such as Life Cycle Assessment (LCA) of carbon dioxide emissions throughout the entire production process. Additionally, investments in technologies, processes, and alternative materials to reduce the absolute amount of environmental pollutants must become more active. Furthermore, not only parent companies but also suppliers in the supply chain should simultaneously consider facility investments and capacity building.

Social issues are even broader and more complex, and measurement is not easy. However, there is a solution. It is to clarify the implementation of many declarative and formal policies so far. For example, companies should disclose qualitative and quantitative results of due diligence programs and related activities that support human rights declarations and continuously implement improvement measures. It is still rare to find domestic companies collaborating with external third-party organizations to conduct human rights due diligence.

The management paradigms represented by ESG have originated from a reflective perspective on humanity’s past economic development patterns. Currently, while recognizing that corporate economic activities are environmentally and socially inefficient, there is coexistence of concerns about path dependency?reliance on long-familiar routes?and new era demands.

When products and services are naturally eco-friendly, management forms clearly comply with and execute policies and processes that meet social international norms, and corporate decision-making is transparent and rational, the era will come when the term ESG is no longer new or an attractive phenomenon in the market. When ESG itself becomes the standard of corporate management, ESG will disappear, and we will face a truly transformative era.