[Asia Exclusive] Kim Yong-jin "Next Year, ESG Application to Expand to 50% of Fund Assets in Managed Assets"

Global Pension Funds Actively Embrace ESG
Will Serve as a Focal Point for Domestic Investment Establishment

Overseas Investment Portfolio for Diversification
Stocks 35% · Bonds 10% · Alternative Investments 10%

National Pension Fund Rebalancing Proposal Approved
Not Yielding to Retail Investors, Domestic Quota Increased
Operational Scope Set According to Market Conditions

Kim Yong-jin, Chairman, is being interviewed on the 14th at the National Pension Service reception room in Jeonju, Jeonbuk.

[Interview = Cho Young-joo, Head of the 4th Industrial Department, Asia Economy; Organized by = Seo So-jung, Reporter] "Next year, the scale of assets under management applying ESG (Environmental, Social, Governance) investment standards will expand to more than 50% of the fund's assets."

Recently, at the National Pension Service reception room in Jeonju, Jeollabuk-do, Chairman Kim Yong-jin consistently emphasized the importance of ESG investment in an interview with Asia Economy. As global pension funds and asset managers actively engage in ESG investment, the National Pension Service, one of the world's top three pension funds, aims to play a central role in deeply rooting ESG investment domestically.

Chairman Kim stated, "Until last year, the scale of ESG investment was about 10% of the total fund assets," adding, "We plan to raise this to 25% this year and apply it to more than 50% next year."

Recently, ESG investment has become a hot topic. Due to the rapid changes in the corporate environment caused by COVID-19, new relationships and orders based on solidarity, responsibility, and trust within the community have become important. Previously, financial performance indicators such as short-term sales and operating profits were emphasized, but gradually, non-financial performance factors like environment, society, and governance are becoming new criteria for evaluating companies.

Chairman Kim also mentioned that companies' perspectives on ESG must change first. He said, "ESG is not a cost but an investment to enhance corporate value and strengthen intangible capital," and added, "The National Pension Service will do its part to ensure that companies actively participate rather than avoid or be dragged into it."

Below is a Q&A with Chairman Kim.

- Why is ESG important to the National Pension Service?

▲ The National Pension Service is a universal investor. It is a long-term investor with a portfolio composed of various assets representing Korea and the global capital markets, and it is also Korea's largest investor. For stable investment returns, long-term and sustainable growth of the entire economy beyond individual companies is important. Since the National Pension Service is a community of shared destiny with the 'national economy,' it will reduce risks and establish a stable profit base through ESG investment while aiming to change the paradigm of companies and society as a whole.

- What are the specific plans for ESG investment?

▲ So far, the National Pension Service has been implementing responsible investment in some domestic stocks. This includes active direct management of domestic stocks (KRW 31.2 trillion), responsible investment-type entrusted management (KRW 6.9 trillion), and passive direct management (KRW 52.2 trillion), totaling about 10% of the fund's total assets. This year, the scope of responsible investment will be expanded to include direct management of domestic and foreign stocks and bonds. Next year, it will be further expanded to entrusted management of domestic and foreign stocks and bonds, and the scale of assets applying responsible investment is expected to exceed half (50%) of the fund's assets. In addition to expanding the asset classes subject to responsible investment, this year, the selection of key environmental and social management issues and the introduction of a negative screening strategy are being considered. The fund management committee will discuss the negative screening strategy.

- Interest in climate change is also rising as the investment environment rapidly changes.

▲ Last year, the National Pension Service conducted research to select key environmental and social management issues for domestic stocks, with climate change and industrial accidents among the candidates. Based on the research results, new key management issues will be selected, and procedures and standards will be established to carry out fiduciary responsibility activities such as confidential dialogues with companies corresponding to these issues. The National Pension Service is reviewing the introduction of a negative screening strategy related to climate change (coal power generation and coal mining), and if the fund management committee decides to adopt this strategy, it plans to faithfully implement related activities. Last year, to exchange with overseas institutional investors on climate change response, the National Pension Service joined the Asia Investor Group on Climate Change (AIGCC), an international consortium.

- Do you believe ESG investment will lead to fund management performance?

▲ Although the correlation between ESG considerations and the financial performance of invested companies is still debated, superior performance has been observed in terms of volatility management when systematic market risks occur. Especially, ESG perspectives are recognized as useful in managing tail risks. From a corporate standpoint, if ESG is driven by government-mandated regulations, companies can only perceive it as a cost. However, if ESG operates as a social order rather than an individual company matter, it can solve chronic problems in our society. While economic actors' relationships have been based on distrust, monitoring, and checks, through ESG, values of trust, coexistence, and fairness will be emphasized, potentially restoring social trust.

- You mentioned raising the ratio of overseas investment assets to about 55% by 2025.

▲ To diversify investments, by the end of 2025, we plan to operate an investment portfolio with about 35% in overseas stocks, 10% in overseas bonds, and 10% in overseas alternative investments out of the total fund assets. Considering the growth of the fund size, we will pursue substantial expansion of overseas stock and bond investments. Through overseas stocks, we aim to overcome the limitations of the narrow domestic market, reduce concentration in some stocks, and expand risk assets to improve long-term returns. Overseas bonds offer high diversification effects and are advantageous for securing foreign currency liquidity, which will be used for crisis management during emergencies.

- On the 9th, the agenda to expand the domestic stock holding target range, 'National Pension Fund Rebalancing System Review,' was passed. There are criticisms that you succumbed to the 'Donghak Ant' investors.

▲ It is a misunderstanding to think that the domestic stock holding limit was increased due to pressure from individual investors. This decision expanded the allowable range for domestic stock holdings from ±2.0 percentage points to ±3.0 percentage points around the previous target ratio. The domestic stock investment ratio remains at 16.8%, but the allowable range was widened to enable operation according to market conditions amid market volatility. If the existing allowable range were maintained despite increased market volatility, mechanical selling would inevitably occur. Due to recent market volatility, rebalancing has been done 3 to 4 times this year alone. Continuous rebalancing destabilizes fund management itself. Conversely, this adjustment also allows the domestic stock ratio to be further reduced.

- Shortly after your appointment, there was a scandal involving marijuana use by fund management headquarters staff. You proposed reform measures.

▲ All employees are well aware of the seriousness of the issue, and above all, it was an opportunity to reaffirm the responsibility and ethical expectations of the public towards the National Pension Service as a public institution. Specifically, regarding fund management staff, reputation checks through professional agencies have been introduced in the recruitment process, and public service discipline-related items are now evaluated during performance reviews. The reform measures, consisting of 60 tasks focusing on cultivating professional ethics and strengthening global expertise, are expected to be mostly completed in the first half of this year.

- There is a great need for National Pension reform, but no solution has been found.

▲ The core of pension reform is to create a sustainable system by properly balancing adequate old-age income security and the financial stability that supports it. Based on the 2018 4th actuarial valuation results, the government proposed a combination plan of 'income replacement rate (40-50%) - contribution rate (9-13%)'. Pension reform is clearly a task that must be resolved beyond political interests or positions of ruling and opposition parties. If a bipartisan consultative body can be established, as chairman of the corporation, I will actively support sufficient discussions for reform.

- Are there difficulties in recruiting talented personnel?

▲ Although the vacancy rate slightly increased around the relocation of the fund management headquarters to Jeonju in late February 2017, it has since stabilized with the recruitment of 136 people. To attract talented personnel, the number of overseas assignments has been more than doubled from 28 to 58, and opportunities for training at global investment institutions are being promoted. We are reviewing plans to provide job rotation opportunities after a certain period of service and to improve compensation levels for fund management personnel. We plan to actively negotiate with related ministries and the National Assembly to improve compensation levels for fund management personnel.