[Column] Proliferating Evaluation Indices Undermine ESG

[Asia Economy Reporter Kim Hyo-jin] "Honestly, I don't know which rhythm to follow. Should I just focus on social contribution?"

This is the comment of a senior official at a major commercial bank who is 'somewhat' enthusiastic about ESG (Environmental, Social, and Governance) management. While they understand the broad meaning of ESG, which emphasizes corporate environmental and social responsibility and ethical management, they lament that the specific standards and directions are vague and hard to grasp. Among banks, which are said to be the most proactive in ESG, there is even a joke that it all comes down to 'paperless.'

The biggest problem cited by ESG practitioners is that the proliferation of rating agencies and their differing evaluation indices cause confusion in standards. Currently, there are hundreds of ESG evaluation indices both domestically and internationally. As a result, it is common for a company to receive the highest rating from one agency but only an average or below rating from another.

Representative examples include Hyundai Motor Company receiving an 'A' from the Korea Corporate Governance Service but a 'B' from Morgan Stanley Capital International (MSCI), and SK Innovation receiving an 'A' from the Korea Corporate Governance Service but only a 'BBB' from MSCI.

A financial holding company official said, "I doubt there is any company claiming to do ESG that hasn't received an A grade from at least one agency." He questioned, "All these companies receive the highest ratings from various agencies, but does it make sense that every company is doing ESG excellently?"

In a recent survey conducted by the Federation of Korean Industries targeting the top 500 companies by sales, about 30% responded that "it is difficult to formulate strategies due to the ambiguous scope and concept of ESG."

This reality leads companies to engage in superficial ESG activities. They label products as ESG by attaching even the slightest relevance and disguise existing savings and deposit products as ESG accounts, even though these are not new. From the perspective of companies that need to appeal to consumers and capital/investment markets with ESG achievements, this may be inevitable.

An industry insider pointed out, "If companies can receive decent ratings and promote themselves this way, the overall level of ESG in Korea will inevitably decline and become superficial." This is why it is urgent for the government and expert groups to establish credible evaluation and measurement indicators to build authority and secure the substance of ESG.