[Inside Chodong] Is ESG Management Only Tackling the Easy Parts?

Balancing ESG Management Remains a Key Challenge for the Banking Sector

[Asia Economy Reporter Park Sunmi]"Every Monday, the cafeteria menu is composed exclusively of low-carbon plant-based foods that can reduce greenhouse gas emissions."

KB Kookmin Bank's newly launched ‘Green Monday’ program is seen as an ESG (Environmental, Social, Governance) management practice because plant-based diets consisting of vegetables and fruits can reduce greenhouse gas emissions by up to 80% compared to animal-based diets. It reflects the intention to contribute, even slightly, to addressing climate change by adopting a plant-based diet instead of meat, which increases the Earth's greenhouse gas emissions.

Among the ESG management efforts permeating the banking sector, the major part of E (Environment) mainly involves issuing green bonds, but small lifestyle practices that consider the environment?such as plant-based menu composition, reducing paper (passbooks and copy paper) usage, saving energy, using renewable energy, and reducing disposable products?have a significant impact due to banks’ extensive customer contact compared to other financial institutions. This is also why banks link customer participation to ESG management. For example, IBK Industrial Bank is currently running an event where the first 10,000 customers who register their ESG commitment to environmental protection and sharing upon subscribing to a specific savings product receive a special preferential interest rate of 0.2 percentage points.

The domestic banking sector is also actively moving to fulfill S (Social responsibility). In addition to supporting COVID-19 affected groups and socially vulnerable populations, banks are actively providing loans to social economy enterprises. As of the end of last year, the outstanding loans to social economy enterprises by banks amounted to 1.1213 trillion KRW, a 31.95% increase from 849.8 billion KRW at the end of 2019. The support from commercial banks, which pours hundreds of billions to trillions of KRW into social economy enterprises, stands out compared to foreign banks, which remain at the level of 1 to 5 billion KRW.

However, the G (Governance) sector is considered a weak point in the banking sector’s ESG management. The Korea Corporate Governance Service explained in its report on the ‘2021 Regular General Meeting of Shareholders Agenda Analysis Results’ released yesterday that "the number of opposition recommendations due to corporate value impairment histories in the appointment of outside directors and audit/audit committee members increased significantly from 3 cases in 2020 to 19 cases in 2021. This was mostly due to the negligence of outside directors and audit committee members in monitoring duties related to corporate value impairment caused by the DLF (Derivative Linked Fund) mis-selling scandal at major commercial banks."

Directors have the duty not only to express approval or disapproval on agenda items submitted to the board but also to monitor and supervise the execution of duties by the CEO and other directors, but this duty is not being properly fulfilled. In fact, the reappointment of financial holding company chairpersons and bank presidents, the role of outside directors as mere rubber stamps while receiving high compensation without change, is a long-standing practice and chronic problem in the financial sector.

Strengthening corporate ESG management has become a global trend this year and is increasingly emphasized in the domestic industry. It is encouraging that the banking sector, which has a conservative organizational culture, is quickly embracing the ESG management strengthening trend and leading the atmosphere. However, balancing ESG management remains a challenge for the banking sector. We hope that the banking sector’s ESG management, which started with what it could do, will not be limited to areas it wants to pursue but will have the courage to boldly challenge and improve areas it has not addressed before.