[In-Depth Review] ESG and the Success Conditions of the Korean-style Green New Deal

Shin Ji-yoon, Head of Research Center at KTB Investment & Securities

The word most frequently mentioned in this year’s stock market is likely ESG (Environmental, Social, and Governance). Although it was an unfamiliar term, now most financial companies and large corporations advocate ESG management. Securities firms’ research departments, which act as intermediaries between companies and investors, have so far responded mainly by explaining the definition and recent trends of ESG, but going forward, they must provide actual support for management and investment to maintain competitiveness.

If we are to talk about the real story, the environment comes first. It is a vast topic, and since Korea’s response to carbon reduction has been insufficient, there is no longer any room for delay. The recent policy changes by the U.S. government, which are strengthening global environmental regulations such as carbon taxes, also heighten the seriousness of the issue.

The hopeful aspect is the Korean-style Green New Deal. After President Moon Jae-in declared it last year, a plan was announced to invest 160 trillion won of public and private funds over five years. This year, the first Green New Deal participation fund and the first New Deal infrastructure fund have been launched, following the schedule. If the following considerations are added, Korea’s carbon reduction response and corporate ESG activities will gain further momentum.

Even for long-term funds, if losses are partially compensated and tax benefits are provided, there is sufficient market demand in this era of low interest rates and rising tax rates. Ultimately, the investment destination is important. The Green New Deal funds are expected to focus on equity investments in companies for now. To fulfill the fund’s purpose, the proportion of long-term green infrastructure projects should be increased.

Large-scale infrastructure projects that allow private participation include offshore wind power projects and utility-scale solar power projects. However, Korea Electric Power Corporation (KEPCO), which still holds a monopoly on transmission and distribution and a duopoly in the power generation sector, intends to take a central role in investing in renewable energy power plants. There are reasons such as the lack of suitable large-scale capital investors, power companies’ obligations to fulfill the Renewable Portfolio Standard (RPS), and responses to reducing fossil fuel facilities, but it is questionable whether the future digital power industry infrastructure can be rapidly established without fostering a private ecosystem. Distributed power sources and Virtual Power Plants (VPP), which are essential for expanding renewable energy, should be led by private operators, but under KEPCO’s monopoly, this is a challenging scenario.

A broader perspective is also necessary. The investment target should be expanded to the entire Korean Peninsula. The 2050 goal of ‘carbon neutrality’ and the Korean-style Green New Deal are long-term plans that can find common ground. Attention should be paid to the fact that North Korea is showing great interest in renewable energy. North Korea also submitted its Nationally Determined Contribution (NDC) for carbon reduction to the UN by 2030 following the Paris Climate Agreement. It places reducing transmission and distribution losses and large-scale expansion of solar and wind power facilities as top policy priorities. Although it is somewhat unrealistic now, about a decade ago, cooperation on Clean Development Mechanism (CDM) projects was actively discussed. Now, the need for inter-Korean linkage is growing in terms of carbon reduction on the Korean Peninsula, expansion of renewable energy, solving the ‘power island’ problem that will become prominent, and industrial structure adjustment. The Korean-style Green New Deal must also prepare for the time that will come without warning.

Lastly, governance. To avoid becoming a second government-controlled fund emphasizing only tax benefits, green, and unification concepts, management supervision and implementation are as important as fund design. Especially, the focus should be on activating private investment. Soon, the national carbon reduction targets are likely to be raised, and carbon emission rights or related tax systems may change. The Green New Deal and fund systems must be well refined so that funds flow timely and appropriately, harmonizing with carbon reduction systems. In this regard, leadership that understands the concept of sustainable development and ESG, and has insight into not only the energy industry but also manufacturing and finance, is necessary.