[Desk Column] Foretold Disaster and ESG

Jeon Pil-su, Head of Securities Department

[Asia Economy Reporter Jeon Pil-su] A predictable disaster. The 1994 Seongsu Bridge collapse, which resulted in 32 deaths and 17 injuries, and the 1995 Sampoong Department Store collapse, a massive disaster with 502 deaths, 937 injuries, and 6 missing persons, are investigations that inevitably arise whenever a major accident occurs. Although the frequency of mega-disasters has decreased due to strengthened safety management following a series of large accidents, most accidents that occur from time to time are caused by negligence in safety management due to cost-cutting.

The building collapse incident in Gwangju on the 9th is no exception. At the time of the accident, the demolition work was carried out by an excavator demolishing from top to bottom. Waste materials were piled up behind the building to be demolished, and the excavator climbed on the pile of waste materials to break the structure. Experts point out that in this case, horizontal loads could shift forward, so structural safety analysis should have been conducted beforehand. Since the demolition site was right next to a sidewalk and a roadway, it has been pointed out that the demolition should have been done from the sidewalk and roadway side. Of course, doing so would inevitably require controlling the road, which would increase costs and time.

This year, the hot topic in the business and investment sectors is undoubtedly ESG. ESG stands for Environment, Social contribution, and Governance, embodying the philosophy that companies must lead environmental protection, actively engage in social contribution activities, and improve governance for transparent management to achieve sustainable development.

Although one might question, "Is a company a place to make money or to do volunteer work?" ESG is now an unstoppable trend. Larry Fink, CEO of BlackRock, the world's largest asset management company with assets under management of $1.87 trillion (about 2,000 trillion KRW), stated in his annual letter to CEOs worldwide last January that climate change risks and ESG would be core factors in investment decisions. Besides BlackRock, Amundi, PIMCO, and others have joined this movement, and domestic asset managers are also increasing their interest in this field. In Korea, Shinhan Asset Management, managing 60 trillion KRW, declared that it would maintain a portfolio in domestic equity public funds with over 70% of companies securing a certain level or higher of ESG ratings.

As investors emphasize ESG, companies competitively talk about ESG management, but the problem is that ESG management costs a lot of money. Reducing carbon emissions and strengthening safety management all require money. Making governance transparent even involves the money of the largest shareholders. Although companies are rushing to establish ESG committees, the reality on the ground is different. Hyundai Development Company, the construction company of the redevelopment project where the Gwangju building collapse occurred, established a Safety Management Office two months ago to enhance safety and environmental management in response to the corporate environment changes emphasizing ESG. However, in a structure involving subcontracting and sub-subcontracting, there are inevitably limits to strengthening safety management that involves additional costs.

ESG is a concept introduced for sustainable development. Safety management is so fundamental to corporate sustainability that it is barely mentioned separately in ESG. If such safety management is compromised due to costs, not only sustainable development but also the survival of the company could be at risk.