[Viewpoint] ESG Management and Economic Value Added in the Era of Great Transformation

Professor Choi Guk-hyun, College of Business Administration, Chung-Ang University

The 2020s seem to be filled with groundbreaking events from the very beginning of the new decade. The COVID-19 pandemic, which began last year, continues to sweep across countries worldwide, while climate change due to global warming is causing unprecedented weather anomalies around the globe, such as heatwaves in South Korea and heavy rains in Henan Province, China. In addition to these natural disasters, the international confrontation between the United States and China is pushing the already divided world into a vortex of chaos.

Accordingly, global companies are choosing paths of self-reliance, riding the overwhelming waves of great transformation and chaos, resulting in a widening gap between companies that survive and prosper and those that perish amid the waves of change. Perhaps our society currently yearns for companies that can act as saviors overcoming pandemics and climate change, while also expecting the emergence of companies that can satisfy humanity’s endless desire for development and progress.

ESG (Environmental, Social, and Governance) management, which raises the flag for corporate sustainability and growth in response to the demands of the era, must move beyond mere slogans. For companies and society to coexist and prosper together, ESG management must strike an appropriate balance between the individual goals and common aspirations pursued by both corporations and society. The negative consequences of failing to do so have already been demonstrated through various ESG management failures. Representative examples include the replacement of management at French agricultural company Danone due to declining profitability, the loss of credibility and management overhaul at Volkswagen Group caused by emissions and fuel efficiency manipulation, and governance failures such as ownership risks and inappropriate market disruption at Namyang Dairy Products.

The goal of companies through ESG management is to coexist and prosper with society. Economists argue that corporate value creation is achieved through economic value added (EVA), which is profit exceeding the cost of capital. Leading companies in the United States and many other countries use EVA as a performance indicator for setting management goals and evaluating results.

Although EVA is a quantitative measure expressed in monetary units, unlike traditional accounting and financial concepts that treat expenses such as research and development, training, and corporate promotion as costs on financial statements, EVA recognizes these as essential investments for corporate survival and growth. It capitalizes related expenditures and recognizes costs over appropriate benefit periods, thereby expanding the scope of intangible assets. This approach allows EVA to inherently include the expenditures and benefits of ESG management. Thus, EVA can encompass performance indicators of corporate management under ESG management alongside traditional performance metrics.

In fact, asset management firms such as Oppenheimer on Wall Street actively use EVA as a key indicator when selecting investment target companies. Therefore, performance indicators like EVA, which include ESG management outcomes, are expected to provide more effective and intuitive information for asset managers?major participants in capital markets?to establish efficient investment plans.