"Exhaust Gas Manipulation Like Volkswagen Scandal" HDC Hyundai Development ESG Fund Remains Cold Shoulder, Inclusion Uncertain

On the 19th, officials from the Ministry of Employment and Labor and the police conducted a search and seizure at the headquarters of HDC Hyundai Development Company in Yongsan-gu, Seoul, in connection with the collapse accident at Hwajeong I-Park in Seo-gu, Gwangju. Scene from the day. / Photo by Moon Honam munonam@

[Asia Economy Reporter Lee Seon-ae] It is inevitable that HDC Hyundai Development Company's domestic and international ESG (Environmental, Social, and Governance) fund holdings will be excluded, and it is expected to be difficult to be included in such funds for the coming years. This outlook is possible when considering the case of Volkswagen, which suffered from exhaust gas manipulation and was unable to be included in ESG funds for five years. However, since HDC Hyundai Development Company originally had a low ESG rating and the number of funds including it was limited, the impact of exclusion is expected to be limited. Nevertheless, as ESG indices become more important and emerge as a key variable in investment strategies, if future inclusion becomes difficult, it is a reality that the company will inevitably be excluded from 'stocks (companies) receiving attention' due to unfavorable supply and demand conditions.

According to the financial investment industry on the 25th, HDC Hyundai Development Company's ESG rating is expected to be downgraded, making the impact unavoidable. As the number of funds pursuing integrated ESG strategies increases, the possibility of being screened out from fund investment stocks grows, which could lead to unfavorable supply and demand. The National Pension Service, the second-largest shareholder, has also declared an expansion of ESG investments, adding pressure. However, since the company already had a low ESG rating, the issue of exclusion from ESG funds is practically limited.

For ESG funds already in operation, the size of domestic ESG funds is rapidly increasing but still around 4 trillion won, and the proportion of Korean holdings in overseas ESG funds is also small. HDC Hyundai Development Company's ESG rating is low (MSCI ESG rating is B, the 6th out of 7 grades), so the number of funds including it is limited. Based on disclosed shares as of the end of 2021 (funds with ESG or social responsibility-related names in their titles, including ETFs), HDC Hyundai Development Company's ESG fund share ratio is only 0.14%. This is lower than Hyundai Engineering & Construction (0.45%) and GS Engineering & Construction (0.64%) by the same standard.

The issue is not 'exclusion' but the timing of 'inclusion.' If the company falls into a cold shoulder status amid the rising prominence of ESG, it means being marginalized in the supply and demand environment. ESG has now emerged as a key variable in the investment environment. Moreover, a decline in the Controversy score can have a greater impact than a downgrade in rating. In the recent apartment collapse incident, where six casualties occurred and the project was significantly affected, and considering a similar incident happened again within a year, it is highly likely that the Controversy score will be assigned a 0 (0 being the lowest, 10 the highest). Although major MSCI ESG indices such as the MSCI ESG Universal index do not have minimum ESG rating thresholds, a Controversy score of 0 results in automatic exclusion without exception. A representative example is Volkswagen, which was assigned a 0 score in September 2015 due to exhaust gas manipulation and was not included in ESG funds until the end of 2020.

Within Korea, it has been found that about 200 funds included HDC Hyundai Development Company. Asset management companies are already trending toward downgrading HDC Hyundai Development Company's ESG rating. Unlike the Ostem Implant incident, no market action has been taken yet, so they are taking a wait-and-see approach, but asset managers agree that a rating downgrade is inevitable. An industry official said, "Passive funds follow indices, so it is difficult to adjust inclusion ratios, but active funds decide inclusion based on the fund manager's judgment of corporate value, so weight adjustments will proceed."