ESG standing for Environmental, Social and Governance has recently emerged as an important subject in the international community. Economic activities considering ESG are being strengthened, and the importance of ESG-related reporting and information disclosure is being emphasized. This study examines the global responses and major issues in ESG and analyzes the ESG scores of firms across major countries and impacts on employment and productivity. Based on these results, it aims to provide implications for government and private sector to address ESG.
In Chapter 2, we examined ESG policy trends in selected countries and the key issues regarding implementation of ESG. The European Union plans to implement the new Corporate Sustainability Reporting Directive, revised existing Non-financial Reporting Directive, requiring more companies to report more detailed sustainability information on an annual basis from 2024. Moreover, the EU aims to establishing ESG ecosystem by introducing sustainable finance strategies as well as the EU taxonomy for environmentally sound economic activities. Recently, the United States has been promoting the enhancement of disclosure regulations, especially for climate-related information, mainly driven by the Securities and Exchange Commission. Asian countries such as South Korea, Japan, China, ASEAN, and India also place increased emphasis on voluntary or mandatory ESG-related information disclosure provisions and guidelines.
Chapter 2 also covers main issues and challenges to be addressed by both Korean companies and government in dealing with ESG practices and policies. First, in order to improve the consistency and comparability of ESG information, it is necessary to integrate various disclosure standards and set up an internationally accepted common standards. Next, the ability of Small and Medium Enterprises to respond to changing landscape of ESG including data disclosure and due diligence duty is increasing important in attracting investment and participating in global supply chains. In addition, since ESG information is used as important basis for decision-making by companies, investors, financial institutions, consumers, and regulators, companies need to make great efforts to improve the quality of ESG data while government should design policy to facilitate these efforts. Finally, we should consider the various factors that make up the sustainability of corporate activities in a balanced manner so that ESG discussions and systems are not overly focused on a specific area.
Chapter 3 reviewed the current status of international supply chain due diligence regulations and major issues, focusing on the recently released EU supply chain due diligence guidelines, and analyzed Korea’s policy support and response conditions. The EU supply chain due diligence guidelines are based on discussions on human rights due diligence by major international organizations such as the UN, OECD, and ILO, and recently EU member states and the United States have also enacted and reorganized their own human rights due diligence laws. In particular, unlike other systems, the EU supply chain due diligence guidelines stipulate due diligence obligations for ESG as a whole. In addition, EU supply chain due diligence guidelines can affect not only directly regulated companies but also domestic and foreign companies in business relationships with them. Therefore, it can be seen as an important issue in terms of the global supply chain.
However, the EU supply chain due diligence guidelines are set to be approved by parliament, and there are still various opinions among stakeholders on whether to include climate change and governance in the supply chain due diligence. In addition, there are currently different opinions from the guideline on whether small and medium-sized companies should be obligated to conduct due diligence on the supply chain and what stage of suppliers will be included in the subject of due diligence on the supply chain. In addition to EU guidelines, there are various national regulations such as the United States, Australia, and Canada, so the cost of compliance is likely to increase significantly, and these systems can act as de facto barriers to market entry. In this situation, Korea has also recently begun government-supported projects to respond to due diligence on the supply chain, but the overall interest and response level of the industry is not enough except for some large companies, and 89.4% of SMEs are not ready for ESG.
Chapter 4 compares the total ESG score across countries including Korea using Moody’s ESG rating, one of the most famous ESG rating agencies. Unlike other rating agencies that only evalute large companies, Moody’s provides prediction scores for small and medium-sized companies that lack ESG data and thus cover most listed and external audit companies in Korea. According to the empirical analysis, Korean companies’ 2021 scores lag in all areas (ESG/E/S/G) compared to 17 high-income countries and major Asian countries. The scores are low even after controlling companies’ financial characteristics and industry fixed effects, especially in the G area. Specifically, the average of Moody’s ESG scores in 18 countries is 20.7 points, and the average of E, S, and G scores are 12.7, 19.7, and 29.9 points, respectively. In contrast, ESG, E, S, and G scores of Korean firms are 11.5, 6.5, 13.3, and 13.3, respectively. Considering that financial characteristics and industrial distribution of companies vary across countries, the difference in scores may have contributed to the low ESG score regardless of corporate characteristics. However, even when comparing only companies sensitive to ESG evaluation, such as major listed companies and large companies, the ESG performance of Korean companies is insufficient. This result is consistent when using Refinitiv scores, another global ESG rating agency.
Chapter 5 examines how ESG evaluation affects firm-level employment and productivity growth. The correlations between the explanatory variables (environmental, social and governance scores) and the dependent variables (employment growth rate, labor productivity, and total factor productivity) were positive in general except for the case of employment growth rate, regardless of whether there is a time lag in the explanatory variables. However, in the panel regression analysis which includes the control variables, there were many cases where there was no effect or a negative effect. A common conclusion from the panel regression analysis can be summarized that (1) governance scores reduce employment growth rate in the non-manufacturing sector, (2) environmental scores negatively affect labor productivity growth in all industries, and (3) environmental and social scores improve total factor productivity growth in non-manufacturing sectors. For the overall score, no common conclusion could be found between the model with the lag and the model without.
Given that ESG activities mainly provide information to investors through disclosures in the capital market and encourage companies to pursue sustainability in the long run, it isn’t easy to see a visibly positive effect on corporate productivity or employment growth in the short run, which takes more time than financial performance. On the other hand, the positive effect on productivity in some literature studying cases for the advanced economies may reflect the fact that their ESG activities have been settled earlier than ours. In contrast, Korea has a relatively short history of full-fledged introduction of ESG activities. Therefore, rather than interpreting this result as a negative effect of ESG activities, it would be more desirable to approach and interpret it from the perspective of paying current costs to contribute to the long-term sustainability of society, businesses, and market participants.
Chapter 6 presents Korea’s policy countermeasures against the spread of international ESG discussions based on the previous discussions as follows. First, governments and regulators need to focus on overhauling the institutional infrastructure related to ESG application to promote voluntary efforts of companies and investors, rather than forcing ESG information disclosure or ESG investment. First of all, when providing non-financial information reporting guidelines, it is necessary to ensure the autonomy of the private sector by approaching the minimum standards as possible. In addition, the government needs to identify what policy support is needed for SMEs participating in global supply chains to be ESG competitive, and to overhaul more fundamental socioeconomic systems surrounding corporate activities such as industrial accidents and labor-management relations laws.
Second, it is necessary to continuously monitor and actively participate in discussions on international supply chain regulations, focusing on the EU supply chain due diligence guidelines, and to expand and reorganize the supply chain due diligence support system for SMEs. In particular, in the case of the EU supply chain due diligence guidelines, it is necessary to monitor discussion trends as there is still a possibility that the contents will change in the process of parliamentary approval, and efforts to convey the opinions of our companies are also needed. In addition to the EU, various countries have recently introduced and operated supply chain-related regulations, so it is necessary to actively participate in international trade cooperation related to supply chain due diligence that may be discussed in the future as well as supporting companies’ responses.
Third, governments and companies need to conduct external communication and policy efforts to more actively enhance ESG activities. First of all, the government needs to actively inform major institutional investors and ESG evaluators of domestic ESG enhancement efforts externally, and also needs to identify the difficulties of companies and actively support them in policy. Companies also need to inform investors and the general civil society of their efforts to improve non-financial indicators that reflect the values of various social needs and contribution activities.
Fourth, it is necessary to preferentially provide ESG consulting activities to small and medium-sized companies that are closely connected to them in business rather than to large companies. In the case of small and medium-sized manufacturers in Korea, since they are closely connected to large companies through supply chains, whether small and medium-sized companies engage in ESG activities can be an important issue for large companies. Therefore, support for small and medium-sized enterprises needs to be strengthened rather than large enterprises with abundant in-house resources. Above all, as the government has recently emphasized support for infrastructure upgrading to create a private-centered ESG ecosystem, government policies needs to focus on strengthening ESG activities of SMEs and identifying corporate constraints in the mid- to long-term.