ESG management, which started from the perspective of investment by financial institutions such as pension funds, has become a management trend for global companies by pressing target companies for sustainable management. Recently, ESG management has been spread not only to private companies but also to public institutions, which is reflected in Korea’s performance evaluation of public institutions.
Public institutions are in a suitable position to lead a change in the private sector by setting an example in ESG management because their establishing purpose is for public interests and the community building. However, Korean state-owned enterprises and quasi-governmental organizations have not established proper ESG management strategies yet.
The public sector has different characteristics from private companies in three areas of ESG: E (environment), S (social), and G (governance). First of all, public companies have similar characteristics in G as private companies, so they pursue the interests of shareholders, but on the other hand, they must simultaneously pursue the policy goals, too. Public institutions other than public companies are different from public companies in G.
In the case of the social (S) sector, the public sector should pursue social values more than private companies. This is because public institutions themselves were established to increase social value or social utility.
In the case of the environmental (E) sector, The public sector should lead the private sector in achieving national carbon reduction targets, using renewable energy, reducing sediments and wastes, and realizing a circular environment because they are public.
In the end, the core of the ESG management strategy of public institutions can be said to be a leading role in establishing a governance structure suitable for the public sector, promoting social values, and coping with climate change.
However, there are not many preceding studies on how the public sector should practice ESG management. Therefore, to establish the ESG strategy of the Korean public sector, it may be beneficial to identify cases of public institutions in major advanced countries around the world that are already building performance and establishing systems ahead of Korea.
There are different kinds of interesting cases of ESG management by public institutions. First of all, France has traditionally accumulated know-how in public sector management of public institutions. The UK public institutions are an important subject of research due to the abundance of cases of privatization. Sweden has a strong public sector due to the social democratic tradition of Northern Europe. German cases are also interesting because of their stakeholder governance, involving stakeholders such as workers in the corporate supervisory board.
The U.S. is a leading country of shareholder capitalism centered on the capital market, and the role of the public sector is not large. However, its public sectors such as Fannie Mae (housing finance) and Amtrak (railroad) are also exemplars. In addition, Japanese public institutions are of interest because they have a similar corporate culture to Korea.
Regarding ESG management of public institutions, international organizations present some guidelines. Representatively, the OECD announced guidelines for multinational enterprises, governance guidelines for state-owned enterprises, and anti-corruption guidelines for state-owned enterprises, It is no exaggeration to say that these three are OECD ESG guidelines.
The UN’s Global Compact, Principles of Responsible Investment (PRI), SDGs, and principles for human rights and business (UNGPs) are important guidelines that Korean public institutions should follow.
In addition, initiatives related to ESG information disclosure also affect the management of public institutions. Public institutions need to understand and apply various initiatives, such as the Sustainable Accounting Standards Board (SASB), the International Sustainability Standards Board (ISSB), the Carbon Information Disclosure Project (CDP), and the Climate-Related Financial Information Disclosure Task Force (TCFD), and the GRI.
In this study, the following implications were derived as a result of studying the policies and ESG status of public institutions in the EU, France, Sweden, Germany, Japan, the United States, and the United Kingdom.
First, in terms of the management type of public institutions, it was found that major countries around the world are converging into a centralized management system. This is the recommended method by the OECD’s governance guidelines for public enterprises, and countries with decentralized or dual management systems are also shifting to centralized management systems.
Second, the governance structure of public institutions is bound to be more stakeholder-centered than that of private companies, and public institutions in major countries were implementing stakeholder-centered ESG management.
Third, The pursuit of social values of public institutions is more powerful and is being promoted through ESG. This is because the purpose of the establishment itself is for the benefit of the community.
Fourth, public institutions were leading the private sector in environmental management. Setting and implementing environmental goals such as NetZero RE100, and SBTi requires considerable cost and sacrifice, where public institutions show examples for the private sector.
Fifth, public institutions in major countries’ESG management target are 17 SDGs, Global Compact, Principles of Responsible Investment (PRI), and Human Rights and Business Principles (UNGPs).
Sixth, as guidelines for achieving these goals, public institutions adopted and followed OECD guidelines for multinational enterprises, governance guidelines for state-owned enterprises, and guidelines for anti-corruption and integrity. In particular, Germany has made 20 principles of the Sustainability Code and 20 checklists by creatively synthesizing these guidelines.
Seventh, in the environmental field, most state-owned companies around the world aim to achieve carbon neutrality before 2050. In addition, as a means of achieving it, it has joined RE100 and has joined SBTi, which scientifically verifies its methodology. In addition, most of them had ISO 14001, an environmental management certification, and 50001, an energy management certification.
Eight, in terms of governance structure, most public institutions had a board-centered management system. The board of directors could appoint and dismiss the head of the agency with independence. The chairman of the board of directors and the head of the institution were separated, the proportion of directors of women or minorities was set, and the proportion of independent non-executive outside directors should exceed half.
Ninth, in the case of Germany, France, and Sweden, which have relatively strong socialist tendencies in the pursuit of social values, the strong momentum of social value was confirmed, but in the case of the United Kingdom, the United States, and Japan, the momentum of social value was relatively low.
Tenth, in connection with the appointment of heads or directors of public institutions, most countries established a tradition of excluding politicians. In the case of the United Kingdom, the Commissioner for Public Appointments monitors, regulates, and discloses the appointment of executives of various public institutions, and the main role is to block personal influence and personnel intervention. The French Public Enterprise Management Agency (APE) integrates and manages the appointment of executives, management contracts of the head of the agency, management performance evaluation, and disclosure of management information including financial information.
Eleventh. a significant portion of public institutions in major countries prepare and disclose sustainability reports through the GRI reporting methods. Public companies in each country include sustainability in their annual reports or publish sustainability reports separately.
Finally, as the above analysis was applied to Korean public institutions, we know that ESG management of Korean public institutions is still in the introduction stage and is at a standstill. In particular, only a few public institutions have declared Net Zero in the environmental field or participated in RE100 and SBTi. Of the 63 domestic RE100 declaration companies, 13 are public institutions. The Korea Agricultural and Marine Products Distribution Corporation is the only public company that has joined SBTi, a scientific methodology for Net Zero.
However, since 2018, the social aspect of ESG management in Korean public institutions has been improved but ESG management across employees, consumers, supply chains, and social contributions is still not organized.
The Achilles heel of ESG management, a Korean public institution, is the governance structure. Above all, the management of public institutions is still centered on the head of the institution, not the board of directors. However, it has become fixed that the head of a public institution is not appointed mainly based on competence or expertise, but is appointed as compensation for its contribution to the election campaign.
To overcome this situation, the management goals and missions of public institutions should be redefined. The U.N. Sustainable Development Goals (SDGs) can be used as an important criterion. The 17 SDGs objectives can be mapped accurately to ESG. Among the 17 goals, selecting goals suitable for their establishment purpose and applying them to management is the way public institutions in advanced countries implement ESG management.
After selecting goals, detailed action plans should be created according to global guidelines for each field of governance, environment, and society. The first thing to be improved in terms of governance, which is a weak point in the Korean public sector, is the ownership management system in the external governance structure. The Public Institution Steering Committee, which can be said to be an external governance organization of public institutions in Korea, is established as an institution under the Ministry of Strategy and Finance, so its independence is not guaranteed. It seems a desirable plan to reorganize it into an independent ownership management organization like the French Public Enterprise Management Agency (APE).
Regarding the external governance structure, the issue of securing transparency and expertise in the appointment of heads of public institutions is also an urgent task to be solved. One of the chronic problems related to the selection of heads of institutions in Korea is the issue of appointment and replacement of heads of institutions linked to regime change. The OECD Anti-Corruption Guidelines recommend banning the appointment of political figures without the expertise to the public institutions.
Next is the improvement of internal governance. it is important to secure management transparency to prevent a head of the institution from pursuing private interests and lax management. To this end, it is essential to secure an internal control system by enhancing the role of the board of directors.
Regarding the improvement of internal governance, the OECD guidelines stress that the board of directors should be able to determine practical management strategies in the management of public corporations and to monitor and check management strategies.
However, in the case of Korea, there is a clear tendency to focus all authority and responsibility on the head of the public institutions.
Korea should now improve the internal governance structure of public institutions, which means centering on the board of directors. The OECD guidelines for determining the independence and autonomy of the board of directors has three criteria: whether the chairman of the board of directors is separated, the proportion of non-executive directors within the board of directors, and the right to appoint and dismiss the head of the institutions. The president of Korea directly appoints the heads of large institutions and public enterprises, and the heads of quasi-governmental institutions are appointed by the minister. The authority of the board of directors is very weak in that the government holds the right to appoint the head of the institutions.
Currently, the appointment and dismissal of directors for the formation of the board of directors of public institutions are made separately by the minister regardless of the characteristics or size of the institution. It is necessary to clearly define the qualifications and requirements for the appointment of directors. Auditor has the same situation.
Another thing the OECD emphasizes concerning the role of the board of directors of public institutions is the risk management ability. The OECD stresses that the role of non-executive directors who do not directly participate in management activities but have accumulated various experiences in each field is very important for crisis management. In Korea, the board of directors of public institutions lacks not only expertise but also diversity, so improvement is urgent.
In addition, the minutes of the board of directors meeting should be transparently disclosed. In addition, the term of office must be guaranteed with sufficient authority to the board of directors, and the activities of the board of directors must be strictly evaluated. In addition, it should be possible to give sufficient authority to non-executive directors.
The OECD also emphasizes transparency in board activities, and Korea is required to disclose matters related to the management of public institutions through www.alio.go.kr. Basic information related to the operation of the board of directors is being disclosed on the site, but it is pointed out that there are still many things to be improved.
Most of the public institutions in major countries are leading the NetZero under the Paris Agreement. Most are aiming to achieve NetZero by 2050, with some disclosing their goal of achieving NetZero earlier than 2050. In addition to responding to climate change, public institutions are taking the lead in implementing a circular environment system that respects biodiversity and uses resources in circulation.
Korea’s public institutions shouldl not only declare 2050 carbon neutrality but also have to present their goals to SBTi and certify their methodologies. In addition, it is necessary to reduce water use and discharge of attractive substances, increase the use of renewable energy, recyclables, and eco-friendly products, and transparently disclose related information.
The way public institutions in each country implement social values is very diverse. In the case of the UK, social value laws are simply intended to consider social value in public service procurement, but Swedish public companies are pursuing social value broadly based on the concept of community building.
It is the OECD guidelines for multinational enterprises that well define ESG activities in the social sector. This covers the United Nations’ human rights and business guidelines. These values of the social part have already been well introduced in the social value part of the performance evaluation of public institutions in Korea, and have been strengthened since 2018. However, it is still pointed out that the indicators of diversity and inclusion are insufficient.
For public institutions to effectively manage ESG in the future, it is necessary to reorganize the current public institution performance evaluation system centered on ESG. A policy was recently announced to reduce the social value sector, which has been increased significantly in the Moon Jae Inn government, and to increase the score of the financial sector. As the regime changed, the direction of ESG management in public institutions changed.
This change due to the political perspective of the government makes public institution difficult to manage ESG. The organization of the institution was changed according to the performance evaluation result and manpower was reassigned, but it was in a situation where it had to be repaired at once. In addition, the consistency of the evaluation was undermined, and it was difficult to use the results of the performance evaluation for future management.
One idealistic alternative is to use an internationally reliable sustainable report format as a standard format for the performance evaluation report of public institutions. The GRI method, the world’s most widely used sustainability report format, can be used to prepare a performance evaluation report for public institutions.
If the reporting format is adopted following international standards and experts in the field evaluate the report by international standards, the management of public institutions in Korea will be internationally certified. For example, disclosure using the GRI criteria in the pursuit of achieving the UN SDGs will increase consistency between objectives and reporting and result in a self-contained quality ESG evaluation.
However, in reality, since this work takes a lot of time, it is necessary to thoroughly analyze the current performance evaluation indicators of public institutions from an ESG perspective and add new indicators. It is also a natural step to change the allocation percentage of the changed indicators.
Analyzing the 2022 management evaluation indicators released at the end of 2021 from the perspective of ESG, too much focus on the social sector was found. In the case of the environment, only 0.5 out of 50, and the governance structure is only about 7.5. On the other hand, 32.5 points are assigned to the social sector. making it difficult to evaluate ESG in a balanced manner with the existing performance evaluation indicators. Of course, there is a separate auditor evaluation to supplement the governance structure, but it cannot be denied that the performance evaluation as a whole is too biased toward social value evaluation. Therefore, such a system cannot properly evaluate or encourage ESG management of public institutions.
Therefore, the management evaluation index of public institutions should be revised significantly. It is desirable to classify the whole into five categories: management strategy, governance structure, society, environment, and finance, and balance the proportion of each index at 20%. In addition, it seems necessary to assign five points to ESG among 50 points in the major business sector by establishing an index to evaluate whether the project has been carried out from an ESG perspective.
In addition, it is necessary to adopt a differentiated evaluation method considering that public companies, quasi-governmental institutions, and other public institutions have different purposes of establishment, management goals, and ESG management environment.
In conclusion, ESG management of public institutions should establish a transparent decision-making structure centered on the board of directors in the governance structure, serve as priming water in the environmental sector and pursue social values more actively than the private sector. The government should make efforts to improve the public sector performance evaluation system in consideration of global ESG trends and overseas cases as a powerful means to drive this.