Recently, ESG(Environment, Society, and Governance) concerns are rapidly growing both domestically and internationally in various fields such as investments, management, consumers, and government policies. Beyond the concept of investment criteria or policy instruments, ESG can be defined as a value system for sustainable prosperity of the human community. ESG issues are rapidly becoming impending socioeconomic risk factors, but it is also being actively researched and implemented as an opportunity and solution in a variety of fields.
The current popularity of ESG can be explained in terms of the role-sharing relationship between the government and the market. The characteristics of political demands have altered as existing socioeconomic problems have accumulated. And the technologies that could be used to solve problems advanced quickly. As a result, not only has the nature of the problem in each industry changed dramatically but so has the relative superiority of efficiency between the market and the state. In the role-sharing of the market and the state, there are wide spectra between mutually exclusive extremes of market failure and government failure.
Shareholder capitalism has not been able to adequately respond to various side effects that damage the natural environment and social community in the process of pursuing economic growth. In the early 1980s, the international organizations began addressing sustainable development in which current economic development does not jeopardize future generations’ economic prosperity. Concerns about sustainability began with environmental issues and grew to include human rights and social ideals. It has been summed up as the ESG concept in recent years, which encompasses three aspects: environmental, social, and corporate governance.
We present examples of companies that are following an ESG approach. Many businesses are spearheading ESG initiatives, and their patterns vary. Some companies, such as Patagonia, have been doing ESG activities consistently since the beginning. In some cases, such as with Unilever, ESG difficulties are represented in existing business practices, but corporations like Schneider Electric, CLP Group, and Oersted have entirely rebuilt their businesses, eliminating certain existing businesses and launching new ones that are compatible with ESG ideals. ESG is also attracting a lot of attention from Korean businesses, particularly in the area of environmental challenges. Given the current situation in Korea, where controlling owners frequently exercise management rights, corporate governance challenges are considered to represent both a threat and an opportunity for the Korean firms.
National ESG strategies are also required, in addition to business ESG plans. The notion of “market failure” serves as a justification for national policy intervention in general. Many initiatives, however, have unintended consequences or are ineffective, as the term “government failure” implies. Market and government roles should be linked on the basis of efficiency. Not a binary distinction of “market or government,” but new frameworks of collaboration between the “market and the government” should be sought. Referring to the remarkable ICT developments such as AI and big data, cutting-edge financial instruments, and various organizational/ management techniques, it is necessary to readjust the existing government policy intervention area and redesign the method innovatively.
Carbon taxes and minimum corporate tax rate regulations are two contemporary international ESG concerns that have been explored. Korea has evolved in terms of economic size and technological level, but still remains developing status with the environmental and energy challenges. As a result, we should create phased implementation schemes and support systems for the significantly and abruptly burdened industries and SMEs, while actively participating in international ESG talks and reforming associated institutional structures.
We also present policy examples from a variety of countries on ESG challenges. The European Union (EU) has taken the lead in instituting ESG regulations such as green taxonomy, sustainable financial disclosure, corporate sustainability reporting, human rights and environmental due diligence responsibilities of business supply chains, and carbon taxes. The U.S. Biden administration drafted state goals closely related to ESG, such as restoring democracy and strengthening human rights, digital innovation, regional development, resolving educational inequality, diversity and equality, and expanding corporate transparency and corporate responsibility. In Japan, diversity guidelines and health management strategies are notable. Individuals and enterprises’ social credit in China are assessed at the national level. This summer, the Chinese government formally unveiled the slogan “Common Prosperity.” Chinese ESG initiatives, such as outlawing monopolies, cracking down on giant platform businesses, and expanding educational equity, are also noteworthy. India is the only country in the world where corporate social responsibility is required by law, and non-compliance with CSR expenditure obligations can result in criminal penalties for firms and their leaders. Meanwhile, the OECD announced on October 8, 2021, that 136 countries and jurisdictions have agreed that certain multinational enterprises (MNEs) will be subject to a minimum 15% tax rate, effective from 2023. Korea also has to develop policies to improve tax transparency and corporate social responsibility.
Investment and business management ESG infrastructures are also critical. This necessitates an adequate division of the roles between the public and private sectors. We need consistent standards for ESG financing, which necessitates an ESG disclosure system and a green taxonomy to determine whether it belongs under the ESG category. Many private agencies have started offering ESG rating services in recent years, but their rating methods are vastly different, and the results are under-correlated with each other. There are also worries that foreign agencies’ ESG assessments do not fully represent Korean-specific circumstances. It might not be a good idea for the government to conduct ESG evaluations directly because it could weaken market discipline. The government, on the other hand, should appropriately oversee the ESG rating system’s entire structure.
We discuss how to establish and implement ESG policies in Korea in a strategic fashion. K-SDGs and the Korean New Deal are two of the most common ESG policies now in use. In addition, 23 Presidential Committees have been established to advise and deliberate on the national policy agenda, including the National Balanced Development Committee and the Aging Society and Population Policy Committee. In addition to the Prime Minister and ministries, there are around 500 committees. This policy approach appears to be in line with ESG trends that are now gaining traction around the world. However, because overlapping policy implementation by separate committees or ministries can lead to inefficiency and conflicts of interest, it is vital to examine integrated policy design and action plans.
We recommend that the National ESG Committee, ESG reports from each ministry, and national ESG strategy reports are established. To begin, we need a policy classification system, such as modularizing individual policies, to effectively control and manage policy duplication. This system should be based on the ESG national plan and be as consistent as feasible with the green categorization system (K-taxonomy). From an ESG viewpoint, it is vital to identify major problems and hazards affecting our society, as well as to map existing policy goals for each risk category. We propose that social “issues” or “risks” be organized into the K-Risk Matrix, with K-SDGs as a primary subset of solutions. The K-Risk Matrix is a diagram that depicts the “likelihood” and “impact” of threats to Korean society, and it may be created using information from the World Economic Forum’s Global Risk Report.
As an action plan, we must first define and taxonomize ESG activities and then construct ESG information infrastructures such as accounting and disclosure systems. ESG rating agencies, in particular, should be prepared with suitable regulations and supervisory processes. These ESG policy objectives should attempt to promote fair and efficient market competition and give a solution to both market and government failure.