Environmental, Social & Governance (2024)

As to the integration of ESG factors into companies’ business operations, the following legislation and regulations were recently announced:

• Sustainability Goals. On 5 July 2022, the Framework Act on Sustainable Development (FASD) came into effect. It specifies sustainability goals and the obligations of governments, as well as companies and citizens, to promote and achieve such goals.
• Environmental DisclosureObligation. In March 2021, the Environmental Technology and Industry Support Act (ETISA) was amended to expand environmental disclosure obligations to all companies listed on the KOSPI Market Division of the Korea Exchange (KRX) (KOSPI Listed Companies) with total assets greater than or equal to KRW 2 trillion. The disclosure obligations concern:
  • environmental goals and plans;
  • development and use of certain products or services to achieve such goals and plans; and
  • a list of achievements relating to the outcome of the environmental goals and plans.
• Governance Disclosure Obligation. Since 2019, the KRX has required KOSPI Listed Companies with total assets greater than or equal to KRW 2 trillion on a consolidated basis to disclose corporate governance reports. Beginning with the fiscal year 2022, and by the end of said year as well as every fiscal year thereafter, this obligation will be extended to companies having more than KRW 1 trillion on a consolidated basis and eventually to KOSPI Listed Companies by 2026.
• Disclosure Obligation on Information Protection System. In December 2021, the Act on the Promotion of Information Security Industry was amended to oblige companies providing an information service through information networks to disclose a system to protect the information including related investment, human resources, certificates, evaluation, monitoring, and other activities.
• Climate Change Impact Analysis. On 25 March 2022, the Framework Act on Carbon Neutrality and Green Growth to Respond to the Climate Crisis (FACNGG) came into effect. It sets out a carbon neutrality goal to be met by 2050 and obligations on companies to perform climate change impact analyses.
• ESG Disclosure Obligation. On 14 January 2021, the Financial Services Commission (FSC) announced that it will:
  • encourage voluntary ESG disclosure by providing ESG guidance;
  • prepare mandatory disclosure rules relating to ESG, which will become applicable from 2025 toKOSPI Listed Companies with more than KRW 2 trillion in assets; and
  • apply such disclosure rules to all KOSPI Listed Companies from 2030.

The Constitution of the Republic of Korea (the “Constitution”) provides ESG-related safeguards and guarantees a focus on the government’s obligation to protect human rights in relation to environmental and social issues caused by companies, through detailed laws and regulations. Pursuant tothe Constitution, laws and regulations imposing ESG principles on companies were adopted as follows:

• For environmental issues:
  • Framework Act on Environmental Policy;
  • Environmental Impact Assessment Act;
  • Act on the Integrated Control of Pollutant-Discharging Facilities;
  • Act on the Control and Aggravated Punishment of Environmental Offences;
  • Environment Dispute Mediation Act;
  • Act on Liability for Environmental Damage and Relief Thereof; and
  • Act on the Allocation and Trading of Greenhouse Gas Emissions Rights regulated by Enforcement Decree of Allocation and Trading of Greenhouse Gas Emissions Rights Act.
• For social issues:
  • Serious Accident Punishment Act (SAPA);
  • Labour Standards Act;
  • Anti-Discrimination against and Remedies for Persons with Disabilities Act;
  • Act on the Protection, etc. of Fixed-term and Part-time Employees; and
  • Act on the Protection, etc. of Dispatched Workers.
• For governance issues:
  • Commercial Code;
  • Fair Trade Law (which stipulates business interference as an illegal activity, but at the same time incorporates programs for cooperative development of large companies and SMEs in the supply chain);
  • Financial Investment Services and Capital Markets Act (which obliges KOSPI Listed Companies with total assets of KRW 2 trillion or more to appoint at least one female director to the board from 2022);
  • Act on the Corporate Governance of Financial Companies;
  • Improper Solicitation and Graft Act; and
  • Act on the Management of Public Institutions (which provides that non-standing directors of public corporations and quasi-governmental institutions shall include one person among the employees of the relevant public corporation/institution as recommended by the employee representative).

In relation to any human rights violations that cannot be addressed by the above legislation, citizens may file a lawsuit in tort law directly against companies, as well as under the Constitutional Court Act against the Korean government.

Korea has both public and private enforcement mechanisms in place based on the above-described legal system addressing ESG issues.

For public enforcement, various Korean regulatory bodies, including the National Human Rights Commission of Korea, are actively enforcing environmental, social, and human rights regulations against companies.

For private enforcement, Korea is seeing a rise in ESG litigation, including human rights and climate change litigation.

Climate change litigation includes:

• On 13 March 2020 and on 13 June 2022, respectively, 19 youth activists and 62 Korean youths, including 39 individuals under the age of 5, as well as a 20-week old fetus, filed complaints in the Constitutional Court against the Korean government, alleging that the government’s insufficient action on climate change violates their fundamental rights.
• On 28 September 2020, more than 60 solar power plant owners and residents near biomass plants filed a suit in the Constitutional Court against the Korean government challenging biomass subsidies on the grounds that biomass emits more carbon dioxide than coal.
• On 23 March 2022, Korean and Australian nationals, together with members of the indigenous community in the Tiwi Islands, filed an injunction against Korean investors in relation to the gas reserve off the coast of Australia, near the Tiwi Islands.

As for social issues, various proceedings have taken place or are currently pending, including, among others:

• In 2018, a global company in Korea reached a mediated settlement with an NGO group representing more than 600 ailing workers and the families of deceased workers whose ill-health allegedly stemmed from the use of chemicals in factories.
• Various legal proceedings have commenced since 2011 in relation to consumer health issues caused by humidifier sterilizer products involving more than 1,800 consumers. In 2018, some of the representatives of related companies were sentenced to criminal punishment for professional negligence which resulted in deaths. Other related proceedings are still pending.

Soft non-binding laws

• UN Sustainability Development Goals (the UN SDGs). The FASD provides grounds for the operation of the sustainability committee in the government and issuance of the annual report to promote the UN SDGs. Detailed sustainability goals in Korea (K-SDGs) were published in 2018 through a public consultation process.
• ESG Rating. One of the main drivers of ESG trends and developments in Korea is the Korean Corporate Governance Service (KCGS), a non-profit organisation owned by the KRX and other related entities, which establishes the codes of practice and carries out ESG evaluations, proxy analysis, and policy research. Through an annual evaluation since 2011, KCGS ratesKOSPI Listed Companies in seven different levels. The rating standards are regularly updated based on international standards, including the UN SDGs and theUN Guiding Principles on Business and Human Rights (UNGP).
• Corporates and Human Rights Guide.In December 2021, the Korean Ministry of Justice (MOJ) published the Corporate and Human Rights Guide (CHRG) based on the UNGP and the OECD Guidelines for Multinational Enterprises (OECD Guidelines). It provides detailed guidance to companies on how to conduct human rights and environmental due diligence in different industries.

Stakeholders

One of the most active non-profit organisations in the field of ESG in Korea is KCGS, comprising members from the KRX, Korea Securities Depositary, Korea Financial Investment Association, KOSDAQ, Korea Listed Companies Association, etc.KCGS, together with other international rating agencies, is driving companies’ ESG activities. As of August 2022, 192 institutional investors have signed on to KCGS’s Stewardship Code, including the National Pension Service (NPS) and the Korea Teachers Pension Service (KTPS).

The Korean public’s awareness of ESG issues has also increased in recent years. In May 2021, a survey result showed that more than 88.3% of consumers are willing to pay a higher price for products of ESG-compliant companies (Korean Chamber of Commerce and Industry, (KCCI), ’21.5).

Recently, the risk of greenwashing is significantly increasing as major financial institutions and companies voluntarily disclose their ESG commitments and information while there are no unified ESG standards. In August 2022, the Korea Financial Supervisory Service, a governmental body overseeing the sound operation of financial institutions in Korea, expressed its concern about greenwashing and announced that it will closely monitor the issuance and operation of ESG bonds to confirm whether they are in fact complying with the information disclosed to the public.

National Contact Points (NCPs)

The Korea National Contract Point (KNCP) was established in 2001 by the MOTIE in accordance with OECD Guidelines. KNCP has been active in human rights matters of Korean companies, organising fora to engage stakeholders, organising seminars, translating and distributing due diligence guides, and so on.

ESG regulation in Korea is process-focused, with various disclosure obligations imposed on companies, such as the environmental disclosure obligation, governance disclosure obligation, disclosure obligation on information protection systems, climate change impact analysis, and the ESG disclosure obligation.

Furthermore, most major Korean conglomerates are providing voluntary ESG disclosures in their annual or biannual reports following the Global Reporting Initiative (GRI), based on the matrices of double materiality and considering the materiality of financial impacts as well as environmental and social impacts. They also frequently adoptthe reporting framework of the Task Force on Climate Related Financial Disclosures (TCFD)and the Sustainability Accounting Standards Board (SASB).

Due to Korea’s high dependency on exports (and thus on the global market demand), Korea’s major industries are highly sensitive to global ESG initiatives.

Private equity

In 2022, we are witnessing heightened ESG attention in the local private equity sector, as the country's major limited partners (i.e., institutional investors who arrange and invest the capital for funds), such as the NPS and Korea Development Bank, begin to evaluate ESG considerations as key requirements when selecting their general partners (i.e., those responsible for making investment decisions).

Hedge funds/asset managers

As of August 2022, approximately 57 asset managers have adopted theKCGS’s Stewardship Code. In addition, some of the largest Korean asset managers have joined the TCFD.

Banks

Major financial holding companies have pledged to cut investments in fossil fuels and make their investment portfolios carbon neutral by 2050. The banking sector is currently rushing to establish in-house committees dedicated to ESG management as part of their efforts to tighten internal structures for transparent ESG management.

Small and medium-sized enterprises (SMEs)

A 2021 survey conducted by the Korea Federation of SMEs showed that 53.3% of SMEs felt that they “need[ed] to adopt ESG management,” while 89.4% felt that they were not prepared to adopt ESG measures. Most SMEs are facing requests for ESG evaluations by foreign customers and larger business partners and are looking to increase their fair trade responsibility indices. A 2022 survey conducted by the KCCI showed that, among 300 domestic export companies, 52.2% of the responding companies felt that contracts and orders from customers were likely to be disrupted due to insufficient ESG management in the supply chain in the future. When asked about ESG due diligence preparedness, 77.2% of SMEs answered “low,” while only 22.8% said “high.”

Fashion industry

An increasing number of companies active in the fashion industry are eliminating plastic bags while actively promoting eco-friendly brands as part of their efforts to meet ESG guidelines. In addition, many fashion companies are establishing committees dedicated to introducing ESG policies and other measures.

Automobile industry

Korea’s automobile industry is critical to achieving the government’s agenda of net-zero emissions by 2050. Korea has been introducing regulations to expand eco-friendly vehicles and is already implementing its plan to introduce a total of 624 hydrogen buses on the roads of the port cities of Busan and Ulsan and the province of South Gyeongsang by 2025 as a replacement for buses with combustion engines. However, key players are facing concerns about the new government’s plan to ban purchases of internal combustion engine cars by 2035, citing unease about the Korean part-makers’ (mostly SMEs) ability to meet the electrification deadlines.

Energy industry

Many Korean companies active in the energy sector have been listed on the Dow Jones Sustainability Indices (DJSI), the Carbon Disclosure Project (CDP), MSCI, KCGS, and have introduced sustainability management implementation systems.

Real estate industry

To reduce carbon dioxide emissions from real estate, the Korean government implemented the Green New Deal policy starting from July 2020 in order to digitalise and promote green buildings. In the Korean real estate investment market, significant global pension funds and large management companies have presented ESG conditions to set up blind fund agreements, using ESG as a significant investment principle and strategy.

Game and video industry

Several Korean companies in the game and video industries have launched ESG committees, published voluntary ESG reports, and introduced a corporate governance charter that lays the foundation of its sustainable business operation. These efforts aim to establish sustainable business activities within the game and video industry in Korea in line with EU and U.S. standards.

A survey conducted by the Daeshin Economic Research Institute in June 2021 found that of the total 106 listed companies affiliated with Korea’s 10 largest conglomerates, 50 of such companies had established ESG committees. Still, as there is growing concern as to whether these committees engage in any meaningful activities, it is expected that more focus will be on actual ESG activities going forward.

Specifically, the KRX’s Guidance on ESG Information Disclosure and KCGS’s ESG Codes of Practice require executives and board members to set companies’ ESG objectives, establish company-wide governance policies that incorporate ESG issues, and evaluate their performance on ESG issues. Furthermore, the board and management are advised to consider how best to allocate limited company resources as they seek to achieve ESG-related goals.

ESG rating agencies

Korean conglomerates are increasingly relying upon ESG rating agencies and indices, including the KCGS, DJSI, MSCI, EcoVadis, and Sustainalytics.

ESG benchmarks

ESG benchmarks most commonly used by Korean companies include the indices established by the GRI, KCGS, EcoVadis, Sustainalytics, WEF, and World Benchmarking Alliance.

ESG in Korea is mainly driven by large companies with business interests in Europe and the U.S., which seek to satisfy their investors’ and clients’ ESG concerns and to align their own policies with the ones already promulgated in the EU and U.S.

Private companies

Private companies in the supply chain of public companies may be indirectly impacted by the various disclosure rules explained in Question 2 above. However, as noted above, the ESG activity levels of SMEs still remain largely dependent upon the level of large companies’ assistance.

Public companies

As mentioned above, KOSPI Listed Companies will be obliged to disclose their ESG reports in a phased manner, beginning in 2025. In the meantime, many public companies are introducing ESG committees to develop ESG strategies and to integrate the newest legislation into their governance schemes.

Government-owned investors

The NPS and the KTPS have amended their investment policies to strengthen ESG considerations and augment their standards for more responsible investments.TheNPSrecently announced plans to accord higher evaluation marks to asset managers with investment policies that incorporate ESG and corporate responsibility standards. It will also require asset managers broadly to disclose matters relating to responsible investment in their fund management reports. TheKTPSannounced that from 2021, it will take into account ESG-related investment policies of fund managers and their track records in shareholder activities when evaluating asset manager appointments for managing investment portfolios of Korean companies.

Korean companies, which may be subject to disclosure rules as explained in Question 2 above, are facing difficulties keeping up with ESG agendas and management profiles adopted by larger companies in their supply chain.

In the 2022 survey by KCCI (mentioned in Question 7 above), responding companies indicated that there is a lack of internal expertise, while the burden of consulting/training costs and the lack of supply chain ESG due diligence information are considered some of the largest hurdles.

The Ministry of Environment of Korea established a national green taxonomy (K-Taxonomy) based on the ETISA. K-Taxonomy provides the classification of green economic activities contributing to six environmental goals:

• greenhouse gas reduction;
• adaptation to climate change;
• sustainable water conservation;
• recycling;
• pollution prevention and management; and
• biodiversity conservation.

Green economic activities must comply with three principles based on preventive environmental management and social consensus:

• contribution to environmental objectives;
• absence of serious environment damages; and
• the minimum protection mechanism.

It is divided into the “Green Category,” which contains green economic activities that are essential for carbon neutrality and environmental improvement, and the “Transition Category,” which contains transitional economic activities that are necessary to reach the ultimate goal of carbon neutrality.

Korean companies are racing to prepare for their annual ESG evaluations and to align their internal policies with current ESG standards suggested by various stakeholders.

Korean companies’ medium-term goals include preparation for ESG-related disclosures, given the FSC’s 2021 plan to mandate KOSPI Listed Companies to disclose their ESG reports in a phased manner.

As part of their long-term goals, we expect to see an increasing number of companies focusing on ESG-washing issues and ESG litigation, which will likely increase due to mounting public ESG disclosure. Companies may also face human rights due diligence obligations in the future, given the ongoing discussions among stakeholders concerning human rights and environment due diligence pursuant to the MOJ’s CHRG.