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[Market Close-up] Socially responsible investments draw limelight in pandemic-hit global market

Limited access to data, lack of measurement tool, low interest are hurdles in Korea

(123rf)
(123rf)


The unprecedented coronavirus pandemic has presented an opportunity for ESG investments -- those in companies that comply with environmental, social and governance standards -- according to market experts Thursday. 

According to the experts, ESG investing will continue to grow in the capital market that is now reeling from uncertainty and volatility, citing rising demand for sustainability in corporate management and investment. Despite the renewed global attention to ESG investing, South Korea, however, seems to have a long way to go.

ESG investing gained momentum only last year with major institutional investors vowing to exercise a stewardship code. But it is the state-run National Pension Service that is a key player, as it accounts for over 90 percent of total ESG transactions in the country, according to the Korea Investors Service. 

It being the dominant player in ESG investing reflects a lack of interest from markets and individual investors.

Limited access to data or a lack of certified tools to measure the ESG levels of companies are also hurdles for investors.

Korean companies with total assets over 2 trillion won ($1.63 billion), are obligated to release corporate governance reports, but not on their environmental and societal commitments. 

Kim Min-jung, an analyst at Hanwha Investment and Securities, said conducting transparent evaluation of their ESG efforts and making it mandatory to release the data is important.

“Financial authorities should obligate local companies to measure and release all ESG factors so that investors can make proper investment decisions,” she said.

Local asset management firms have been also stepping up to follow the global trend, introducing five ESG funds last year. But there should be more incentives, such as tax breaks, to draw greater attention to ESG investing, the KIS said.

Drawing retail investors’ attention to ESG-aware investments is the key to pushing companies to enhance sustainability in management, said Yoon Jin-soo, head of the ESG business division at the Korea Corporate Governance Service, the country’s leading proxy adviser.

Such corporate efforts would prepare them for unexpected risks, like coronavirus. 

“As the virus infections spread, Asia-Pacific shares of companies with the highest ESG scores outperformed other stocks by nearly 6 percent in March,” Yoon said, citing research findings that companies with higher ESG scores saw an increase in average stock returns in 2018. 

It may contribute to wiping out foreign investors’ lingering distrust of Korean markets in regard to governance issues of Korean conglomerates controlled by a small number of ownership family members.

South Korea ranked ninth out of 12 major economies in the Asia-Pacific region last year and family-dominated governance as well as low dividend payout ratios have prevented the country from being reclassified as a developed market by index provider MSCI, according to an official at the Asian Corporate Governance Association. 

“Individual investors’ continuing interest is a driving force underlying the positive changes to local companies driven by the ESG investing. Their active participation combined with companies’ ESG-oriented activities will slowly change the global trend into a common investment practice in Korea, rather than a temporary boom,” said Yoon. 

Taking corporate responsibility as its core value, SK Group, the country’s third-largest conglomerate, last year introduced an evaluation index to measure social values generated by 16 affiliates. Chairman Chey Tae-won, a second-generation chaebol scion, is at the center of the drive, seeking ways to measure value created in its efforts to make a better society and happier organization. 

Chey, in a public speech, stressed the need to measure such subjective value, saying that investors and customers in the future will look for companies’ capabilities in sustaining their business, not just operation profits in numbers. The group has been encouraging other corporate peers to join the move, but no significant change has been seen so far. 

Individual investors’ stronger appetite for ESG investing is likely to pressure companies to carry out corporate social responsibilities as part of improving credit in the global financial markets, he added.

Global rating agency Moody’s said nearly 33 percent of its ratings actions in 2019 were made in accordance with ESG factors, according to its latest report. 

The pandemic could act as a catalyst for ESG investing when companies’ sustainable management or business resilience have become important factors to counter the economic fallout, market watchers said.

“We think the pandemic could precipitate a more acute focus on ESG factors from both companies and investors. Indeed, strong ESG performers with stakeholder-focused and adaptive-governance structures are likely to remain resilient amid these rapidly changing dynamics,” said Bertrand Jabouley, an analyst at S&P Global Ratings. 

The global investment figure reached nearly $30 trillion in 2018, up 34 percent from $22 trillion in 2016, industry data showed. 

By Choi Jae-hee (cjh@heraldcorp.com)

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