Regulatory and fiduciary obligations
Are institutional investors and financial intermediaries legally required to consider ESG factors when making investment decisions? Are there additional non-financial principles and objectives to consider?
In principle, institutional investors and financial intermediaries are governed by company law when managing their own assets, and by capital markets law (which regulates commercial collective investment entities and fiduciary commercial entities) or trust law (which regulates trustees) when managing the assets of others in the form of trusts or investment funds. However, these laws do not yet contain any provision, mandatory or voluntary, obliging companies to take ESG factors into account when making investment decisions.
With respect to pension funds, pension laws such as the National Pensions Act may be applicable. Under the National Pensions Act, there are provisions expressly allowing the consideration of ESG factors to the extent that they are based on profit maximization. Article 102(4) states that in order to increase a stable long-term income, ESG factors relating to an investment objective may be taken into account. Pursuant to Article 103-3, the Special Fiduciary Responsibility Commission of the National Pension Fund Management Committee examines and deliberates on ESG considerations.
In addition, industry-specific ESG-related laws continue to be developed to encourage institutional investors and financial intermediaries to consider ESG factors in their investment decisions. For example, under Article 10-4 of the Environmental Technology Law, financial institutions must incorporate environmental factors into their decision to invest, thereby making an environmentally friendly investment. With the enactment of the Carbon Neutral Act in 2021, Korea became the 14th country in the world to legislate for carbon neutrality. By law, national and local governments must implement financial policies to transition to a carbon-neutral society and respond to the climate crisis, and public institutions and businesses must cooperate with them.
Voluntary standards and best practices
What voluntary standards and best practices are commonly followed in your jurisdiction regarding the integration of ESG factors and other non-financial principles into investment decisions?
Korea Corporate Governance Service (KCGS) released the voluntary stewardship code, titled Principles on Stewardship Responsibilities of Institutional Investors, in December 2016. As of June 22, 2022, there were approximately 190 participating institutional investors, including including pension funds, insurance companies, asset management companies. corporations, private equity firms, financial advisory firms, banks and National Pension Service.
One of the underlying principles of the Stewardship Code is that institutional investors should regularly inspect investment target companies in order to improve their values over the medium to long term, thereby preserving and increasing their investment values. Its detailed guidelines provide that, for the purpose of inspection, institutional investors must consider all factors that affect the value and sustainable growth of target investment companies. They should not only consider financial factors such as the company’s financial structure and performance, but also non-financial factors such as corporate governance and business strategies.
Measurement, reporting and disclosure
What voluntary and statutory measurement, reporting and disclosure frameworks are followed in your jurisdiction with respect to ESG and other non-financial factors?
From 2019, listed companies with net assets of 2 trillion won or more are required to publish corporate governance reports and, from 2022, the threshold of the above requirement was lowered to net assets of 1 trillion won or more.
In addition to corporate governance reports, ESG disclosures are typically made through sustainability reports, and voluntary disclosure is required on topics that need to be communicated to investors. To encourage voluntary disclosure by companies, the Korea Stock Exchange (KRX) published the ESG Disclosure Guide in January 2021, which describes the basic principles of ESG disclosure and advisory disclosure guidelines.
In addition, according to the Financial Services Commission, starting in 2025, the sustainability reporting requirement will apply to all listed companies with net assets of 2 trillion won or more, and from 2030 to all listed companies.
Ratings, indices and guidelines
What ratings, indices and guidelines are used to assess compliance with ESG principles and other non-financial factors in your jurisdiction?
KCGS and some private companies such as Sustinvest and Daishin Economic Research Institute have designed their own assessment models to rate companies’ ESG management. These three agencies are known as the main national ESG rating agencies, and most financial market participants, when making their investment decisions, refer to the annual ESG ratings they publish. In addition, international ESG ratings provided by global assessment indicators, such as the Dow Jones Sustainability Indices (DJSI) and MSCI ESG Indices, are cited as important sources.
Although not required, many listed companies voluntarily publish and disclose their sustainability reports. Most companies use various international indices for disclosure, but the Global Reporting Initiative (GRI) is most often adopted. A growing number of companies are using indices from the Task Force on Climate-Related Financial Disclosures (TCFD) or the Sustainability Accounting Standards Board (SASB), which consider investors as their primary target for disclosure. For verification of sustainability information, international standards such as AA1000AS and ISAE3000 are used.
The Ministry of Commerce, Industry and Energy issued draft K-ESG guidelines in December 2021 in accordance with the Industrial Development Law, which is tailored to the Korean business environment while meeting the criteria international.
Incentives, benefits and financial support
Are tax incentives or other benefits available in your jurisdiction to encourage institutional investors and financial intermediaries to incorporate ESG and other non-financial factors into their investment decisions?
The Korea Credit Guarantee Fund (KCGF), a state-owned financial institution, and the Korea Industrial Bank, a state-owned bank whose goal is to revitalize SMEs, have established various mechanisms to provide benefits such as guarantees and interest rate reductions. Since February 2022, KCGF has operated the ESG Management Competency Assessment Guarantee System, in which ESG-oriented companies are given preference in their verification process. Based on its review of applicants’ ESG management, KCGF offers benefits such as increased guarantee limit and reduced guarantee fees.
In April 2022, the Industrial Bank of Korea and the Korea Chamber of Commerce and Industry (a private economic organization established under the Chambers of Commerce and Industry Act) introduced a sustainability-linked loan ( SLL). A bank adjusts the SLL interest rate according to the borrower’s level of ESG management. SLLs incentivize SMEs to raise the level of ESG management by offering discount rates on staged loans based on their achievement of ESG objectives.
In addition to ESG factors, what considerations and practices are commonly incorporated into impact investment strategies?
The government provides policy-oriented investment support and tax benefits to certified social enterprises. In addition, the government is creating various funds to reinvigorate impact investing and promote preferential investment of public funds in certified social enterprises. Under the Tech Incubation Program for Startups (TIPS), once venture capital and accelerators verify the growth potential of certain innovative start-ups, the government provides them with follow-up support. To stimulate the growth of SMEs and venture companies, the government established the Korea Fund of Funds (KFoF) in 2005 for indirect venture capital investment. According to a media report in April 2022, the incoming presidency with the new ruling political party announced that it plans to expand the KFoF and TIPS from the previous administration.