Environmental, Social, and Corporate Governance (ESG) can lead to greener, more responsible investment. But standards remain irregular: creating common denominators will be crucial.
The subject of Environmental, Social, and Corporate Governance (ESG) continues to take increased prominence in public and private debate, but their remains much to determine in how these principles should be implemented across emerging Europe.
According to Jeffrey Liebert, CEO of Gazelle Finance – which is involved in frontier financing and engaged in helping implement ESG practices in the countries of the former USSR – ESG is an opportunity to raise companies’ performance.
“It can help differentiate good from great companies. But standards are very irregular. It’s a constant game of trade offs, but ESG is a positive, and is good for business,” he says.
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Liebert was speaking at Emerging Europe and the Asian Tigers: Towards 2030, an event held jointly in the Polish capital Warsaw and the South Korean capital Seoul on April 29, which explored sustainable future relations between the emerging Europe region and key Asian markets, with a focus on ESGs.
Discussions focused on how businesses should – but also actually do – operate, asking if fair and sustainable trade and investment, social-impact investing, sustainable sourcing and supply chains, as well as fair and sustainable trade are possible to achieve.
Opening up economies will be crucial to at least making such positive developments a possibility, believes Jae-Joon Lim, CEO and president of the Korea Exchange. “Poland and South Korea both shared vibrant economic growth only after opening up their economies,” he says. “We are focused on good governance, which is all part of our ESG strategy. We want to ensure that corporations understand the importance of ESG principles.”
Carrot and stick in Korea
HyoSang Ryou, a professor at Soongsil University in Seoul, notes that while Korea and emerging Europe are two very different regions, they share the need to follow ESG standards as used in the EU and the US.
“Some suggest ESG is being used as another way for richer countries to colonise emerging markets, creating unseen tariff barriers, but that is not always so,” he says.
“We must use carrots, not sticks.”
International trade and investment are an engine for inclusive economic growth, which is vital in the global post-Covid-19 recovery, he adds.
In January, Korea’s Financial Services Commission (FSC) unveiled measures to improve corporate disclosure rules in South Korea. These included initiatives to promote ESG and responsible investing, including implementation of mandatory ESG disclosures for listed companies.
In a statement, the FSC said it recognised the “growing significance of ESG factors and responsible investing” and concluded that it was “necessary to set up an appropriate regulatory environment.”
In June 2020, the Korea Exchange itself launched a platform dedicated to what it calls Socially Responsible Investment (SRI) bonds to promote sustainability. By January 2021, there were approximately 550 products registered on the platform.
The Korea Exchange now plans to issue guidance on ESG disclosures to promote voluntary disclosure by listed companies by 2025. It will phase in mandatory ESG disclosures by 2030, when all KOSPI-listed companies will be required to disclose ESG information.
For foreign investors, the implementation of mandatory ESG disclosures for listed companies should increase the amount of data relevant to sustainable investment decisions in South Korea and could therefore make the market more attractive as interest in sustainable investing grows globally, the Korea Exchange believes. It remains to be seen whether the FSC or other regulators in South Korea will apply similar principles to unlisted companies.
Fitch Ratings says the new regulations may contribute to a growing volume of data that “could influence the willingness and ability of investors and other financial institutions to apply ESG due diligence and exclusionary processes.”
Korea joins the Hong Kong Exchange in introducing mandatory ESG disclosures, while most other authorities in the region have either voluntary guidelines or requirements only on a ‘comply-or-explain’ basis.
Many Korean financial institutions have already instituted policies to begin implementing these commitments. The Samsung Group, for example, stated in November that all group affiliates would phase out coal-related investments. A number of South Korean insurers – including Samsung Fire and Marine Insurance, Dongbu Insurance and Shinhan Life Insurance – have signed up to the UN Environment Programme’s Principles for Sustainable Insurance Initiative since 2010.
Financial institutions are also increasingly keen to promote positive social outcomes, such as employment generation via SME financing. Corporate governance improvements represent another field that has drawn more attention in recent years, particularly among the country’s large conglomerates, or chaebol.
Building consensus in Europe
In Europe, the European Fund and Asset Management Association (Efama) believes accelerated development of the mandatory European sustainability reporting standards (ESS) could “become a game-changer unleashing the impact of sustainable finance.”
Efama says that mandatory ESS were “essential for the achievement of the European Union’s Green Deal objectives and evolving sustainable finance policies, and at the same time, drive cooperation towards convergence behind a global sustainability reporting architecture.”
Agnieszka Gajewska, public sector and infrastructure lead for Central and Eastern Europe at PwC, says building consensus was a precondition of successful roll-out of ESG in less developed economies.
“Rule-based trade is essential,” she adds, saying that an EU report in January showed that 42 per cent of firms that said they were ESG-ready were actually not.
In terms of distribution of assets in ESG funds, Europe has 47 per cent of assets considered as ‘ESG’. With 40 per cent of assets, the US is catching up. Australia and New Zealand account for another seven per cent, while Japan accounts for six per cent. Moody’s puts the value of ESG debt funds globally in 2019 at 200 billion US dollars, up from just over 2.5 billion US dollars in 2012.
“What we are seeing and hearing is that ESG is an opportunity to create value,” adds Gajewska. “What we need now are to define common denominators as to what we understand as ‘green’.”
Poland: Small but growing fast
Poland is currently at the beginning of its road towards a more substantial level of ESG investment, but in 2019 the Warsaw Stock Exchange started to publish an index dedicated to companies that observe ESG criteria.
The total value of assets accumulated in the the four ESG-listed funds at the end of 2019 was 1.7 billion złoty (373 million euros), which is 0.6 per cent of all assets in Polish investment funds. The share of ESG funds globally already is about 15 per cent.
Marek Dietl, CEO of the Warsaw Stock Exchange (GPW), notes however that while the Korea bourse was twentyfold bigger than the GPW, the Warsaw bourse was the fastest growing in the EU and with an energy exchange was a little more diversified.
“We have more similarities than differences,” he says. “We followed South Korea’s strategy for capital market development. Although Korea’s capital market is much larger, we have seen similar developments in recent years, including the rapid growth of trade volumes.”
“In Poland we are working hard to create a narrative around ESG, promoting it across all sectors, including those where there is room for improvement. The message is being well received: we really hope that it will lead to greener and more responsible investment.“
Jae-Joon Lim, Marek Dietl, Agnieszka Gajewska, HyoSang Ryou and Jeffrey Liebert were speaking at Emerging Europe and the Asian Tigers: Towards 2030, an event held in Warsaw and Seoul on April 29.
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