Companies are facing a stricter and more standardized ESG business environment. Recently, the Korean state-run bodies have released the K-ESG guidelines, or guidelines for domestic players to abide by. As 2021 ends, reputable ESG rating agencies are publishing ESG scores in Korea. One of the most famous rankers globally is MSCI, and its ESG ratings recently added the new climate change section as part of their rating systems. The newly included ”Implied Temperature Rise“ element tracks how the company is proceeding with the global target of no more than 2 degrees Celsius increase by 2050. Other information about the company’s decarbonization target and comprehensiveness are summarized.

Transitioning with ESG

According to a study by McKinsey & Co., the corporations face a new challenge to transition the entire market forces toward climate change in a condensed time frame. Especially, the recent COP26 reassured that governments and business entities have pledged to achieve net zero. This will require the largest reallocation of capital in human history because stakeholders now have to rebuild an economy in 30 years which originally took 200 years to build. However, net-zero commitments have risen without clear scientific targets and solutions.

Companies that can actualize the organizations’ true ESG targets most efficiently and effectively are likely to become new leaders in the coming years. ESG will become both the new competitiveness driver and capabilities. The fastest way varies by industry segments; however, the common procedure is to start with the ESG-linked compliance issues. Rating agencies have differentiated evaluation criteria, but there are standard components such as climate change or environmental management (e.g., policy, organization, stakeholder training, and risk monitoring and reporting).

While conducting compliance management, companies usually start developing new opportunities to expand their business areas along with the newly found ESG expertise. For example, manufacturing companies focus on reusing energy, heat, or water waste into their production cycles. These solutions ultimately allow companies to reduce cost and climate change-averse resources for improving operational efficiencies.

Information technology-driven companies with a harder time deriving climate change technologies and performance usually focus on using data-based solutions to improve innovation features. Businesses that belong to this industry segment can use their technological capacity to enable and explore new opportunities with the other industry players.

Climate change transition and ESG require our utmost attention and immediate technological adaptation. Responsible investment monitoring will be simultaneously reinforced to check if capital goes to the proper ESG-prone businesses. Challenging as it seems, the core principles still follows the old wisdom of competitiveness building -- a source of competitive advantage that stems from improving efficiency and differentiation. Companies that can reinstate their brand value to the consumers and society along ESG efficiency and differentiation will become the new winners or game changers.

K-ESG: What it means to businesses

On Dec. 1, Korea’s Ministry of Trade, Industry and Energy released the K-ESG guideline by incorporating 13 key indexes of ratings agencies such as KCGS, DJSI, EcoVadis, Sustainalytics, WEF, and GRI. K-ESG is composed of four main categories and a total of 61 elements. The government bodies will update the guideline every one or two years. In addition, specific guidelines for industries and company types will be released starting 2022.

K-ESG guidelines will be helpful to the organizations that need to develop clear and solid systems. Currently, there is an oversupply, a flood of ESG raters that account for over 1,000 worldwide. This has caused a degree of confusion for the recent followers, and K-ESG is likely to serve as a simplified remedy for many that have just begun to pay attention to improving ESG management.

Korea has a unique economic characteristic as a nation. The country functions as a vast platform. At the center are large enterprises. Each company is densely connected with a broad range of suppliers. It is true in most IT, manufacturing, automotive and retail industries. Since Korea’s economy has the trait of interdependency, having standardized and consistent ESG guidelines will help garner ESG competitiveness as a nation.

C-level and business leaders have spent 2021 catching up with the global ESG news and information. In 2022, businesses should stop questioning the necessity of ESG management and use corporate resources and capabilities to achieve climate change transition in every business practice.

Only a few Korean companies smiled or showed relief at the release of many ESG ratings this year. Businesses should quickly incorporate K-ESG criteria into business operations by meeting the compliance issues. Then, depending on the industry type, companies must either explore new opportunities around operational efficiencies or differentiate value. Both solutions of reducing cost or differentiating value of products and services should ultimately enhance consumer value. Businesses can maximize social impact and transformation through these fundamental principles of ESG competitiveness.

Lee Yeon-woo

Lee Yeon-woo is an expert adviser at the Korean law firm Bae, Kim & Lee. This is the final installment. -- Ed.