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ESG Management: A Necessity, Not an Option

As the business environment has deteriorated due to the coronavirus disease 2019 (COVID-19), corporate sustainability management has emerged as an essential research topic. Therefore, environmental and social responsibilities and governance (ESG) have become significant components in business. In other words, non-financial performances play an important role in corporate sustainability management. In this regard, the Sungkyun Times (SKT) will look into what ESG management is, why it is necessary, what problems are currently happening, and how to improve the issues.

ESG Management That the Era Wants

Why ESG Management Has Emerged

ESG refers to three core elements to achieve sustainability in business: environmental, social, and governance. Each evaluates whether a company manages to be eco-friendly, carries out social responsibility, respects human rights, and has transparent governance. The continuation of COVID-19 outbreak has accelerated the significant shift to ESG management in the business paradigm. Enterprises have faced changes such as shutdowns, infections of employees, and collapses of supply chains. However, despite COVID-19, the companies that had concrete labor welfare and governance, that is, the companies that had a basis for ESG management, found it easier to overcome the crisis. It also became a good chance for corporations to recognize the necessity of ESG management as the necessity to protect the environment has enhanced and green consumption increased across society. Also, in August 2019, the Business Round Table (BRT), the representative institution of the financial world in the United States (US), declared the end of shareholder capitalism and the transition to stakeholder capitalism. Unlike shareholder capitalism, stakeholder capitalism targets coexistence with every individual related to firms. Corporate management that had only emphasized financial performances has now entered the era of creating new values, including non-financial factors like environmental and social responsibility.

ESG Management

What Expected Effects ESG Management Will Have

ESG management brings benefits to both societies and companies. ESG management helps corporations recognize the seriousness of climate change and seek answers to protect the environment. For example, international fashion brand Patagonia has produced all of its sportswear with organic cotton since 1994 so that no harmful chemicals like pesticides are emitted during production. Also, businesses can strengthen social reliability by achieving social values like equality and cooperation and having rational governance. The food enterprise Ottogi is an example of this. They have contributed to society by supporting the medical fees for children with congenital heart defects since 1992. Second-hand market platform Daangn Market attempts make a horizontal work environment as workers call each other by names instead of by their positions. ESG management provides financial benefits to companies as well. Millennials and Generation Z tend to prefer ESG management corporations when they buy something. Investors also tend to invest more in ESG management corporations with a high social value. For example, after the daily necessities retail business Unilever launched “Sunlight,” the detergent that uses less water, its corporate image has improved, and sales have increased. This shows that ESG acts as an important factor in investment and consumption, and accordingly, ESG management is directly related to corporate interests.

Problems with ESG Management

Perfunctory ESG Management

ESG management has become an essential factor for corporate performance, but few companies do it properly. Many enterprises neither contribute to society effectively nor adopt the slogan of ESG. According to Money S News, an anonymous business authority said, “The purpose of ESG management has changed to increase corporate value rather than to contribute to society, and eventually it has degenerated into a means for increasing stock prices.” Because of this tendency, the concept of ESG washing has emerged, indicating the deliberate use of ESG management for improving brand image. The most representative example of ESG washing is the Korean dairy company Namyang. They defined their value as “respect for motherhood and humans,” but, in reality, they deprived a female team leader of her position when she returned after her maternity leave. They claimed ESG management superficially while they ran the opposite in practice. This problem also arises in terms of governance structure. The food enterprise company Pulmuone clarified that they value the “independence of outside directors;” however, they elected Won Hye-young, the founder of Pulmuone, as the outside director at a shareholders’ general meeting in March 2021. As she is intimate with executives, it is not easy to secure the independence of outside directors. With the emergence of ESG, the gap between superficial management and actual management is widening.

ESG Washing

Lack of Clarity in the Scope of ESG

It is challenging to measure eco-friendly corporate activities or transparent governance. There are more than 600 ESG evaluation agencies worldwide, but they all have different methods without common criteria. According to The Survey of Middle Markets’ Opinions on ESG carried out by the Federation of Middle Market Enterprises of Korea (FOMEK) in 2021, many medium-sized companies struggle to practice ESG management. As a reason for difficulties, 19.8% of respondents chose “ambiguous concept and scope,” and 17.8% of them mentioned “different evaluation system.” Because of the vagueness of ESG, companies find it difficult to understand ESG thoroughly; therefore, management capabilities drop. Green taxonomy shows how vague and incoherent current ESG standards are. It is a system that classifies which sources are eco-friendly and which businesses are green. However, there have been controversies over the EU taxonomy draft since it includes a nuclear power plant and liquefied natural gas (LNG). K-taxonomy also classifies LNG as an eco-friendly resource. Because of such a decision, a tremendous amount of money can be spent on building facilities that are not eco-friendly. Environmental organizations are consistently criticizing the taxonomy details, saying it is greenwashing. These are all problems occurring due to the obscurity of ESG.

For Successful ESG Management

Combination of ESG Management and New Technologies

As problems such as ESG washing occur, global ESG evaluation agencies are making various attempts to solve these issues. When analyzing and evaluating ESG, they use artificial intelligence (AI) algorithms to secure objectivity and reliability. For example, they collect news about companies and then grade ESG scores depending on whether the news content coincides with ESG or not. Also, leading companies have introduced blockchain technology. Blockchain is a data-saving technology that records every detail of business activity and copies them to multiple computers to secure the data. Companies can ensure reliability with consumers because it prevents hacking and forgery of data by using multiple computers. For example, a global coffeehouse chain Starbucks has used blockchain technology since 2018 and progressed the “Bean to Cup” project. They check records of coffee beans’ production and distribution. With the help of this project, fair trade is guaranteed as blockchain technology records the entire distribution process. Besides this, many global advanced companies have adopted new technologies into ESG management in order to solve social and environmental problems effectively. The multinational technology brand Microsoft has been propelling “Project Natick,” which constructs the undersea data center operated with eco-friendly energy, thereby removing problems experienced with overground data centers. In this way, new technologies enable corporations’ innovation and sustainable development to help successful ESG management.

Block Chain Technology (biz.chosun.com)

Establish Clear Standards for ESG

Regarding the problem related to the ambiguity of ESG’s concept and range, there are increasing demands for clear and specific ESG criteria. Supervisory authorities, including the US Securities and Exchange Commission (SEC), had requested several organizations to make coherent criteria for public information. Such efforts would help improve ESG evaluation and secure public confidence. The International Financial Reporting Standards (IFRS) Foundation stated that they would establish the Sustainability Standards Boards (SSB) and lead the creation of a unified standard for the release of ESG information. In addition, in February 2021, the International Organization of Securities Commissions (IOSCO) stated that the unified ESG standard is necessary, so they would support the establishment of SSB and cooperate with them. The official announcement of IOSCO supporting the IFRS Foundation implies participation and agreement of worldwide major financial market regulators. Although it could take a long time to create ESG standards and apply them to the real world, it is clear that new measures will enable companies to do ESG management based on a thorough understanding of ESG, and further, block ESG washings.

As the era has changed, ESG management has become a corporation’s prerequisite, not a choice. This means it is time to put ESG into practice and actualize it successfully. Although there are many shortcomings to ESG management, the SKT hopes corporations strengthen their management capabilities and prosper with society through ESG management with technologies and clear standards.

홍채린  cinbrhn02@g.skku.edu

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