Recently, the expression ESG management has been used a lot, and companies are actively promoting ESG management. ESG is an abbreviation of Environment, Society, and Governance. ESG management means to protect the environment, co-exist with society, and conduct management with a well-established governance structure in corporate management.
Environmental protection is easy to understand, but what does it mean for a business to be with society? Companies are also a component of our society, and their influence is getting stronger. Companies provide all goods and services that are essential for our daily life. Examples include electricity, water, gas, telecommunications, subways and buses, and gasoline or rice. If the supply is interrupted even for a moment, daily life will be greatly disrupted. Therefore, a company’s responsibility to society starts with its responsibility to customers who consume products and services, to its employees who provide labor, to its suppliers that supply raw materials, to agencies that sell products and services, and even to the government and media organizations.
Responsibility for governance means responsibility for monitoring whether the company is properly managed. Most fundamentally, the board of directors of a company is responsible for monitoring and managing whether the CEO is managing the company well. In order to fulfill these responsibilities well, an outside director system that includes neutral outside directors in the composition of the directors is required. In Korea, legally, companies over a certain size must include outside directors. However, the average approval rate of outside directors in Korea exceeds 99%. It is difficult to see that monitoring and checks are being carried out properly considering this percentage. Also, the CEO and the chairman of the board of directors must be composed of different people so that the board can monitor and check the management of the CEO. In Korea, the same person often concurrently takes both positions. As a result, the company misses the opportunity to prevent the CEO’s mismanagement in advance or to rectify it at an early stage, leading to decline or even bankruptcy.
Why is ESG management being emphasized recently? In the past, corporate social responsibility has been emphasized. Corporate social responsibility (CSR), which was often described as economic responsibility, legal responsibility, and ethical responsibility, had a justifiable aspect. In other words, it was argued that the company should fulfill its responsibility to society as much as it became an important component of society. However, when investors with money or investment funds that receive and manage investors’ money analyzed them, they found that companies that fulfill their social responsibilities are more profitable in the long run.
This is because investments in companies that have grown rapidly in a short period of time have been profitable for a while, but have experienced sudden bankruptcy or poor profitability in the mid to long-term. Instead, looking at companies with good long-term profitability, it was confirmed that they were fulfilling their social responsibilities. Therefore, investors and investment funds have come to demand management that fulfills social responsibility, or ESG management as a requirement for investment.
Therefore, ESG management is not a new management method, but a management that fulfills the social responsibility has become a necessary condition for attracting external investment. According to the Global Sustainable Investment Association (GSIA), the size of funds that invest in ESG-managed companies around the world will reach 35 trillion dollars in 2020, or about 49,000 trillion won, and 130 trillion dollars in 2030, or about 182,000 trillion won is expected to increase. Korea is no exception. As of June 2021, it amounts to about 530 trillion won. Under this circumstance, the government required KOSPI-listed companies with assets of more than 2 trillion won to publish and disclose sustainability reports from 2025. In 2030, it became mandatory for all KOSPI-listed companies. If ESG management is insufficient, it is difficult to attract investment, and as a result, corporate value and credit worthiness are inevitably damaged.
Accordingly, ESG management has become an inevitable factor in the survival and prosperity of a company. However, ESG management will only be maintained when the CEO’s true will and stakeholder demands agree with each other. Inappropriate demands from stakeholders, such as stock investors who emphasize only profitability even if the environment is damaged, excessive demands from workers sacrificing the future of the company, and the government that emphasize only regulation and tax payment, make ESG management difficult for companies and ultimately lead to corporate decline. It will lead the country to a path of decline.