Insights

Long-term Postponement of Scope 3 Disclosures Sparks Concerns
over a New ‘Korea Discount’

ㅣ Karl Yang, Founder & Executive Director of KoSIF ㅣ

• - Mandatory ESG disclosure acts as the common language of capital markets... Expanding target companies and directly transitioning to statutory disclosure are proactive moves.
• - Considering ‘Safe Harbor’ provisions, the Scope 3 grace period needs to be shortened to one year in line with global standards.
• - An optimal complementary measure must be derived to ensure disclosure accountability and effectiveness while managing corporate burdens.
• - The government must urgently establish systems for data, talent, verification, and financial support so companies can build their disclosure capacities.

The final draft of the 'Mandatory ESG Disclosure Roadmap' announced by the government and the Democratic Party of Korea on July 8 marks a crucial turning point in the history of sustainability within the Korean capital market. What stands out most is the transition of disclosure channels.

The decision to bypass the previously discussed exchange-regulated disclosure and proceed directly to statutory disclosure is highly forward-looking. This signifies that ESG information will no longer be treated as mere supplementary reference material, but as core data that directly influences investment decisions and capital allocation.

Furthermore, it is highly welcoming that the initial target group was expanded from companies with consolidated total assets of 30 trillion won or more in the initial proposal to those with 10 trillion won or more. Incorporating ESG disclosures into the framework of the Capital Markets Act will lay the institutional foundation to provide investors with comparable, reliable information, thereby steering capital toward sustainability. Though delayed, it is a step in the right direction.

However, the real issue lies in the details. While the institutional framework has advanced, a closer look at the specific designs reveals loopholes that could potentially undermine the global competitiveness of Korean companies. This is because a fragile structure—characterized by an excessive safe harbor and a prolonged deferral of core information like Scope 3—has been erected upon the sturdy foundation of statutory disclosure under the Capital Markets Act.

There are rising concerns that these mechanisms, introduced under the guise of ensuring a soft landing for the system, may instead weaken the accountability and credibility of disclosures, ultimately distancing Korea from global standards.

First and foremost, we must examine the scope and duration of the 'Safe Harbor' (liability exemption) system, which is set to grant a three-year immunity to 'all disclosed information.' The intent to ease the initial burden on companies and facilitate a smooth transition is understandable. ESG disclosure remains unfamiliar to many corporations, and it is true that collecting and verifying climate-related data requires significant preparation. However, such necessity does not justify blanket immunity for all disclosed information over an extended period.

A safe harbor should inherently be limited in scope. It is necessary to provide reasonable protection for forward-looking statements that are difficult to predict, highly uncertain scenario analyses, or supply chain data beyond a company's complete control. However, applying safe harbor rules to actual historical facts and data that clearly exist within a company could severely fracture the accountability and reliability of the disclosures.

A more serious issue is postponing Scope 3 emissions disclosures—the core of climate reporting—by three years from the initial mandatory disclosure date, delaying its implementation until 2031. Scope 3 covers indirect emissions that occur across a company’s entire value chain.

It is the very data that comprehensively reflects a company’s actual climate impact, encompassing raw material procurement, logistics, product use, disposal, as well as investment and financing activities. In many industries, Scope 3 emissions constitute the overwhelming majority of total emissions. Excluding this from climate disclosure is no different from revealing a small piece of ice above water while concealing the massive iceberg submerged below.

Climate disclosures that only reveal Scope 1 and 2 emissions are vastly insufficient for global investors attempting to evaluate a company's substantive climate risks. Particularly for export-oriented businesses, manufacturing, and energy-intensive industries, emissions generated during the supply chain and product-use phases dictate corporate value and regulatory risks.

The European Union’s supply chain regulations, the Carbon Border Adjustment Mechanism (CBAM), procurement standards of global clients, and the portfolio carbon accounting of international financial institutions already peer well beyond a company’s direct emissions to look at its entire value chain. Under these circumstances, granting Korean companies alone a long-term deferral on Scope 3 is not protection; it is isolation.

The trajectory of international private initiatives is also distinct. The Science Based Targets initiative (SBTi) already emphasizes the importance of Scope 3 in setting substantial corporate reduction targets. Similarly, the Partnership for Carbon Accounting Financials (PCAF), which provides carbon accounting standards for financial institutions, heavily weights the emissions of companies included in investment and loan portfolios—especially their value chain emissions.

Global capital is already screening and selecting companies that transparently disclose supply chain data, manage climate risks, and present clear reduction pathways. If Korean companies shelter behind domestic institutional deferrals, they are highly likely to face disadvantages in evaluations by international investors and global pension funds. This could manifest as a new form of the 'Korea Discount.'

The government must significantly shorten the Scope 3 disclosure grace period. Considering the ISSB standards and the demands of international investors, a three-year deferral is excessively long. If demanding flawless data from all companies from day one is unrealistic, the solution is not to delay the disclosure altogether, but to design a phased approach.

For instance, companies could be required to disclose key categories and calculation methodologies in the first year and subsequently elevate data coverage and verification levels over time. The critical objective is to prompt companies to start gathering data, engaging with their supply chains, and building internal systems at an earlier stage.

Extending grace periods on the grounds of insufficient infrastructure is not a righteous strategy. If infrastructure is lacking, the government must swiftly establish the technical and policy foundations and concentrate on administrative and financial support. This must be accompanied by calculating support for small and medium-sized suppliers, constructing industry-specific emission factors and data platforms, nurturing disclosure personnel, strengthening the capacity of verification agencies, and refining data utilization frameworks within financial institutions.

The role of the government is not to temporarily shield companies from regulations, but to propel them to equip themselves with the capabilities to survive in the global market.

ESG disclosure is not a mere regulation. It is a vital market signal that drives capital to move around sustainability. If the signal is faint, capital will not move. If the signal is delayed, corporate responses will also lag. If the signal carries no accountability, the market will not trust the information. ESG mandatory disclosure is not a mechanism to burden companies; it is the common language of the capital market that enables investors, companies, financial institutions, and supply chains to judge future risks and opportunities upon identical criteria.

Ultimately, the ball is now in the National Assembly's court. Having set the correct direction toward statutory disclosure, the upcoming amendments to the Capital Markets Act and its enforcement decree must forge an optimal compromise—one that considers the corporate burden while strictly guaranteeing disclosure accountability and effectiveness. Because Scope 3 deferrals operate under the institutional protection of a safe harbor, we must seek ways to shorten the grace period to one year, in line with global expectations. Concurrently, the government must hasten to establish support frameworks across data, talent, verification, and finance so that companies can genuinely foster their disclosure capacities.

Will we raise our companies to be robust whales capable of surviving the rough seas of global standards, or will we turn them into greenhouse plants confined within domestic regulations? This ESG mandatory disclosure roadmap stands at that very crossroads. Now is the time for a forward-looking, meticulously calculated resolution from the National Assembly and the government. I look forward to the National Assembly rising to the occasion.