Insights

The National Pension Service’s Two Acts of “ESG-Washing”

ㅣJong-oh Lee, CIO of KoSIFㅣ

Greenwashing is a “sin.”

In reports published in 2007 and 2010, Canadian environmental consultancy TerraChoice identified the various ways in which companies engage in greenwashing and described such practices as “sins.”

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In recent years, legal measures to prevent greenwashing and ESG-washing have expanded beyond the products and services of ordinary companies to financial institutions and investment products.

Representative examples include the European Union’s Sustainable Finance Disclosure Regulation, or SFDR, which took effect in March 2021, as well as the U.S. Securities and Exchange Commission’s proposed fund disclosure rules and amended Names Rule.

The Names Rule requires at least 80% of a fund’s investments to be consistent with the investment focus suggested by its name. For example, when a fund uses terms such as “ESG” or “sustainability” in its name, at least 80% of its portfolio must align with the objective implied by those terms.

The European Securities and Markets Authority is also developing similar guidelines linked to the SFDR. Korea’s requirements are not as stringent as those of the United States or the European Union, but the country announced its own ESG fund disclosure standards in October, with implementation beginning in February 2024.

Around the world, governments and regulators are establishing a common front against greenwashing and ESG-washing. Without redirecting the flow of capital toward a sustainable economy, a sustainable society will remain little more than a myth.

Yet Korea’s largest public pension fund, the National Pension Service, or NPS, is moving against this global trend. Its conduct goes beyond a “sin.” It amounts, in effect, to an offense.

     ESG-Washing Offense No. 1: Inflating Responsible Investment Assets

During the latest regular parliamentary audit, National Assembly member Han Jeoung-ae argued that “98% of the NPS’s externally managed responsible investment assets constitute ESG-washing.”

The NPS reported KRW 284.4 trillion in externally managed assets. Until recently, only assets managed under dedicated responsible investment mandates were counted as ESG investments. As of the end of 2022, those assets amounted to just KRW 6 trillion.

This means that approximately KRW 278.4 trillion—98% of the total KRW 284.4 trillion—was not actually managed as responsible investment assets.

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The NPS classified all assets entrusted to asset managers that had adopted responsible investment policies or the Stewardship Code as responsible investment assets, regardless of whether those principles were actually applied to the assets concerned.

Under the NPS’s logic, every asset managed by its selected asset managers—including assets unrelated to the NPS’s mandates—could also be classified as responsible investment. Korea’s total responsible investment market would then appear to increase dramatically overnight.

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The cases of Shinyoung Asset Management and DWS Asset Management expose the fundamental weakness of the NPS’s logic.

Neither institution had adopted the Korean Stewardship Code, and no responsible investment policies or guidelines could be found on their websites. Nevertheless, both were selected as external managers for domestic equities and bonds, and the NPS counted the assets entrusted to them as responsible investment assets.

This is a clear case of greenwashing and ESG-washing.

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The NPS must immediately revise the criteria it uses to calculate responsible investment assets, recalculate the figures and issue a corrected disclosure. The longer it delays, the greater the scale of the ESG-washing becomes.

In other jurisdictions, conduct of this kind could already have triggered litigation over misleading ESG claims.

Under the relevant disclosure rules, the NPS was scheduled to publish its responsible investment asset figures at the end of March 2024. If it again inflated those figures, it should be held strictly accountable.

     ESG-Washing Offense No. 2: A Coal Exit Pledge Defined by Delay

The NPS announced its coal exit policy on May 28, 2021, two days before the opening of the P4G Seoul Summit.

It subsequently commissioned research on a coal investment restriction strategy, but only after considerable delay. The National Pension Fund Management Committee, the fund’s highest decision-making body, did not receive the final report until the end of April 2022.

Yet the NPS still had not introduced a coal investment restriction strategy.

Nearly two years and seven months had passed since the coal exit announcement, and almost one year and eight months since the final report was delivered. During that period, the NPS’s coal investments actually increased.

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The phrase that best captures the message of the Intergovernmental Panel on Climate Change’s Sixth Assessment Report is “Now or Never.”

The conduct of the NPS and its supervising ministry, the Ministry of Health and Welfare, however, has reflected a very different attitude: “Now or Later”—the complacent belief that what is not done now can simply be done at some later point.

To announce a coal exit policy to the world and then delay implementation for nearly two years and seven months demonstrates a lack of urgency that can only be explained by the absence of genuine commitment to addressing the climate crisis.

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The NPS is now trapped in serious path dependency. It has been unable to break away from the familiar practice of coal investment, even though the need for change is already clear.

Admittedly, the complexity of the decision-making process—including the massive financial losses faced by Korea Electric Power Corporation—should not be underestimated.

Nevertheless, every year of delay intensifies the climate crisis, weakens the competitiveness of Korean companies and financial institutions, and increases the financial risks faced by the NPS itself.

     ESG-Washing as a Trojan Horse

Greenwashing and ESG-washing resemble a Trojan horse.

By wearing the mask of sustainability, they can undermine sustainability itself and destroy the foundations on which it depends.

This is why major economies—including the European Union, the United States, the United Kingdom and Japan—are strengthening or introducing laws and regulations designed to prevent ESG-washing.

Particular attention is being paid to financial institutions. Because they determine how capital is allocated, the consequences are especially severe when ESG-washing occurs in the financial sector.

The NPS manages close to KRW 1,000 trillion in assets—KRW 984.2 trillion as of the third quarter of 2023. It holds approximately 6% of Korea’s domestic equity market and around 10% of its bond market, and invests across most sectors and in a large proportion of Korean companies.

It is, in other words, a universal owner.

When an institution with such enormous influence hides behind the mask of sustainability—when it engages in greenwashing or ESG-washing—the consequences are borne by Korean society as a whole.

This is precisely why the NPS’s two acts of ESG-washing must not be tolerated.

The NPS must stop inflating its responsible investment assets and move swiftly to implement its coal exit commitment.

This column was contributed to Impact On by Jong-oh Lee, Secretary General of the Korea Sustainability Investing Forum. This post is an edited version of the original column.