Insights

“The Next Task Is to Pass an ESG Framework Act”:
An Interview with Jong-oh Lee, Secretary General of KoSIF

This article is an edited version of an interview conducted by Impact On with Jong-oh Lee, Secretary General of the Korea Sustainability Investing Forum.

     Q. KoSIF has long proposed and supported laws and policies aimed at improving ESG practices at the National Pension Service and other financial institutions. Why has the organization focused particularly on the financial sector?

Since its establishment in April 2007, the Korea Sustainability Investing Forum, or KoSIF, has placed ESG and corporate social responsibility at the center of its work, with the aim of advancing ESG practices among financial institutions.

To build a virtuous ESG market ecosystem, we must focus on the flow of capital.

The European Union can be regarded as the source of many ESG-related laws and policies. One of its first major policy frameworks was the Sustainable Finance Action Plan, introduced in 2018.

The EU developed ESG-related laws and institutions from the perspective of finance and capital allocation.

In Korea, the institution with the greatest influence over capital flows is the National Pension Service, or NPS.

We believed that if the NPS incorporated ESG considerations into its investments, it could encourage not only external asset managers but also portfolio companies to improve their ESG management.

     Q. Could you introduce some of the legislative and policy initiatives KoSIF has undertaken to bring about change at the NPS?

Through legislative support that began in 2013, KoSIF contributed to the amendment of the National Pension Act in January 2015.

Article 102, Paragraph 4 of the Act introduced a legal basis for ESG investment by stating that, in managing and operating the fund, environmental, social and governance factors related to investment targets may be considered in order to achieve stable long-term returns.

Article 105, Paragraph 1, Subparagraph 5 also required the NPS to disclose information on socially responsible investment assets that take ESG factors into account.

Under this provision, the NPS now discloses annually:

• - The criteria it uses to consider ESG factors
• - The scale of investments incorporating ESG considerations
• - The securities and asset allocation to which ESG considerations are applied
• - Its responsible investment policies and organizational structure

The establishment of the Special Committee on Fiduciary Responsibility can also be regarded as an important achievement.

From the 2016 general election through policy forums held ahead of the 2017 presidential election, KoSIF consistently called for the creation of an independent socially responsible investment committee within the NPS.

In December 2017, the Ministry of Health and Welfare announced plans to establish a Socially Responsible Investment Committee. When the NPS later adopted the Stewardship Code, the proposal was incorporated in the form of the Fiduciary Responsibility Committee.

This policy proposal was inspired by the practices of institutions such as Norway’s sovereign wealth fund and Swedish pension funds, which operate ethics councils and actively manage ESG issues at portfolio companies by identifying companies for exclusion or enhanced monitoring.

     Q. What are some examples of KoSIF’s work to bring about change at other financial institutions and build an ESG ecosystem?

Beginning with the Korea Teachers’ Pension and the Government Employees Pension Service in 2018, KoSIF helped bring about coal exit declarations from more than 100 financial institutions.

Before that, no Korean financial institution had publicly announced a coal exit policy.

One of the key systems designed to mainstream coal-free finance was the “coal-free treasury” initiative.

Local governments and education offices select financial institutions every three or four years to manage the collection, custody and disbursement of public funds.

The coal-free treasury initiative was designed to give preference in this selection process to banks that had publicly committed to ending coal finance.

This system played a major role in encouraging banks, which form the core of financial groups, to announce coal exit policies.

The 2016 amendment to Korea’s public procurement legislation was another achievement.

The amendment introduced a discretionary provision allowing the government to consider environmental protection, human rights, labor standards, fair trade and consumer protection when conducting public procurement.

This created a legal basis for socially responsible public procurement.

The Industrial Development Act, amended in 2007, required the government to establish comprehensive measures for corporate social responsibility and sustainable management.

However, the government failed to publish such measures for ten years.

In 2017, the Act was amended again to require the government to establish comprehensive measures every five years and publish annual implementation plans.

A Sustainable Management Center was also created to carry out this work, and the Korea Productivity Center currently performs this role.

     Q. What major tasks remain?

Korea needs an ESG Framework Act.

The country has introduced a variety of ESG policies, but they remain fragmented. A foundational law is needed to integrate them into a coherent system.

In September last year, KoSIF supported National Assembly member Lee Won-wook in introducing the Act on the Promotion of Environmental, Social and Governance Management, commonly referred to as the ESG Framework Act.

The bill consists of 55 articles and includes provisions to:

• - Define the responsibilities of the national government, local governments, companies and financial institutions in promoting ESG management and investment
• - Require the government to establish and implement a national ESG promotion plan every five years
• - Create an ESG Promotion Committee under the Prime Minister
• - Establish standards for ESG disclosure

The bill also includes provisions on ESG ratings, disclosure, assurance providers and support for companies participating in ESG management.

Related tasks that remain unresolved include amendments to the Financial Investment Services and Capital Markets Act and the National Finance Act.

KoSIF has engaged on the Capital Markets Act since 2012, particularly in relation to mandatory ESG disclosure, but the law has yet to be amended.

The disclosure of ESG information is the most important element in building a functioning ESG ecosystem.

The National Finance Act applies to 68 public funds.

Our approach was to amend this overarching law so that ESG considerations would be incorporated into the asset management principles of individual public pension and government funds.

Although the Act itself was not amended, we achieved a partial result by having ESG investment included as an item in the annual fund evaluations conducted by the Ministry of Economy and Finance.

Amending these overarching laws remains a major task.

     Q. A general election is scheduled for April. What would you like to say to prospective National Assembly candidates?

They need to understand the ESG market ecosystem and its operating principles as one integrated picture.

That picture is the ESG Framework Act.

Once the Framework Act is enacted, policymakers will need to identify the legal, institutional and policy gaps that remain and work to connect and fill them.

The ESG ecosystem includes companies, government agencies, financial institutions, consumers, customers, rating agencies and assurance providers.

These participants are connected through chains of information, regulation, incentives and support.

If even one point in this chain is broken or weak, the ecosystem may fail to function properly.

The central issue is the movement of capital based on ESG information.

Without disclosure, capital does not move and the ecosystem cannot develop.

Even when an ecosystem is created, weak laws can lead to greenwashing and other forms of ESG-washing.

Institutions are also needed to monitor these practices.

More than 200 institutions, including the NPS, have adopted the Stewardship Code, but there has been little monitoring of whether they are actually implementing the Code in practice.

If an ESG market ecosystem is not properly established, or if widespread washing occurs, the competitiveness of Korean companies and financial institutions will also decline.

I urge those who will enter the 22nd National Assembly to work together to enact ESG-related laws and institutions, particularly the ESG Framework Act, and ensure its swift passage.

     Q. What can participants expect to hear at the upcoming roundtable?

Companies need to understand the regulations that will become necessary and are likely to be introduced, and prepare for them in advance.

Rather than simply asking the government for support policies, companies should also call for the earlier introduction of necessary regulations.

Good regulation reduces uncertainty and helps companies strengthen their competitiveness.

At the roundtable, we plan to discuss such regulations.

Through my presentation, I hope to help participants identify the regulations that are needed and encourage them to call actively for both their introduction and the accompanying support policies.

     Event Information

2024 Impact On ESG Roundtable No. 1

ESG Laws and Policies After the General Election

The event, 2024 Impact On ESG Roundtable No. 1: ESG Laws and Policies After the General Election, will be held at 4:30 p.m. on Thursday, February 1, at Sympoiesis Hall in Bangbae-dong, Seoul.

The roundtable will focus on the legislative and policy tasks required to build a virtuous ESG market ecosystem after the general election.

Jong-oh Lee, Secretary General of the Korea Sustainability Investing Forum, will participate as a speaker.