Insights

NPS Must Declare Net Zero and Lead Korea’s Climate Transition

What must move first for society to change?

For Jong-oh Lee, Secretary General of the Korea Sustainability Investing Forum, or KoSIF, the answer is clear: capital.

And which institution moves the largest amount of capital in Korea?

Few would dispute that it is the National Pension Service, or NPS, one of the world’s three largest public pension funds, managing KRW 917 trillion as of the end of January this year.

That is why Lee has spent more than 15 years, since joining KoSIF in 2007, calling for change at the NPS.

“If the NPS manages its fund with sustainability at the center, Korea’s capital market will move in that direction,” Lee said. “Companies will then change accordingly, and ultimately, society itself will change.”

For this reason, one of Lee’s current priorities is urging the NPS to make a net-zero commitment.

Climate change has emerged as a challenge for all humanity, while sustainable development is no longer merely a corporate issue but a task for society as a whole.

The clearest expression of this objective is net zero: reducing net greenhouse gas emissions to zero by 2050.

Lee believes, however, that the NPS has failed to respond adequately to this global shift.

“Leading pension funds and other financial institutions around the world have declared net-zero targets and are working to implement them in response to the climate crisis and to ensure the sustainability of their funds,” he said.

“Despite its status as one of the world’s three largest pension funds, the NPS has shown virtually no interest in net zero. It did announce a coal exit policy in 2021, but nearly two years later, it has yet to establish even the criteria for restricting coal investments.”

While the NPS hesitates, net zero is increasingly becoming a practical constraint on capital markets and corporate activity.

“The European Union identified redirecting capital flows as one of the three main objectives of its Sustainable Finance Action Plan as early as 2018,” Lee said.

“Since then, the EU has institutionalized measures such as the Carbon Border Adjustment Mechanism and supply-chain due diligence legislation. Carbon-related regulations are increasingly becoming barriers for Korean companies and capital markets as well.”

To encourage the NPS to take action on net zero, Lee has focused on the concept of financed emissions.

Unlike manufacturing companies, financial institutions generally produce relatively few direct greenhouse gas emissions through their own operations.

However, the capital they provide can have a substantial influence on the emissions generated by the companies they finance.

Financed emissions measure the greenhouse gas emissions associated with financial activities such as investment, lending and insurance.

The concept gained wider recognition following the establishment of the Glasgow Financial Alliance for Net Zero, or GFANZ, ahead of the 26th United Nations Climate Change Conference, COP26, held in Glasgow in 2021.

The Partnership for Carbon Accounting Financials, or PCAF, provides a global standard for measuring financed emissions.

More than 550 financial institutions worldwide currently participate in GFANZ, representing approximately USD 150 trillion in assets under management.

On the 18th, KoSIF became the first organization in Korea to calculate and disclose the NPS’s financed emissions.

According to the findings, the NPS’s financed emissions amounted to 27,103,018 tonnes of greenhouse gases in 2021, equivalent to 3.98% of Korea’s total emissions.

“The calculation covered only 312 companies for which emissions data were available, out of 1,168 domestic companies,” Lee said.

“Considering that the NPS also invests in domestic and overseas equities, bonds and alternative assets, the financed emissions associated with its entire portfolio are likely to be far higher.”

“This makes it even clearer that if Korea is to respond meaningfully to climate change, the NPS must move first,” he added.

Lee emphasized that an NPS net-zero commitment and a transition in its investment strategy to reduce financed emissions to zero would also support the long-term sustainability of the fund.

“Climate change will inevitably affect corporate value and the profitability of financial institutions over the long term through physical and transition risks,” he said.

“Improving the climate resilience of Korean companies is directly connected to improving the returns of the NPS, which is both a long-term investor and a universal owner invested across Korea’s industrial economy.”

Considering climate-related risks and creating climate-related opportunities have now also become part of the NPS’s fiduciary responsibility.

On March 7 this year, the Guidelines on Fiduciary Responsibility Activities of the National Pension Service were amended to designate “matters requiring the management of climate-related risks” as a priority management issue in the environmental category.

The revision expanded the NPS’s priority management framework into the environmental and social fields, designating climate change as the principal environmental issue and industrial accidents as the principal social issue.

Lee had consistently called for these changes since the NPS announced its Measures to Promote Responsible Investment in 2019.

Lee participated as a founding member of KoSIF in 2007 and has continued to lead efforts to bring about change at the NPS.

His work has included supporting the 2015 amendment to the National Pension Act requiring consideration of ESG factors, raising public awareness in 2016 of the NPS’s investments in companies responsible for the humidifier disinfectant disaster, promoting the adoption of the NPS Stewardship Code in 2018, and contributing to the introduction of measures to strengthen responsible investment in 2019.

Original: Lee Sang-ho Report, Business Post