Insights

Growing Concerns over Climate Disclosure: Preparing for
Effective Implementation Is Urgent

ㅣTaehan Kim, COO of KoSIFㅣ

“Climate disclosure phobia” may ease when the actual enforcement of Korea’s Capital Markets Act is examined

Excessive concern could, paradoxically, weaken the competitiveness of Korean companies and increase their reporting burden

“Once climate disclosure becomes mandatory, companies’ legal and litigation risks will increase dramatically.”

This concern has recently been raised with growing frequency by business associations, law firms, and other stakeholders. It is often followed by calls to delay mandatory disclosure significantly so that companies have more time to prepare for legal risks, or to introduce disclosure on a voluntary rather than mandatory basis.

     Climate Disclosure Phobia: What Does Enforcement of the Capital Markets Act Actually Look Like?

If sustainability disclosures, including climate-related information, are required to be published through annual business reports, companies will become subject to the Financial Investment Services and Capital Markets Act, which governs such reports.

Article 162 of the Act provides that companies may be liable for investor losses where annual business reports contain false statements or omit material information.

Article 164 also authorizes the Financial Services Commission and the Financial Supervisory Service to request documents from and investigate companies subject to annual reporting requirements. Where false statements or material omissions are identified, the authorities may order corrective disclosure.

Where necessary, they may also suspend the issuance or trading of securities, recommend the dismissal of executives, impose administrative fines of up to KRW 2 billion under Article 429, or apply criminal penalties of up to five years’ imprisonment under Article 444.

The statutory penalties are clearly not insignificant.

However, it is common sense that the existence of a provision allowing imprisonment of up to ten years does not mean that every related offence results in the maximum sentence.

To assess the legal risks companies may face under mandatory sustainability disclosure, it is necessary to examine not only what the law provides, but also how it is enforced in practice.

First, consider the Financial Supervisory Service’s responses to disclosure violations.

Each year, the Financial Supervisory Service reviews all or part of the companies required to submit annual business reports. These reviews, however, are not equivalent to surprise inspections intended primarily to impose penalties.

Their purpose is to improve the completeness of annual business reports and encourage corrective disclosure. To give companies sufficient time to prepare, the authority announces priority review areas in advance each February.

According to the results of the 2023 review, measures were taken in relation to 116 disclosure violations by 105 companies. Of these measures, 87.9 percent were relatively minor actions such as warnings or cautions.

The main violations identified by the Financial Supervisory Service included failures to submit securities registration statements and omissions of collateral information in material event reports concerning convertible bond issuances. No cases involved non-financial information in annual business reports.

In 2022, the authority also conducted a priority review of the Management Discussion and Analysis section of annual business reports, which, like sustainability disclosure, contains a significant amount of forward-looking information. No cases involving major sanctions such as financial penalties were reported.

Next, consider actual litigation and liability arising from false disclosure.

It is important not to overlook that Article 162 of the Capital Markets Act includes a due-diligence defense. Even where false statements or omissions of material information have occurred, those potentially liable—including the chief executive and those responsible for preparing or directing the preparation of the report—may be exempt from liability if they can demonstrate that they exercised due care.

The Act also provides a safe harbor for forward-looking information, which is inherently more likely to prove inaccurate. Liability may be avoided where the company clearly identifies the information as forward-looking and discloses the assumptions or grounds on which the projection is based.

A substantial proportion of climate-related disclosures is likely to fall within this category.

Of course, litigation risk remains where inaccurate information is disclosed due to inadequate preparation and the conditions for exemption are not met.

However, court decisions on disclosure violations to date have largely involved financial statement matters such as accounting fraud or false disclosure of positive developments intended to attract investment or manipulate share prices. There appear to be few, if any, cases imposing liability for management errors made in the course of ordinary business operations.

Considering the Financial Supervisory Service’s enforcement approach, existing litigation, and the direction of court rulings, there appears to be little basis for concluding that mandatory sustainability disclosure would cause litigation or penalties to increase dramatically because of unintentional reporting errors or management misjudgments concerning climate and other sustainability matters arising in the ordinary course of business.

It is true that complaints and disputes concerning corporate greenwashing have increased both internationally and in Korea.

However, these cases have generally concerned alleged violations of the Act on Fair Labeling and Advertising or the Environmental Technology and Industry Support Act in relation to corporate advertising and promotional activities.

Most companies likely to become subject to mandatory climate disclosure already publish sustainability reports. If those reports contain materially false information, complaints can already be brought under advertising or environmental legislation.

It is therefore difficult to accept the argument that litigation or penalties will suddenly increase simply because disclosure becomes mandatory and the information moves into annual business reports.

Such claims may, of course, be reframed as alleged violations of the Capital Markets Act. But this does not necessarily mean that the overall volume of litigation faced by companies will increase.

     Excessive Concern Could Weaken Corporate Competitiveness and Increase the Reporting Burden

It is difficult to avoid the conclusion that recent concerns raised by business associations over legal risk are excessive.

Whenever a new制度 is introduced, concern is natural. Companies may reasonably ask for more time and support to prepare.

But it becomes a different matter when excessive concern obstructs the introduction of a制度 that society clearly needs.

It is difficult to determine whether business associations are genuinely concerned about legal risk or are using those concerns strategically to delay the introduction of mandatory disclosure.

Regardless, Korea must recognize that delaying its own disclosure requirements will not reduce or postpone the reporting burden facing Korean companies.

Foreign investors already account for more than 30 percent of Korea’s stock market. They are unlikely to stop requesting ESG information from Korean companies simply because Korea delays introducing a sustainability disclosure regime.

Even if they did stop making such requests, that would be no cause for relief. It would indicate the withdrawal of a growing pool of ESG-related capital.

Information demands from global customers such as Google and Apple, which are strengthening sustainability management across their supply chains, will also continue regardless of whether Korea introduces domestic disclosure requirements.

A corporate disclosure system is an effective mechanism for responding collectively to the individual information requests of multiple stakeholders.

Paradoxically, calls from the business community to delay mandatory ESG disclosure may ultimately increase the information burden on Korean companies rather than reduce it.