Press Releases

"98% of National Pension Service's Outsourced Responsible Investment Assets are ESG Washing"

"Criteria for Calculating Responsible Investment Assets is Highly Arbitrary"... "Standards Must be Strengthened to Recalculate and Re-disclose"

- National Pension Service's ESG Washing Inflicts Negative Impact on the Entire Capital Market Ecosystem

Allegations have been raised that the National Pension Service (NPS) has engaged in 'ESG Washing' by massively inflating its scale of responsible investment assets.

During the National Assembly audit of the National Pension Service on the 20th, Lawmaker Jeoung-ae Han of the Democratic Party of Korea strongly criticized NPS Chairman Tae-hyun Kim, stating, "98% of the domestic and international outsourced investment assets in stocks and bonds disclosed by the National Pension Service as responsible investment assets at the end of 2022 are either not responsible investment assets at all, or the grounds for classifying them as such are extremely weak." She added, "This represents a textbook example of greenwashing and ESG washing typically committed by financial institutions."

ESG washing refers to the act of an organization falsifying or exaggerating the ESG (Environmental, Social, and Governance) performance of its products or services to obtain economic benefits or social reputation.

As of the end of 2022, the total scale of responsible investment disclosed by the NPS stood at 384.1 trillion won. Out of this, internally managed assets accounted for 99.7 trillion won, while outsourced assets accounted for 284.4 trillion won. The total size of responsible investments, which was 130.2 trillion won at the end of 2021, surged rapidly at the end of 2022, and this growth was driven entirely by outsourced management. Until the end of 2021, the NPS applied outsourced responsible investment assets to only a single mandate type ('Responsible Investment Type') among various domestic equity outsourcing categories, which amounted to a mere 7.7 trillion won. However, in 2022, the NPS aggregated and disclosed all domestic equities, domestic bonds, overseas equities, and overseas bonds outsourced to asset management companies as responsible investment assets.

However, Lawmaker Han pointed out, "Out of this 284.4 trillion won in outsourced assets, approximately 278.4 trillion won—excluding 6 trillion won—cannot be classified as responsible investment assets, or the supporting evidence is significantly deficient."

The 6 trillion won represents assets as of the end of 2022 that were outsourced specifically under the 'Responsible Investment Type' among various domestic equity outsourcing mandates, such as pure equity, small-and-mid cap, and value stocks. These are NPS assets managed by asset management firms selected after their specific responsible investment details—such as ▲ responsible investment philosophy, ▲ NPS responsible investment management strategies, ▲ NPS responsible investment execution plans, and ▲ implementation plans for sustainable stock research—were rigorously evaluated through requests for proposals (RFPs). In other words, these are assets that substantially integrate ESG factors during the actual management process. Naturally, compliance with what was described in the proposals is also audited.

In contrast, for the remaining outsourced assets (domestic equities, domestic bonds, overseas bonds) that do not fall under the 'Responsible Investment Type,' the NPS merely grants 1 or 2 extra points as a bonus during the selection of outsourced managers based on whether they have adopted a Stewardship Code, possess detailed guidelines, or maintain ESG investment policies and guidelines. The NPS does not verify whether these managers actually integrate ESG considerations when operating the outsourced NPS assets. In short, this process is merely an evaluation of the organization's policies and systems rather than its actual management practices. Despite this, the NPS regarded all assets outsourced to asset managers selected through this process as responsible investment assets.

Lawmaker Han criticized, "According to the logic of the National Pension Service, an absurd leap can be made that not only the NPS assets outsourced to these management firms but all of their managed assets, including various public funds, would constitute responsible investment assets." She supported her claim of ESG washing in the NPS disclosure by citing examples where "there are outsourced asset managers of the NPS that have neither joined the Stewardship Code nor possess responsible investment policies and guidelines, yet these outsourced assets are still included in the total scale of responsible investment." This demonstrates how arbitrary the NPS criteria for classifying responsible investment assets truly are.

Unlike other asset classes, outsourced managers for overseas equities are selected by evaluating the 'Level of ESG Integration in Investment Strategies,' which is allocated a 2-point bonus. The classification is divided into a total of 5 tiers, ranging from Grade A (the highest, ESG1) to Grade E (unrated for ESG), with scores ranging from a maximum of 2 points to a minimum of 1.2 points. Overseas equity outsourced assets utilize an 'ESG Integration' approach, which adds ESG consideration factors to existing operations. While this can be viewed as closer to responsible investment compared to the selection methods used for other asset classes, it remains highly insufficient to classify them entirely as responsible investment assets. This is because it operates on a bonus-point system, the grading differences regarding the level of ESG integration among outsourced managers are narrow, and whether it is applied in actual operations is an entirely separate matter.

Currently, as ESG goes mainstream, cases of conventional companies as well as financial institutions facing lawsuits alongside greenwashing and ESG washing are on the rise. Accordingly, advanced nations such as the European Union and the United States are establishing or developing legal and institutional mechanisms to prevent various forms of washing.

The European Union's SFDR (Sustainable Finance Disclosure Regulation) classifies conventional funds, ESG-related funds, and sustainability funds, and regulates disclosure items for each tier.

In the United States, the Names Rule requires that at least 80% of fund assets be managed in accordance with the investment policy implied by the fund's name. For example, if a fund considers ESG factors in its strategy implementation and decision-making process but does not prioritize them over conventional financial or economic factors, it is prohibited from using expressions such as 'ESG' or 'Sustainability' in the fund name.

South Korea's Financial Supervisory Service (FSS) has also recently introduced 'Disclosure Standards for ESG Funds,' which will be fully implemented starting in February next year. Under these standards, funds that portray themselves as 'ESG'—either by including ESG in the fund name or by stating in the prospectus that ESG factors are considered in the investment objectives and strategies—must pre-disclose the correlation between critical information (such as investment objectives, strategies, management capabilities, and investment risks) and ESG metrics, and must regularly report management progress through asset management reports.

Lawmaker Han urged, "The ESG washing by the National Pension Service—an entity that ought to build and monitor a healthy ESG ecosystem—is an extremely grave issue, as it destroys trust across the broader capital market and degrades the sustainability of our entire society. The National Pension Service must strictly establish its classification criteria for outsourced responsible investment assets from the perspective of 'preventing ESG washing,' and based on this, it must recalculate and re-disclose the exact scale of its responsible investment assets."

[END]