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ANALYSISESG responsibility changes financial investment landscape

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Profit growing from ESG investment

By Lee Kyung-min

Korean investors factoring in environmental, social and corporate governance (ESG) criteria is increasingly becoming the "new normal," as indicated by the global standard rapidly translating into investment portfolio restructuring.

The new global initiative advanced by governments, large pension funds, sovereign wealth funds and financial services firms around the world is contributing to creating a social consensus whereby profit and environmental sustainability are two crucial values that can no longer be treated as mutually exclusive.

The heightened awareness is spreading rapidly among individual retail investors, something market watchers say bodes well for the overall improvement of financial investments long associated with selfish greed at the expense of, or at least an understandable disregard, for healthy growth values.

Also providing cause for large institutional investors seeking a greater say in green, responsible asset management is the stewardship code, principles to be followed by entities that manage other people's money via active engagement in corporate governance in the interests of their beneficiaries, or the shareholders.

First implemented in December 2016, the code is embraced by 149 organizations in Korea including three pension funds, 49 private equity funds (PEF), 49 non-PEF asset managers, five insurers, four brokerages and two investment consultancies, according to the Korea Corporate Governance Service (KCGS).

Institutional investors

National Pension Service Chairman Kim Yong-jin / Korea Times file
National Pension Service Chairman Kim Yong-jin / Korea Times file
The National Assembly Strategy and Finance Committee passed a revision bill Feb. 19 that will require the Korea Investment Corp. (KIC) to consider ESG concerns before making an investment, in a successful push to have the sovereign fund lead the sustainability drive.

The KIC is a sovereign wealth fund operated with money from foreign exchange reserves managed by the Ministry of Strategy and Finance, and the Bank of Korea.

Its investments, including overseas stocks, bonds and real estate, amounted to assets under management of around $183.1 billion, or about 200 trillion won, as of 2020.

The bill put forward by Rep. Kim Kyung-hyup of the ruling Democratic Party of Korea (DPK) in July 2020 states that the fund should factor in ESG criteria, a requirement with a pre-condition whereby the increase of entrusted assets should be maximized only to the extent that the amount total is not put at risk.

The bill that drew cross-partisan support was initially opposed by the finance ministry, which argued that setting up the legal basis would be essentially meaningless given the fund's limited influence in the global market and a lack of similar precedents established by its larger global peers.

Yet committee members pushed for the revision, a measure they say would prevent what could later become a major liability issue concerning investments with firms involved in ethics and compliance lapses or corruption scandals. Examples cited were the KIC's investment in Reckitt Benckiser, the British manufacturer of a deadly disinfectant sterilizer, and Volkswagen, a German carmaker embroiled in an emissions cheating scandal.

Korea Investment Corp. CEO Choi Hee-nam / Korea Times file
Korea Investment Corp. CEO Choi Hee-nam / Korea Times file
The passage of the bill to be tabled at the National Assembly plenary session March 26 will hold the sovereign wealth fund to the same stringent standards as the National Pension Fund (NPS), the world's third-largest pension fund with over 700 trillion won in assets under management.

The pension fund plans to increase ESG-oriented investment to half of its assets by 2022, a dramatic goal from only about 32 trillion won in 2019.

The ambitious plan would require a significant and rapid improvement since its ESG-oriented investment stood at only around 27 trillion won in 2019, accounting for slightly over a third of 71.6 trillion won in stocks directly managed by the NPS.

The remaining 5 trillion won is part of 60 trillion won in stock investment managed by PEFs among other asset managers chosen by the NPS.

The pension fund says the ESG-oriented investment will soar further to 500 trillion won by 2024, backed by its chairman Kim Yong-jin's plan on more investments in overseas stocks and domestic bonds. The two accounted for a respective 166 trillion won and 322 trillion won of the fund's portfolio in 2019.

Profits

The local financial industry expects a higher return for the ESG investment, on the back of the fast-growing investment appetite around the world.

Data from FnGuide, a financial information services provider, showed that ESG funds drew 399.8 billion won in investments as of Feb. 18, a notable inflow compared to over 1.24 trillion won that fled PEF investments in the same period.

Socially Responsible Funds (SRI) that encompasses ESG funds stood at over 1.51 trillion won as of end of 2020, a five-fold increase from 318.4 billion won a year earlier.

Its average annual return was 32.85 percent, about three times higher than 11.6 percent a year ago. The return for January was 7.3 percent, exceeding the 3.58 percent gained by the benchmark KOSPI in the same period.

According to KG Zeroin, an investment consultancy, the net assets of domestic ESG funds stood at 2.3 trillion won as of February, about 11 percent of 20.94 trillion won operated via active stock funds. The number of ESG funds jumped to 60, up 10 from 2019.

The amount in ESG corporate bonds was 1.1 trillion won in January alone, far exceeding the annual issuance of 800 billion won last year.

These are in line with a global increase in ESG investment which rose to $40.5 trillion as of June, up 32 percent in only 18 months.

About 15 percent of newly introduced exchange-traded funds (ETFs) were ESG funds in 2020. BlackRock, the world's largest asset management company, predicted that the world's ESG funds will exceed $20 trillion by 2028.

Seoul National University economist Kim So-young said the ESG drive will gain further ground.

"ESG investments will accelerate since the COVID-19 pandemic did more than raise public awareness on health consequences and possible environmental implications along with it. A social consensus to put a greater emphasis on health and environmental values has been formed and investor behavior will continue to adjust accordingly."


Lee Kyung-min lkm@koreatimes.co.kr


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