A few days after the Financial Services Commission's announcement of its plan to create an institutional foundation for responsible investment based on ESG (Environment, Social, and Governance) factors, the Korea Exchange announced on January 18, 2021 that it has adopted an ESG information disclosure guidance (the “Guidance”). The Guidance will serve as a bottom line for publicly listed companies to select and disclose important ESG information. The Guidance consists of the concept of ESG, the roles of the board of directors and management, principles of disclosure, materiality assessment, report preparation and disclosure procedures, and recommended disclosure indicators.
1. ESG Information Disclosure Principles
The Guidance provides a number of principles that listed companies must follow when disclosing ESG information as follows:
2. Recommended Disclosure Indicators
The Guidance introduced a number of disclosure indicators that companies are recommended to include in their ESG disclosure. These indicators are selected from the widely used ESG disclosure standards and initiatives. If a specific indicator is omitted in a disclosure, the reason for such omission must be explained (the ‘Respond or Explain’ principle).
Companies must also explain any improvement or deterioration in their performance of the indicators in each year, and the reason and response strategy for such change in performance. Unless other publication term is provided by a company or any ESG issue that can have a significant impact on the financial performance of a company occurs, these indicators are disclosed on an annual basis.
3. Materiality Assessment
Companies are not required to report all ESG issues. Rather, they should determine the scope and content of the information to be disclosed based on the materiality of each issue determined by materiality assessments. In addition, companies should assess the likelihood and intensity of economic, environmental, and social impacts of each issue, and the likelihood of risks and opportunities posed by such issue in order to prioritize the items to be included in the report.
4. Implications
Despite the non-financial nature of ESG information, there is no doubt that it will have a significant impact on the finances of a company. For those companies preparing for an initial public offering (IPO), ESG information will affect the direction of the IPO. For publicly listed companies, it will serve as important disclosed information that will affect corporate valuation as well as investment decisions of investors and potential investors. Companies preparing for the disclosure of ESG information will now be able to rely on the principle, scope and procedures introduced in the Guidance. Thus, companies preparing for IPO as well as companies already listed on the Korea Exchange should establish an internal system for ESG information reporting as soon as possible so that relevant ESG information can be disclosed in accordance with the Guidance in a timely manner.
