Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.” The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience. The goals of Five Questions about SRI are fourfold:
- To collect a catalogue of examples of SRI in practice in emerging markets;
- To raise awareness about SRI in emerging markets;
- To reflect on what SRI in emerging markets means to practitioners; and
- To enable SRI practitioners in emerging markets to network with peers around the world.
This week’s interview is with Ji-won Shin, Head, Eco-Frontier Sustainable Finance Center, Seoul, South Korea.
Eco-Frontier, South Korea’s first sustainable investment advisory, persuades major domestic and international financial institutions to invest in economically, environmentally and socially healthy companies. It was established in 1995 to contribute towards global sustainable development in incorporating social and environmental value into economic value. Eco-Frontier aims to provide companies, financial institutions, local communities, governments and international organizations with knowledge-based and highly value-oriented sustainability solutions, from research, consulting, environmental technology, information technology, regulatory and financial advisory service, even offering services for creating and commercializing of new types of business. Dedicated to making a difference today for a better tomorrow, Eco-Frontier is contributing to making the world more sustainable, helping healthy growth of businesses, and raising the quality of life for the public. Eco-Frontier, as part of a global market entry, established the Asia Sustainability Research Alliance (ASRA), in cooperation with the ESG research firms SIRIS (Sustainable Investment Research Institute Pty Limited) and OWW (Owens, Williams & Wood Consulting). This is the biggest ESG Research Consortium in Asia. Ji-Won Shin is the head of the Eco-Frontier Sustainable Finance Center. Following completion of her studies she worked as a consultant in Eco-Frontier’s sustainable strategy team for five years. Since 2010 she is with the Sustainable Finance Center, working on issues and projects related to the Carbon Disclosure Project, green finance, ESG ratings (MSCI) and UNEP FI (Korea local partners). She holds a Master’s degree in accounting and a Bachelor’s degree in management from Chung-Ang University.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Ji-won Shin: Socially Responsible Investment is a type of long-term investment considering non-financial factors – Environment, Social and Governance (ESG) factors, which can affect the sustainability of corporations as well as financial factors investors conventionally regard as important for investment decisions.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Ji-won Shin: SRI should consider short-term issues with a long-term perspective. In other words, it is to decide whether to invest or not, while considering non-financial factors such as Environment, Social and Governance (ESG) factors arising from business management issues with an eye to expecting not short-term but instead long-term return and corporate performance. However, the investment method of SRI is not basically different from other investment types. It can reinforce a quality of investment analysis by integrating ESG factors into conventional analysis. Therefore, investors can increase their profitability and lower investment risk by making investment decisions based on more information. Because of these advantages, the concept of SRI is included in major investors’ investment principles in Europe and the USA.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in South Korea to manage?
Ji-won Shin: Looking at the social condition in Korea, now the society is asking corporations to undertake responsible activities for consumers, employees, shareholders and even for the local/regional community. To meet these demands, corporations have been doing social responsible management with various types of social contribution. The most representative activity is “philanthropic” or “voluntary,” such as endowing a scholarship for children of low-income families or providing medical treatment for the elderly. These days, however, some corporations’ social activities are being changed, from donations to charity and dispensation to strategic social contributions. Strategic social contributions are a differentiated activity which can demonstrate a corporation’s vision, philosophy, features of its goods and relation to business. So “thematic social contribution” related to corporation’s core values and its identity began to emerge as a new trend. In addition, strategic social contribution leads to a social enterprise establishment.
The social responsible management of corporations is not just donation or beneficence but corporate strategy. Utilizing corporate business solutions and systems, they can show innovation in social responsibility and undertake business development. And it is a big chance for corporations to contribute sincerely for society. The cost of corporations cannot help increasing if they start social responsible management late. Because those activities can create business opportunity.
If a corporation considers social responsible management simply a donation, then probably next year it will say again, “Nobody recognize our efforts, even we spend trillions every year.”
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in South Korean companies to analyze?
Ji-won Shin: Korean corporations have grown up rapidly while receiving benefits from government-led development policy. As a result, Korean corporations in manufacturing and service industries as well as financial and insurance business are of great importance to the national economy and make a great contribution to national economy. Considering their performance and net asset value, however, they are undervalued. One of the main risks affecting this undervalued status is governance. In the Korean capital market, governance is the fundamentally and structurally weakest economic point.
It is clear that Korean corporations’ governance has significantly improved after the past financial crisis. But there still remain governance issues including embezzlement, inappropriate audit, unfair deal among affiliates, business management by the owner family and inappropriate inheritance. It is no exaggeration to say that the governance risk damaging shareholder value is the main cause of ‘the Korea Discount.’
Emerging Markets ESG: Around which issues do CSR, SRI and sustainability converge in South Korea today?
Ji-won Shin: Recently, the discussion over ‘democratization of the economy’ is popular in Korea. ‘Democratization of the economy’ means balanced growth, stability and distribution as well as prevention of market abuse due to market dominance and economic power. It can be thought as a solution for social and economic imbalance in Korea. Specially, the polarization of wealth among corporations has become more serious due to growing distinctive imbalance as well as overall low growth. To solve these imbalances, the Korean government has established a “National Commission for Corporate Partnership” and passed a related law. The companies also signed a ‘Corporate Partnership Agreement” and actively began to do programs for win-win relation with cooperative firms. With these efforts, the income gap between conglomerates and small and medium-sized businesses has decreased. Nevertheless, the polarization of wealth between companies and the national economy still remains a problem Korean society has to solve.
Awareness about and efforts to improve ‘the imbalance in Korean society and economy’ by the Korean government and companies are expected to contribute towards making the Korean capital market into a virtuous circle structure.