[Contribution] Support Korean companies in their ESG journey
ESG, the environmental, social and governance aspects of a business, has quickly become one of the hottest topics in the corporate and financial sectors in Korea. Faced with the urgent need to tackle climate change and social inequalities, companies are preparing to make positive change.
One of the reasons for the emergence of this trend is the realization that companies have a key role to play in ensuring a sustainable future for all, beyond their financial obligations to their shareholders.
This awareness is also linked to the fact that more and more externalities – defined as the cost of business to society as a whole – are visible in today’s world. Climate change is no longer a theoretical concept and the impact of companies on society is increasingly visible.
Finally, strong corporate governance is increasingly recognized as a key lever to ensure that companies adopt a balanced and holistic vision vis-à-vis the various stakeholders.
Investors are clearly turning to ESG around the world. At our recent ESG seminar, we saw how the scale of ESG investing is expected to increase to $ 45 trillion by the end of 2021, which represents 50% of total global assets under management.
In line with this global trend, the Korea National Pensions Service recently announced plans to increase its investment in ESG assets by up to 50% by 2022.
To meet investor ESG requirements, companies are stepping up to integrate ESG management and issue ESG bonds, while asset managers are launching ESG funds. According to the Korea Stock Exchange, the volume of Korean private sector ESG bond issuance rose 28-fold in the first quarter of this year compared to the same period last year.
ESG bonds issued on the global market last year were worth around $ 494 billion, an increase of around 80% from 2019.
It is clear that the importance of ESG bonds is increasing. In the early stages of the ESG bond market, issuers focused on green bonds. However, now there are not only green bonds, but also social bonds, sustainable bonds that have the characteristics of both green and social bonds and sustainability bonds, also known as SLBs. Issuers are testing a wider range of ESG bond labels.
However, we see the need for the market to remain focused on existing labels to deepen quality around ESG performance and issuer disclosure as a higher priority, especially in the SLB market.
Many companies still approach ESG from a simple promotional mindset. This strategy will become increasingly risky from a reputation standpoint, as superficial reactions to ESG concerns can lead to accusations of “green washing”.
Recent research questions whether ESG-linked investments produce better returns. If the argument has not yet been definitively decided, this question is also missed, for two reasons.
First, as mentioned above, investments related to ESG are in part aimed at capturing the broader operating costs and the benefits of doing so in a sustainable manner. Measuring this correctly has to be done over decades, rather than years, and cannot be accurately reflected in traditional ROI analysis.
Second, the question for investors is less: “What is the additional return on my ESG investments”, and even more: “What is the hidden cost of non-ESG companies?”
As stranded costs become more visible, the tide is turning to companies that don’t embrace this change. This can be seen very clearly in certain sectors, such as oil and gas, where the costs of exploring and refining assets are increasingly weighed down by costs related to the environment.
These companies need to adapt quickly and fundamentally or else they risk having massive amounts of so-called stranded assets. Of course, this requires a change in society as a whole, in the way we operate and in what we consume.
Due to the protracted COVID-19 pandemic, interest in environmental and social issues has increased and South Korean companies are increasingly active on the ESG front.
This is an essential opportunity for Korean companies to become leaders in the technologies of tomorrow. This is evident in the field of electric vehicle batteries, in which many Korean companies are investing.
But this is also the case in the steel industry, where new, less polluting technologies are tested and launched to produce steel, using hydrogen instead of coal. Take the case of twin-engine ships, which are less polluting than diesel-only ships. Or in social bonds or loans, the proceeds of which are directed to disadvantaged and disenfranchised members. ESG should therefore not be seen as a constraint, but rather as an opportunity to develop new profitable and sustainable business models.
BNP Paribas supports its clients in the issuance of ESG bonds and in 2020 reached number one in the world in the issuance of sustainable bonds and social bonds.
At BNP Paribas, we focus on ESG both internally and externally, to such an extent that ESG objectives are integrated into the key performance indicators of BNP Paribas executives. These objectives are set taking into account the social and environmental performance of the bank.
As the world’s leading financial group in the euro zone, BNP Paribas has made a commitment to completely exit the coal industry by 2040 worldwide.
In addition, to achieve carbon neutrality, we have stopped financing unconventional hydrocarbons such as shale gas and tar sands.
In addition, BNP Paribas plans to increase loans to companies that directly contribute to the achievement of the United Nations Sustainable Development Goals to 210 billion euros (255 billion dollars) by 2022.
Most recently, we joined the Net-Zero Banking Alliance as a founding member. This commitment, launched by the Funding Initiative of the United Nations Environment Program, commits BNP Paribas to align its loan portfolio to make it compatible with a trajectory of zero net GHG emissions.
In Korea, we have actively participated in the development of the ESG-related market, managing the issuance of a large number of green, sustainable and social bonds and other social asset-backed securities in recent years. We also worked closely with a major automaker to finance one of the world’s first hydrogen truck fleets in Switzerland.
BNP Paribas also actively promotes ESG among its employees.
In 2018, BNP Paribas launched Green Company for Employees, a global environmental program for BNP Paribas employees, in order to help reduce our direct environmental impact. The program focuses on educating our employees to change their daily habits, such as reducing the use of single-use plastics.
As a result, single-use cups and plastic bottles have been completely removed from BNP Paribas premises, and our employees are very supportive of this change.
BNP Paribas also gives high priority to diversity and inclusion at work, in line with ESG’s governance objectives. The group has set a goal of achieving 40 percent female representation in its executive committees as well as in its top 100 senior management positions by 2025. In Korea, the representation of women on the board of directors of the bank has reached 25 percent two years ago.
ESG is both a challenge and a great opportunity to mobilize all stakeholders around fundamental objectives for companies and for society in general.
As an expert in ESG solutions, BNP Paribas is there to help its clients integrate ESG into business management for the benefit of all.
Philippe Noirot is Head of Territory for BNP Paribas South Korea – Ed.