By Song Kyung-jin
A tectonic shift is taking place around the world. Making more profits is no longer seen as the only prime purpose of businesses. Environment, social and governance (ESG) is a global standard by which businesses determine their activities to be responsible and sustainable. Most businesses firmly believe that an ESG strategy is directly linked to corporate growth, competitiveness and survival. The global race has already kicked off.
When Apple announced its carbon neutrality (or net zero) goal for 2030, not just its competitors but business partners in the value chain could not turn a blind eye but had to follow suit for their survival. A retail giant like Walmart is determined to extend financial support to small and medium companies in the value chain to achieve "Scope 3" emissions, or value chain emissions.
I would argue that Korea with its globalized economy and companies is well-positioned to become a global leader in ESG once you think outside the box.
First, there is a high national interest in ESG spreading like wildfire. Finding every Tom, Dick and Harry (I could not find a gender-neutral version!) murmuring ESG in conversation is commonplace. People's cohesiveness gets strong when a common cause is presented.
Second, Korea's economic structure with strong manufacturing base (accounting for 30 percent of gross domestic product) and a high trade dependency and externalities are often said to be unfavorable and vulnerable to ESG standards. However, being a manufacturing power with high externalities is in fact providing Korea with a golden opportunity to become a global leader in ESG, although highly challenging.
When you cannot opt out of the ESG rules for growth, competitiveness and survival, adapt to and internalize them. Globalized Korean companies have firmly established their places in the global supply chains of their own or other global companies. The timely driving force is coming from both inside and outside. Most importantly, they know well that their survival depends on implementing ESG rules including carbon emissions reduction, labor standards and human rights.
Third, while still insufficient, the nation is committed to playing a role in the global endeavor to reach carbon neutrality. Of the multitude of ESG factors, the E factors, especially the carbon emissions reduction, are at the forefront of the ESG strategy.
The Korean government announced an upgraded nationally determined contribution (NDC) emissions target at COP26 last month in Glasgow. It pledged to reduce carbon emissions by 40 percent below 2018 levels by 2030. The Framework Act on Carbon Neutrality and Green Growth sets the carbon neutrality target by 2050. Korea announced, in April 2021, an immediate end to public financing of overseas coal-fired power plants.
The most important in the path to carbon neutrality is the phasing out of coal use in power plants. In 2020, however, 35.6 percent of power in Korea came from coal-fired power plants, while 29 percent was generated from nuclear plants and 6.6 percent from renewables.
Given the carbon-neutrality target and an excessively ambitious renewables share of 60 percent to 70 percent of the national energy mix by 2050, the nation must be clear on the energy path it will take so as not to waste time and have to retract its overly audacious scheme. France's recent plan to shift to small modular reactors is a good case in point, to closely follow up for reference.
Fourth, Korea is improving considerably in energy innovation. According to the Global Energy Innovation Index 2021 from the Information Technology and Innovation Foundation, Korea ranked 5th for knowledge development and diffusion. A chronic weakness stood out again in entrepreneurial experimentation and market formation as well as social legitimation and international collaboration. It is particularly weak in international collaboration, ranking 32nd of the 34 countries surveyed. In this regard, KAIST's plan to open a campus in New York for more international competition and collaboration is timely commendable.
Financial institutions world over are quickly expanding ESG financing. A recent survey by an American insurance company found that 80 percent of respondents in the financial services sector ranked climate change and ESG as either an important, or the most important, issue for their operations. Shinhan Financial Group declared at the Glasgow COP26 its intention to go net zero by 2050.
It was the first of its kind among East Asian financial institutions. Sales of its green financial products are on a sharp rise. For instance, its green car loans jumped almost 40 times this year from last year. It is also introducing Scope 3 emissions loans to large companies and partner companies. Such experiences when accumulated can play the role of a benchmark for follower financial institutions at home and abroad.
The above strengths will excel only when a well-designed, targeted, ambitious and yet realistic national policy framework is in place and only when a public-private partnership is firmly consolidated. It makes economic sense when the economy needs stronger demand. So, let's get started.
Dr. Song Kyung-jin (kj_song@hotmail.com) led the Institute for Global Economics (IGE), based in Seoul, and served as special adviser to the chairman of the Presidential Committee for the Seoul G20 Summit in the Office of the President. Now, she chairs the international cooperation committee called the Innovative Economy Forum.
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When Apple announced its carbon neutrality (or net zero) goal for 2030, not just its competitors but business partners in the value chain could not turn a blind eye but had to follow suit for their survival. A retail giant like Walmart is determined to extend financial support to small and medium companies in the value chain to achieve "Scope 3" emissions, or value chain emissions.
I would argue that Korea with its globalized economy and companies is well-positioned to become a global leader in ESG once you think outside the box.
First, there is a high national interest in ESG spreading like wildfire. Finding every Tom, Dick and Harry (I could not find a gender-neutral version!) murmuring ESG in conversation is commonplace. People's cohesiveness gets strong when a common cause is presented.
Second, Korea's economic structure with strong manufacturing base (accounting for 30 percent of gross domestic product) and a high trade dependency and externalities are often said to be unfavorable and vulnerable to ESG standards. However, being a manufacturing power with high externalities is in fact providing Korea with a golden opportunity to become a global leader in ESG, although highly challenging.
When you cannot opt out of the ESG rules for growth, competitiveness and survival, adapt to and internalize them. Globalized Korean companies have firmly established their places in the global supply chains of their own or other global companies. The timely driving force is coming from both inside and outside. Most importantly, they know well that their survival depends on implementing ESG rules including carbon emissions reduction, labor standards and human rights.
Third, while still insufficient, the nation is committed to playing a role in the global endeavor to reach carbon neutrality. Of the multitude of ESG factors, the E factors, especially the carbon emissions reduction, are at the forefront of the ESG strategy.
The Korean government announced an upgraded nationally determined contribution (NDC) emissions target at COP26 last month in Glasgow. It pledged to reduce carbon emissions by 40 percent below 2018 levels by 2030. The Framework Act on Carbon Neutrality and Green Growth sets the carbon neutrality target by 2050. Korea announced, in April 2021, an immediate end to public financing of overseas coal-fired power plants.
The most important in the path to carbon neutrality is the phasing out of coal use in power plants. In 2020, however, 35.6 percent of power in Korea came from coal-fired power plants, while 29 percent was generated from nuclear plants and 6.6 percent from renewables.
Given the carbon-neutrality target and an excessively ambitious renewables share of 60 percent to 70 percent of the national energy mix by 2050, the nation must be clear on the energy path it will take so as not to waste time and have to retract its overly audacious scheme. France's recent plan to shift to small modular reactors is a good case in point, to closely follow up for reference.
Fourth, Korea is improving considerably in energy innovation. According to the Global Energy Innovation Index 2021 from the Information Technology and Innovation Foundation, Korea ranked 5th for knowledge development and diffusion. A chronic weakness stood out again in entrepreneurial experimentation and market formation as well as social legitimation and international collaboration. It is particularly weak in international collaboration, ranking 32nd of the 34 countries surveyed. In this regard, KAIST's plan to open a campus in New York for more international competition and collaboration is timely commendable.
Financial institutions world over are quickly expanding ESG financing. A recent survey by an American insurance company found that 80 percent of respondents in the financial services sector ranked climate change and ESG as either an important, or the most important, issue for their operations. Shinhan Financial Group declared at the Glasgow COP26 its intention to go net zero by 2050.
It was the first of its kind among East Asian financial institutions. Sales of its green financial products are on a sharp rise. For instance, its green car loans jumped almost 40 times this year from last year. It is also introducing Scope 3 emissions loans to large companies and partner companies. Such experiences when accumulated can play the role of a benchmark for follower financial institutions at home and abroad.
The above strengths will excel only when a well-designed, targeted, ambitious and yet realistic national policy framework is in place and only when a public-private partnership is firmly consolidated. It makes economic sense when the economy needs stronger demand. So, let's get started.
Dr. Song Kyung-jin (kj_song@hotmail.com) led the Institute for Global Economics (IGE), based in Seoul, and served as special adviser to the chairman of the Presidential Committee for the Seoul G20 Summit in the Office of the President. Now, she chairs the international cooperation committee called the Innovative Economy Forum.
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