Effectiveness of ESG Management in Korea Companies Son, Suyun & Cho, Minseo

Effectiveness of ESG Management in Korea Companies

Author 1 Full Name : Son, Suyun

(Last Name, First Name)

School Name : Daewon Foreign Language High School

Author 2 Full Name : Cho, Minseo

(Last Name, First Name)

School Name : Daewon Foreign Language High School

Abstract:

This study was conducted under the purpose of proving ESG management can help boost company wealth not only for multinational companies but also domestic ones as well. By evaluating the increasing global trend of ESG implementation and unique characteristics of Korean society that may affect the domestic ESG scene, we have identified the roots of the widespread misconception of ESG being harmful to company performance. We have analyzed two companies, Naver and SK Innovation, as examples of showing increased financial performance followed by the implementation of ESG management.

Through this study, we hope for company owners, stockholders, or any other stakeholders in the economy to realize that ESG management, unlike its misunderstanding of being accomplished at the sacrifice of profit, is rather helpful for a company’s wealth. Also, we expect this study to contribute to the dispersion of ESG implementation to Korean companies and ultimately carry out a true sustainable society that lives up to the fundamental purpose of ESG.

Keywords: ESG management, environment, social activities, corporation, governance

I. Introduction

1.1 Purpose

With a certain amount of affluence attained and the increasing importance of social activism in today’s society, the priorities of one of the most influential actors in modern capitalistic society, companies, have shifted from pure profit generation to consideration of other surrounding factors of the civil reality. They now recognize and act on their social responsibilities even if it means the sacrifice of a portion of their profits, which is an economic phenomenon that could not have dared been imagined even a few decades ago. One of the ways such changes are manifest is the increasing implementation of ESG management. The emergence and implementation of ESG management is meaningful in that it reflects the evolved roles and responsibilities of companies in contemporary society. The old-fashioned goal of prioritizing profit with the sacrifice of society and environment does no longer work. Rather, companies nowadays are expected to take social responsibility even if it means generating less profit. This is due to the increased conscience and morals in consumption of the public. People no longer only buy what is the cheapest. Instead, people can afford the luxury to activate their morals in consumption, and because the impact of companies on our society is increasing by the day (and the people know it), the public is more reluctant to easily buy a product they know will kill people and animals on the other side of the planet. In fact, studies show 50% of consumers are influenced by the fact of whether a company practices sustainability or not, and the percentage is significantly higher among Generation Z and Millenials. This age proportion is important as they are the future generation, meaning if a company wants to be sustainable not only socially but also economically, ESG implementation is vital. In other words, ESG management is no longer an option but an obligation in today’s global economy. Regardless of its importance, however, companies are still reluctant to incorporate a rather novel management style of high risk in the fear that it may deteriorate their profits. At a glance, this seems sensible—ESG management means an increased expense for social responsibility that seems more to be charity work rather than contribute to money. However, recent studies have shown that ESG implementation and profits do in fact have a direct correlation with not only profit generation but also company investment. According to MSCI, between 2015-2018, the top 30 companies that were active in reducing emissions had an increase of 15% of company value while that of the bottom 30 companies reduced by 12%. Plus, Black Rock, one of the world’s biggest investment management cooperation, announced they would add a requirement of reducing 15% of emissions when they invest or take over a company, and would consider ESG in all active products. As such, statistics show that ESG has a positive effect on company wealth as opposed to social perception. However, while objective facts have shown that ESG management is beneficial to both the economic and social sectors of a company, the misconception of the public that ESG is detrimental to profit generation is still widespread, especially among older generations who consist a majority of influential investors and stockholders. Especially with those age groups being conservative and having a tendency to resist changes, they are one of the major impediments in the ESG implementation in Korean companies.

As ESG is a relatively novel term, especially in Korea, it is mostly at a pioneering stage. Only a few major companies that can afford resources are the ones consisting most of the participants in the domestic ESG field, while others have doubt regardless of objective statistics. In order for a truly sustainable society and economy, there needs to be no distinction of such; all companies must be given the opportunity to at least try implementing one of the most essential management strategies in today’s economy without irrational fears stopping them. Through this study, we aim to prove that ESG works not only for huge multinational companies but also domestic ones by explaining the linkage of a company’s ESG performance and changes in its financial performance and eradicate unreasonable perceptions of ESG amongst the public.

1.2 Significance of Study

As aforementioned, ESG management is being deemed as a necessary and definite strategy for a company to take on, and global companies are working towards that perception. But if Korean companies ignore such practices based on subjective misinterpretations of the correlation of ESG and profits, they will no longer have a place in the global economy which affects the national economy and power as well. In other words, the implementation of Korean ESG companies isn’t only a matter of its influence on the community--it is also a matter of national power . Therefore, by proving ESG is effective in financial performance for domestic companies as well, this study will contribute to eradicating misperceptions of ESG and spread ESG management among companies in Korea, ultimately attaining a genuine sustainable society both socially and economically.

II. Introduction of ESG Management

2.1 Definition of ESG

ESG criteria refer to environmental, social, and corporate governance factors which are taken into consideration when socially-conscious investors and shareholders want to screen investments and assess a company’s impact on the world. Briefly explained, the E for environmental encompasses both indirect and direct effect that companies’ activities have on the environment. The S for social includes the impact that a company has in the community. The G for governance alludes to the company’s corporate governance - for example, shareholder rights and tax transparency. A company’s ESG management is usually assessed by a third-party organisation ESG performance. There are several authoritative rating agencies. In fact, Morgan Stanley Capital International (MSCI) is mainly used by domestic and foreign companies as an ESG management evaluation indicator, as well as the Dow Jones (DJSI) sustainability index.

2.2 ESG Guidelines

DJSI (Dow Jones Sustainability Indices) has been the world’s most well recognized ESG (Environment, Society, and Governance) evaluation. The DJSI World (Dow Jones Sustainability™ World Index) represents the top 10% of the largest 2500 companies in the S&P

Global Broad Market Index based on long-term economic and ESG factors. The DJSI benchmarks consist of three geographical breakdowns: DJSI World (including DJSI Emerging Markets), DJSI Regions, and DJSI Countries. Indices within these geographical divisions use different starting universes and different percentiles to mark the “cut off” point in selecting the most sustainable companies (see Constituent Selection for details). This means that the emerging markets, country and regional indices are not simply sub-indices of the DJSI World, and there is no “roll up” of indices from country, to region, to world. The key factor in selecting constituents for any DJSI index is a company’s S&P Global ESG Score, calculated under SAM’s annual Corporate Sustainability Assessment (CSA). If a company adds ESG profile points and preparedness, that’s its ESG score. Profile development assesses the exposure of an entity’s operations to observable ESG risks and opportunities, accounting for the governance structure in mitigating risks and capitalizing on opportunities. In the environmental sector, they look for greenhouse gas emissions, waste and pollution, water use, and land use. In the social sector, they look for workforce and diversity, safety management, customer engagement, and communities. Lastly for the governance sector, they have their criteria on corporation structure and oversight, codes and values, transparency and reporting, and cyber risks.

With over 45 years of expertise in research, data and technology, MSCI enables its clients to make better investment decisions. They have their own unique criteria to assess a company's ESG rate. They assign percentage weights to each ESG risk, according to their assessment. Their ESG Ratings range from leader (AAA, AA), average (A, BBB, BB) to laggard (B, CCC). A company lagging its industry based on its high exposure and failure to manage significant ESG risks and a company with a mixed or unexceptional track record of managing the most significant ESG risks and opportunities relative to industry peers is included in the average range. For a company leading its industry in managing the most significant ESG risks and opportunities is in the leader part. To determine these ratings, MSCI evaluates thousands of data points across 35 key ESG factors. An environmental pillar is divided into 4 parts which are climate change, natural capital, pollution and waste, and environment opportunities. Climate change includes carbon emissions, product carbon footprint, financing environmental impact, and climate change vulnerability. Natural Capital includes water stress, biodiversity & Land use, and raw material sourcing. Pollution & water includes toxic emissions & waste, packaging material & waste, and electronic waste. Environmental opportunities include clean technology, green building and renewable energy. Secondly, the social pillar consists of human capital, product liability, stakeholder opposition, and social opportunities. Labor Management, health & safety, human capital development, and supply chain labor standards are included in human capital. On the product liability criteria, product safety & quality, chemical safety, consumer financial protection, privacy & data security, responsible investment, and ensuring health & demographic risk are the evaluation standards. For the stakeholder opposition, controversial sourcing and community relations are included. Lastly, for social opportunities, access to communication, access to finance, access to health care, and opportunities in Nutrition & Health are major criteria. Lastly, for the governance pillar, corporate governance which includes board, pay, ownership, and accounting and corporate behavior which includes business ethics and tax transparency are the two major criteria of

evaluation.

However there are problems in Korea that each evaluation agency has a significant difference in its evaluations and they do not clearly disclose the criteria for rating or scoring, other than the fact that evaluation indicators have increased steadily due to the latest management trends. The criteria for each indicator are ambiguous. If the agency puts the items about hiring females into the evaluation criteria, they need to give some guidelines to companies such as what percentage they should hire, but there are no such things. In result, people are saying that the more ESG management principles emerge, the happier only law firms and consulting firms that claim to be counseling roles will be. It also makes investors concerned that ESG's original intention to become a sustainable company by building trust with various stakeholders surrounding the company, not just for profit creation, will be reduced to a means of making money for those who claim to be evaluation institutions.

The MSCI Korea ESG Leaders Index indicates companies with Environmental, Social and Governance performance relative to their sector peers. According to MSCI Korea ESG Index 2021, the top 10 constituents are Naver, Kakao Corporation, LG Chem, Samsung SDI corporation, KB financial group, Shinhan financial group, LG Electronics, LG Household & Health, SK Innovation corporation, and SK Telecom corporation. Four out of ten companies are corporations providing communication services and two of them are related to the financial sector. The Communication Services sector took 24.23%, materials for 14.68%, information technology for 14.04% and financials got 12.29%. Different from the MSCI Korea ESG Leaders Index, the MSCI Korea index is designed to measure the performance of the South Korean market with 103 constituents.

Currently, there are about 360 ESG evaluation criteria across 70 countries around the world, but the ambiguity of ESG measurement institutions and criteria remains a challenge. Experts emphasized the necessity of a unified ESG evaluation standard. They said that a specific evaluation standard should be prepared to prevent confusion. Companies are struggling to come up with internationally unified ESG evaluation standards. At the World Economic Forum held in September 2020, the world's four largest accounting firms, developed a common ESG framework for companies to use, and published a report containing 21 key indicators and 34 expansion indicators. In December 2020, five organizations, including the Global Reporting Initiative (GRI), the Sustainability Accounting Commission (SASB), the International Integrated Reporting Commission (IIRC), the Climate Open Standards Commission (CDSB) and the Carbon Information Disclosure Project (CDP), announced plans to integrate ESG standards.

2.3 Why We Chose Naver and SK Innovation

According to the MSCI Korea ESG Universal Index, Naver and SK Innovation were the leading Korean companies in terms of ESG Management. Naver and SK Innovation represent the communication services sector and the information technology sector respectively, while simultaneously containing unique characteristics of Korean business management. Due to these factors, we thought these two companies would be the best and exemplary

representation of Korean ESG management and thus fit our topic.

III. Case1 – Naver

3.1 Company Introduction

Naver is a leading internet search portal in South Korea began as a venture firm in 1999. Naver Corporation runs its search platform, commerce, and fintech business based on the “Naver” service. It has the nation’s largest internet data center. As an ICT company, it is expanding its business worldwide. Its ESG management is mostly focused on the environmental footprint of hardware infrastructure, data privacy, advertising standards & freedom of expression, data security and employee recruitment.

3.2 Environment Sector

As Naver will construct their second data center and increase data usage in the 5G era, their energy consumption and greenhouse gas emissions are forecast to increase. To solve these problems, they are trying to minimize such risks. In response, Naver established the "2040 Carbon Negative" with a goal of zero carbon emissions and started establishing a roadmap for annual implementation earlier this year.

First, they are saving resources through E-contracts. Naver is reducing paper consumption, which in turn is leading to reduction of CO2 emissions, by switching from the paper-based contract to a full electronic contract.

Second, their headquarters and the Data Center GAK have been built in consideration of the environment starting from the design. Opened in June 2013, their Data Center “GAK” lowers the impact of heat in an environmentally-friendly way. They are also operated in an ecofriendly way, trying to reduce energy by reducing electric power consumption in the summer, improving facility operations, and using renewable energy, such as geothermal heat/photovoltaic. It also uses Snow Melting method to save energy, which is a road heating system which uses waste heat in the wintertime, photovoltaic and solar thermal power generation and a natural cooling system using outside air. By installing sensors that detect temperature inside the Center so that they can optimize air flow. Not only for the energy but also considering water consumption, the Center makes more use of a water thermal storage system which stores electricity at night, then uses during the day. They are making efforts to reduce their water consumption while increasing water reuse. They use water-saving sanitary fixtures and rainwater. They are also known for using recycled energy by using LED lighting and electric vehicles. Not only their data center but also their headquarters, Green Factory’s energy consumption has fallen over the past three years. In 2020, they reduced their energy consumption by 5.86% and GHG emissions by 6.24% compared to the previous year. Their second office building, which is expected to be completed in 2021, also installed a geothermal system and photovoltaic system on the rooftop. The interiors are designed to use a panel cooling system to save energy. During construction, it is recycling at least 98% of construction sites and striving to reduce noise and dust pollution. Through their efforts, their power usage

effectiveness level is at close to 1.

Third, they established the ESG committee, which consists of three CEOs and three independent directors, so that the board can oversee climate-related risks and opportunities. The ESG Committee decides Naver’s long term climate change strategy and establishes a roadmap for the implementation of a carbon negative project. It conducts environmental education for executives and employees and tries to execute investments and raise capital for the implementation of climate change strategies of Naver. By carrying out execution management and supervision, they planned to publish reports to expand the disclosure of ESG information.

Lastly, Naver issued "Sustainability Bond," a five-year foreign currency ESG bond worth $500 million, at an annual interest rate of 1.5 percent on March 23. Naver is the first among Internet/IT companies around the world to issue debut bonds as ESG bonds. ESG bonds are special purpose bonds issued for the purpose of socially responsible investment. Green Bonds used in eco-friendly business areas and Social Bonds used to solve social problems are classified as sustainable bonds.

Figure 1: Environmental Efforts made by Naver as part of their ESG management practices

3.3 Social sector

Their plans for social contributions include digital literacy, support for small and medium enterprises(SMEs), and Startups. First, Naver helps SMEs that have business with Naver through shopping platforms and suffered from the COVID-19 pandemic by easing the burden of commission and marketing fees through the Naver platform. By enhancing selfsustainability of early-stage online startups by providing financial support for training, consulting, and marketing expenses, and reducing the fee for opening a store at Naver Shopping. Naver assists SMEs’ efforts to go digital with various forms of online support related to Kiosk set-up, mobile ordering, delivery service management, and online employee training. They also offer free online consulting on such issues as labor, legal, and tax and help SMEs advance into the overseas market through direct contracts between partners and the company’s overseas subsidiaries. Naver's representative SME support program is "Project Flower." The project, which marks its fifth anniversary this year, is a project to create an online start-up. Currently, 450,000 online founders are active on the Naver platform, and Smart Store SME's smart store transactions amounted to 17 trillion won last year. In addition, the growth project of offline SME based on the neighborhood has begun in earnest, creating more than 100 neighborhood markets across the country.

Second, they make a partnership with local agricultural, fishery, and livestock producers, and governments, so that they can help local producers. They provide management, education, and welfare support to enhance self-sustainability of relatively small suppliers. They are also supporting the growth of technology related start-ups by offering business space and development infrastructure support. They make equity investments in tech start-ups and help them attract investments. They provide work space free of charge.

Related to the social factors, they also consist of employees from diverse backgrounds. They are taking the lead in creating an environment where employees can work freely with one’s own capabilities. Holding a program called Global Lunch once a month for foreign employees, they try to reflect various opinions. Their male-to-female ratio is about 65:35. They do not impose any glass ceiling limitations and salary discrepancy based on gender.

3.4 Governance Sector

Naver is trying to increase shareholder value and gain market trust by communicating with shareholders and investors through various channels to advance its governance structure. They communicate with investors regarding various issues by conferences. Naver’s largest shareholder is the National Pension Service, and foreign shareholders. To increase shareholder value and gain market trust by communicating with them through a wide range of channels, they operate a separate IR page on their website in both Korean and English so that shareholders can easily access information. It publishes annual reports as well as sales reports, articles of association and audit reports at shareholders' meetings to help investors make decisions based on more accurate information. They also transparently disclose the governance system through the Corporate Governance Report. They Encouraged directors to attend Analyst Day so that they can expand communication opportunities with shareholders. In the future, they will further

expand the participation of outside directors in major IR events to listen to what shareholders expect from Naver and actively reflect them on the board of directors to review various measures to make innovative and shareholder-friendly operations. In order to increase the predictability and transparency of shareholder return, they established and announced shareholder return policy in 2019. Naver pays cash dividends and implements stock repurchases every year. They also set the shareholder return at 30% of the average of the consolidated free cash flows for the previous two years to stabilize returns by reducing fluctuations.

The board of Naver consists of 6 male and 1 female. By having separated roles of the CEO and Board Chairman, they ensured the independence of the board and transparency. It has five board sub-committees (Audit Committee, Compensation Committee, Outside Director Nominating Committee, Risk Management Committee, and ESG Committee). The board is operated by directors who have extensive professional knowledge and experience in their fields.

For ESG investors, data privacy risk has become a crucial metric in assessing the companies in which they invest. Naver has once had a personal information leakage incident in the process of providing receipts needed for year-end tax adjustment. After the incident, to make improvements they established a system preventing infringement during the data transmission process. And as the nation's largest search portal, it strictly applies privacy principles for its users. They created their own control services named Private Impact Assessment (PIA) and the Privacy Information Management System (nPIMS). Those systems manage risks, so that personal information protection can be fully established. Naver also operates a training system for their employees to enhance their awareness of personal information protection. They transparently discloses processing of user’s personal information at all times and collects minimum personal information in accordance with the purpose and responsibly manages personal information. Naver guarantees user’s freedom of expression and intellectual property rights by applying the policy regulations.

For the company's ethical management, leaders in positions with considerable roles and responsibilities undergo separate ethical management training in the form of workshops every year. They also offered training to newly hired employees. In March, there was an online training designed to inform all employees of integrity related to corporate ethics, anti corruption,and human rights, and its significance. NAVER has established a system designed to prevent fraud risks in advance and detect them afterwards. As a part of these efforts, they are operating a “Self-Check System” that allows the employees themselves to build a culture of cautiousness to prevent serious fraud. The system, which is based on constant monitoring, frequently monitors unusual cases in the system across individuals, management support, business, and technology, and if any abnormal data is detected, a mail is sent to the relevant employee, who is then given an opportunity to provide an explanation. Further actions are taken as and when necessary. They are enhancing the effectiveness of monitoring by improving the monitoring scenarios, while expanding the scope of application, in a drive to boost our systematic countermeasures to corruption risks. NAVER continuously conducts surveys of all its partners to check that their transaction process with NAVER (selection of companies, terms

of contracts, termination of contracts, etc.) is transparent and fair. NAVER also conducts an annual ethical awareness survey toward all its employees in order to check and monitor the corporation’s overall level of ethics on a regular basis. NAVER operates the Business Ethics Consulting Center to enable employees to receive consultation and to report employees unethical abuses of the rules and regulations, such as the unfair handling of work; the use of one’s position to make undue demands; the provision or receipt of money, goods, entertainment, or conveniences; interference in the business of partners; complaint related to payment; leakages of confidential information; and/or any other corrupt or unlawful conduct. The Business Ethics Consulting Center can be freely accessed through the Naver website in Korean and English, and reports can be made using a false name or anonymously.

Complying with tax laws is an important part of management. To faithfully fulfill its tax payment duties in accordance with laws, Naver says that they strictly comply with domestic and overseas tax regulations in all our transactions. To prevent tax issues in special interest party transactions at home and abroad, they established a price policy and continued monitoring. To enhance transparency in tax burden for stakeholders, NAVER discloses tax-related information through business reports. In addition, for appropriate tax law application and protection of stakeholders, they conduct a final review by internal and external tax experts on major tax items, and comply with filing obligations. When conducting transactions, NAVER determines risks and makes decisions beforehand in consideration of opinions given by outside tax experts. To prevent the various tax risks that may arise from trading of goods and services, M&A, corporate restructuring, and transaction structure change, they make a final decision by comprehensively reviewing the results of examining task risks and various business decision factors.

Lastly, Naver recently announced that it will introduce the "Stock Grand" system to strengthen employees' competitiveness in compensation. StockGrand is a stock compensation method that gives employees free shares held by the company. Naver will pay 10 million won worth of Naver shares to all employees except executives. Naver, which has been providing stock options worth 10 million won to all employees every year for three years from 2019 to this year, tries to share its performance with employees by adding StockGrand.

3.5 Limitation

Naver's ESG management is well received by global rating agencies. Naver ranked second among Asian Internet/Software companies in the "ESG Report" published by Hong Kong-based securities firm CLSA in March. In addition, Naver also scored higher compared to global Internet companies, including major ESG evaluation agencies such as MSCI (Morgan Stanley Capital International) and Sustainalytics. Naver is leading the new ESG era in Korea. The corporate governance reform conducted in 2017 has had the effect of increasing long-term corporate value.

However, Naver needs a lot of development in the environment and governance sector. It was rated better than the industry average in energy usage and waste recycling rates, and the greenhouse gas emissions and water recycling rates were at the industry average level, but the

fine dust emissions were three times larger than the industry average. Furthermore, the adequacy of executive/employee remuneration in the governance sector has been raised as a problem. The ratio of remuneration between executives and employees was 3.5 times larger than the industry average in the appropriateness of executive/employee conservation. ESG management that overcomes these problems seems to be necessary.

IV. Case2 – SK Innovation

4.1 Company Introduction

SK innovation is a global energy and chemical company that runs battery and E&P businesses with 6 major subsidiaries: SK energy, SK global chemical, SK lubricants, SK incheon petrochem, SK trading international, and SK IE technology. They have established a value chain in the oil and chemical industry with the development of petroleum and invest in battery and material sectors. It was listed in the “DJSI World Company” for the 4 consecutive years. (DJSI World Company represents the top 10% of the largest 2500 companies in the S&P Global Broad Market Index based on long-term economic and ESG factors.)

4.2 Environment Sector

SK innovation is one of the most active companies participating in eco-friendly business models. SK innovation has focused on electric vehicle battery and related core materials business. It has pursued eco-friendly management by distributing infrastructure including SK gas stations, LPG stations and Netruck Houses. These stations enable electric vehicle charging and hydrogen fueling. Furthermore, they are in partnerships with global corporations to achieve Plastic to Chemical beyond Plastic to Fuel. SK energy developed Premium Asphalt which consists of fewer odors from ascon, less exhausted gases and less fine dust for the first time. It also reduces construction cost and leads to less damage to roads. SK energy is also trying to find ways to recycle waste ascon. SK global chemical developed high crystallinity plastic products which feature the same strength and shock absorption with less plastic content. The expansion of environment-friendly plastic sales contribute to mitigating greenhouse gas emissions while minimizing the use of resources. SK also made eco-friendly lubricants. It boasts a 3% better fuel efficiency than the existing ones, resulting in the reduction of greenhouse gas emissions. SK global chemical has replaced an ozone layer with an ecofriendly one contributing to less pollutant emissions. Energy Storage System enables generated electricity to be saved through lithium-ion batteries and increases the efficiency of the electricity industry. SK innovation produces rechargeable batteries for automobiles and ESS. The lithium-ion batteries are supplied to automobile companies all over the world so that they can minimize the air pollution caused by CO2 emission. SK trading international also reduces pollutants during transportation. They are in charge of sales and procurement of raw material. And they have supported SMEs through participation in eco-friendly funds.

Figure 2: Environmental Efforts Made by SK Innovation As Part of Their ESG Management Practices

4.3 Social Sector

SK innovation strictly implements human rights protection to ensure no human rights violations occur in the process of business activities. They have systematically established various policies on human rights, SHE(safety, health, and environment), and code of conduct, and are periodically evaluating these and implementing improvement activities so that each policy can be effectively executed. For detailed operating instructions, they do not employ children and young people under the age of 15 to prohibit child labor, have no discrimination in employment on the grounds such as gender, race, nationality, ethnicity or religion and have no discrimination in employment conditions such as wage or promotion. Wages of employees are above the minimum level set forth by the labor laws of the country and try to provide standard working hours. SK innovation operates channels such as hotline, online, and offline to manage such human rights violence acts. It disclosed the human rights policies and human rights through the Sustainability Report and SK innovation website. SK innovation operates transparent hiring principles and procedures. They adopt blind screening to strictly block possible disadvantages by reason of academic background and gender. In addition, to promote corporate social responsibility, they additionally hire disabled persons. Their evaluating and compensating system is based on performance-based fair standards. SK innovation affiliates pay and bonus based on each employee’s job competency and work performance. The wage is strictly managed to be above the minimum level set by the labor laws of each country and the

increase rate is set by reflecting domestic inflation rate. It complies with regular work hours and overtime hours set by each nation’s labor law and grants appropriate rest to employees. They are trying to create a flexible work environment by setting employees’ own office arriving and leaving hours and operating PC shut down service (access to the company internet is blocked at 7PM) to prevent overtime work. Based on the SK Management System, it has established the Code of Ethics. To strengthen monitoring and management of ethical management, it operates communication channels including ethics consultation office and ethical management website. It also makes public disclosure of key ethical issues. To measure the employees’ level of awareness for implementation of ethical management, they conduct ethical management training and survey. The Code of Ethics also includes information about protection policy. Personal information of the employees and customers are protected by minimizing chances of personal information leaks. SK innovation minimizes the number of employees processing personal information, and conducts network separation for work PCs. They operate a system to protect their information and provide security training for new employees. By classifying and managing core suppliers, they create a fair trade environment and manage the suppliers’ sustainability. When a violation of the Code of Ethics occurs, an SK employee or supplier both can report it through the Audit Office. They manage the supply chain by considering financial and non-financial factors. They consider not only price competitiveness, quality but also human rights, labor, environment, and anti-corruption. They conduct supplier evaluation and monitor them on the ESG evaluation.

Figure 3: Governance Statistics About Employee Diversity Provided by SK Innovation

Figure 4: Social Contribution Activities Practiced by SK Innovation

4.4 Governance Sector

In terms of governance, SK Innovation is most concerned with the issues of the transparency of disclosure of company performance, tax-related problems, and is especially working on the transparency of the executive board. With the company president stepping down from the chair of the board last year, they decided it would be unjust for the CEO to be the chair of the board simultaneously as those two positions were supposed to keep in check with each other. Such consideration shows SK’s efforts to improve corporate governance policies. Additionally, other subsidiary companies including SK Hynix and SK Telecom executed the same policy of separating the CEO and chair of the board. SK Innovation and C&C took this one step further by appointing a board executive from outside the company. In their annual and sustainability report, they clearly disclosed their taxing by including information based on region and their profits before the taxes. Lastly, they tried to provide opportunities for investors to communicate with the company by stating the company’s financial state and profit on their reports.

4.5 Limitation

In the case of SK, none of the ESG evaluation details received exceptionally good scores, but the average score was high because most of the items were evenly evaluated. In particular, the score in the "Society" category was 7.5 points, more than 30% higher than the overall average (5.7 points). It was recognized for simplifying the position system to comply with international standards and laws related to working conditions and to provide partner companies with free patent technology rights to form a horizontal and flexible organization. However, they acknowledged that SK Group was not good enough in terms of social rewards compared to other areas.

V. ESG and Profits

5.1 Importance of ESG

In the past, neither business nor stakeholders paid much attention to ESG because it was hard to find a correlation between ESG and corporate value. However, due to the recent development of the Internet, corporate stakeholders can easily acquire all the information related to the company. Instead of simply receiving press releases and financial information from companies as before, you can find information related to companies anywhere on the Internet. And using this information, good companies sell more, and bad companies go on a boycott, which has an integrated impact on financial performance. As a result of a shift in the business paradigm surrounding corporate management, stakeholder capitalism has emerged and the demand for integrated management of financial/non-financial performance is required. In fact, investments that take into account non-financial information such as ESG are found to be highly successful.It is the financial investment industry that ESG is being used in earnest. Unlike in the past, when only financial performance such as sales and net profit were evaluated and found, ESG is now an indicator of corporate value and sustainability from a longer-term

perspective, as in the above case. Investors from all over the world are also taking the lead in investing in ESG.

As interest in sustainable development and ESG management has increased significantly, governments of each country are actively institutionalizing ESG-related policies. The number of new global ESG regulations increased from only 28 in 2016 to 210 in 2018. In particular, it has been increasing rapidly since 2016, increasing at an average annual rate of 66.9% from 2013 to 2015, but increasing at an average annual rate of 102.9% from 2016 to 2018. With these new policies, the U.S. Securities and Exchange Commission made it mandatory for individual ESG funds to specify the ESG strategies and goals they pursue. In Asia, Japan is encouraging market participation by providing subsidies and giving practical incentives to ESG bond issuers. In China, companies that violate carbon emissions targets will also be subject to higher taxes and other measures, as companies will be given credit ratings in the environmental, political and social sectors. Lastly, Europe is establishing a "sustainable financial classification system standard", which is EU Taxonomy, that defines ESG, and it is expected that investment activities will be banned in the future if conditions are not met by mandating ESG disclosure for all financial companies from March 2021. Financial institutions will also step up to boost low carbon investment. To maintain or run their business, nowadays ESG management is mandatory.

In addition, ESG management companies are receiving more investment as ESG management factors emerge rapidly based on funding and investment. The level of meeting ESG evaluation standards is reflected in loan interest rates, and various domestic and foreign companies have begun investing in ESG in earnest. Korea's national pension has also come up with a plan to expand ESG investment, and Norway's investment and loan screening are expanding in consideration of ESG elements by signing the UN PRI. And companies cannot ignore the inflow of funds into ESG investments, with global ESG bond issuance increasing and bond types diversifying, resulting in a 63% year-on-year increase of $484.1 billion in 2020. In addition, the participation of non-financial companies such as Hyundai Card and Woori Bank is also increasing in Korea, and according to the Korea Exchange, the net assets of ESG funds issued in Korea increased 2.6 times compared to two years ago. For example, the European Investment Bank (EIB) has decided not to fund fossil fuel-related projects from 2022, and Norway's sovereign wealth fund has also announced that it will restrict investment in coalrelated companies. In Korea, the National Pension Service has declared that it will invest 50% of its total assets in ESG-based by the end of 2022.

ESG has emerged as an important factor in the value calculation of deal sourcing and m&a transactions. Large-scale deals are also actively underway in South Korea, with environments such as electric vehicle battery materials and waste disposal at the forefront. As of 2020, more than 40% of Korea's large M&As worth more than 500 billion won were ESGrelated M&As. For example, SK Engineering & Construction acquired a company called EMC Holdings, which handles water treatment and waste for 1.5 trillion won. ESG has become a major consideration in M&A. In the environment, all companies are cleaning up antienvironmental projects to solve environmental problems raised by the international community

and non-profit organizations. In addition, in terms of society, all stakeholders have begun to be considered during mergers and acquisitions, and the relationship between franchisees, partners, and employee treatment of large companies are also being evaluated. As you can see from the sale of Hanwha and the decentralized coal project, it is better to dispose of projects with unethical and inhumane factors such as human rights violations and civilian damage. And in terms of government, it is very beneficial to run ESG to increase the value of your company in future M&A transactions because it also looks at the diversity of board composition and management corruption.

As investment in consideration of non-financial factors such as ESG expands, companies are increasingly required to focus on managing ESG risks for smooth financing. According to the Global Risks Report released by the World Economic Forum, global risks 10 years ago were centered on financial risks, but in recent years, most of them are non-financial risks such as the environment and society. In other words, companies with well-managed ESG are likely to have the ability to cope with these non-financial global risks. In fact, if ESG is well managed, it is unlikely that companies with high energy efficiency will experience negative events such as embezzlement and corruption, and even if energy prices soar due to climate change, they can respond more reliably than other companies. ESG management enables companies to manage risks, increase sustainability, and achieve long-term corporate value gains while facilitating financing.

In the current situation where non-financial risks are extremely important, companies can reduce these risks through ESG management, draw investments through ESG ratings, and generate long-term increases in corporate value. For these reasons, many corporations are conducting ESG management. Microsoft has been working on a project to build an undersea data center since 2015. When servers in existing data centers are heated, they cannot function properly and have to be cooled down continuously, which is said to use a huge amount of electricity. The company is pushing for a way to build a data center on the seabed to maintain temperatures without using electricity. Apple is also going to reflect ESG's management performance on executives' performance-based bonuses. The plan is to evaluate the level of efforts of executives on six key values, including environment, diversity, and integration among employees, and reflect them in performance-based bonuses. It seems to be clear that companies that are good at ESG management have good financial performance and show better corporate operational performance when considering ESG. A report released by Bank of America in 2019 also showed that the value premium between the top 20% companies with high ESG scores and the bottom 20% more than five times. In other words, corporate performance and ESG management can never be thought aside. ESG, which is never easy to push ahead with considering immediate benefits, is becoming the core for sustainable growth. In particular, it is no exaggeration to say that it is difficult to guarantee the future of companies unless they actively respond to ESG.

5.2 Correlation of ESG Management and Corporation Profits

A small, gradual increase in corporate wealth and value is natural even without the implementation of ESG due to new technology development, concrete target consumers and

more. However, for such significant rising wealth, we believe the implementation of ESG management had largely to do with this phenomenon.

While there is no proper way to exactly evaluate what factors contributed to corporate wealth, it can be concluded with simple logic that for a sudden rapid increase, there must be a revolutionary or innovative change that was unprecedented in the company history. In 2017, which is when ESG management was first incorporated in Naver, there were no other significant developments of new technology that may have contributed to the large increase of corporate profit or value as we have seen above. In fact, it is rather thought to be natural for domestic portal websites such as NAVER to actually decrease in company wealth due to the emergence of numerous competitors and the characteristic of a portal website to have little room for impactful uniqueness. Naver’s share in the online portal market decreased over the period of 2017 to 2020 by 33.88%, from having a share of 90.12% and 56.24% respectively. Despite this decline in the market itself, however, the wealth of the company itself in terms of profits, value, or investments have continued to increase. This means that there were external factors irrelevant with the company performance contributing to such increase. We think that factor is ESG. With the implementation of ESG, Naver was able to gain an unique public image of being socially responsible and thus improve corporate image with a peculiar “kick” differing from other domestic portal sites. This led to a niche, but concrete target group of consumers and thus secured at least a certain amount of profits. Profits may not be limited to terms of usage of the portal site itself but also other public engagement such as investment. The increased rate of civil investors supports this case. Sustainable funds conducted by Naver overseas, pushed in $3.2 billion, which is more than six times the original amount of recruitment. It shows that ESG funds are trending and by executing ESG Management, corporations can earn financial profits. Naver will mainly use funds raised through sustainable bonds to strengthen ESG management, focuson eco-friendly projects and social contribution projects. Such reinvestment in ESG practices will help further enforce the sustainability of ESG management, ultimately leading not only sustainability of management but also profits. Also, with the implementation of ESG, companies can attain sustainability which is an increasingly important factor to consider in investing nowadays due to the rapidly changing modern economy scene. Overall, Naver was able to benefit in terms of corporate wealth by ESG management acting as a certain uniqueness in the overly common portal site discipline.

For SK Innovation, ESG management largely influenced company wealth by improving their brand image. With increasing environmental awareness among society followed a movement for replacing fossil fuels and oil for renewable and energy. This phenomenon was attributed to the fact that oil was gaining a more and more negative image among the public with its environmentally harmful practices. These various factors would seem detrimental to corporate value and profit as people would consume their products, but contrary to this assumption, one can see their profits gradually increase over the years. This is because with SK Innovation working especially towards environmental aspects of ESG, they made up for their negative image of harming the environment. Rather, they now have a positive image of providing us with the comfort of oil while simultaneously being responsible to the society. This allows people, who were feeling somewhat uncomfortable, if not guilty, about using oil

while being aware of its disastrous impacts on the planet to be guilt-free without the sacrifice of their convenience. In other words, SK Innovation, despite the shifting trend of replacing fossil fuels and oil to renewable and sustainable energy sources, attained sustainability and a resulted increased corporate wealth by improving their brand image through ESG management.

VⅠ. Conclusion

6.1 Summary

ESG management is a recently emerging management strategy that is effective for companies to achieve sustainability not only for the corporations themselves but also for the society. Global companies have started to pioneer this novel strategy, and with their progress we now realize ESG management is no longer a choice but a necessity. Without its implementation, companies would lose competitiveness in the global economy where social responsibility is becoming one of the major aspects being considered. However, there is a rampant misconception amongst the public that ESG management is only attained at the expense of profit generation.

This misconception is what impedes ESG implementation in Korea, and if this continues, Korean companies would lose their spots in the global economy which impacts the national political and economic power as well. This misconception, therefore, needs to be eradicated, which is what this study helps with. Through this study, one can clearly see through the two examples provided (Naver, SK Innovation) that ESG management actually improves corporate wealth through indirect factors such as investment or company image. In fact, those two examples explain the power of ESG management as those two companies are in the industries that are deemed to lose value over time but still managed to show an increase in terms of total wealth. Naver, a portal website, has been losing consumers which is a phenomenon resulting from the emergence of similar websites and thus losing uniqueness. However, Naver was able to gain back character and originality not by their product itself but through corporate management strategies of various ESG practices as mentioned above. SK Innovation, in theory, as being in the oil industry, is supposed to lose value as energy sources are being replaced with renewable and eco-friendly ones. Even in that situation, though, they managed to show continual increase by improving their corporate image as an oil company to a socially responsible company, freeing consumers from the prevailing guilt and encouraging consumption.

Despite its proven effectiveness, as ESG management is still a newly introduced term in Korea, there is room for improvement that would further help improve the efficiency and profits. One common example of such problems we found that was exclusive for Korean companies was the lack of ‘governance’ factors in ESG practices, especially with SK Innovation. This leads to the unbalance of the three factors which should be harmonized. If this phenomenon prolongs, it will eventually lead to a clash of the three factors and thus fail to achieve true ESG management. Governance is especially important for companies such as SK Innovation that relies heavily on investors who consider transparency as a substantial factor. If

such problems were fixed, ESG management would only improve and thus allow maximum efficiency, eradicating previous fears of the inability to generate profits.

6.2 Conclusion

By evaluating two domestic companies, Naver and SK Innovation, we have proven that ESG management is indeed effective for company wealth to the extent that it may make up for the lost costs in company performance itself by contributing to more indirect factors such as attracting investors or an improved corporate image. We expect such results to abolish incorrect perceptions about ESG management that it is attained through the sacrifice of profits. By abolishing such misconceptions, we expect this study to contribute to ESG management becoming a widespread management strategy in the Korean economy and thus help foster a sustainable society and economy.

There are limitations in that the two companies we have investigated is not a clear representation of the economic scene in Korea not only in terms of industry but also due to the fact that those two companies are companies deemed to be a major influential corporations in the domestic society and thus may differ for cases of smaller companies and MSMEs. These limitations, although unfortunate, may be an inevitable flaw for most ESG-related studies as ESG management is a relatively novel term in Korea. Smaller companies without as much resources are more reluctant as they are putting more at risk than big companies, so the actual execution of ESG among MSMEs itself is scarce, meaning there is insufficient data to conduct a research on. We hope to overcome these limitations through further studies handling more diverse industries and range of companies when ESG is more of a widespread management strategy and has a set place in the Korean economic scene.

VⅡ. Reference

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