What is cooking in South Korea on ESG?

Synopsis: In Emerging Markets, evaluating a company on its ESG performance is a huge challenge for a variety of reasons such as lack of reliable data and complicated disclosures. Apart from that, there are also peculiarities like the complex ownership structure that has certain implications, which is a big issue in many EMs. The chaebol or conglomerate business structure of South Korea is an interesting case here. The term Chaebol refers to a complex, conglomerate type ownership structure that originated in South Korea in the 1960s, comprising of either a single large company or several group of companies. Samsung, Hyundai, SK Group, and LG Group are among the biggest and most prominent chaebols. While they are doing well on the business front, there are several issues associated with such an arrangement, such as their oversized influence and non-transparent relationship with politicians and government officials. Although South Korean firms are making good progress on Environmental and Social issues, the record is not as elegant when it comes to Governance. The ‘chaebol way of doing business’, could be the culprit here. With this in context, there are some important lessons for institutional investors that have surfaced from the latest developments in the ESG space in South Korea including, a) No two ESG scores are the same despite having the same headline figure. This shows that it is the composition that makes the difference and hence all three parameters need to be evaluated separately. The EMAlpha algorithms provide separate scores for E, S and G so that an investor can review the sectoral performance more transparently, and, b) An ESG score without context and background is meaningless and the EMAlpha analysis meticulously integrates this critical part of the ESG evaluation jigsaw puzzle.

Why ESG evaluation is more complex in Emerging Markets

Regulatory changes are strange things because they often fail to achieve their stated objective. As such, the first and especially the second order impacts of any such change is much easier to understand, provided you have knowledge of the cultural and historical background of the environment. This applies to business too. We need to take a step back to understand what any regulatory change can achieve when it comes to the improvement of corporate behaviour and practically, what could be the limitations. In the post-World War II era, South Korea achieved its economic growth because of these large and dominant organizations. While that’s all good and rosy, the question that warrants mention is: Is there more to this than meets the eye?

The degree may vary but in the case of most Emerging Markets, evaluating a company on ESG performance and more specifically on the governance standards is a huge challenge. More so because the conventional parameters which can be effectively used in the Developed Markets are either lacking reliable data or they are not practical. There have also been cases when these assessments have not been very helpful for investors in evaluating the company’s performance on corporate governance for specific reasons.

The complex ownership structure and its implications

There are certain peculiarities in many EMs which play a role in ESG evaluation. For example, the complex ownership structure and its implication is a big issue in many Emerging countries. Whereas this is something which is not as big a challenge in the developed markets. The political linkage of senior Government officials with the controlling group families and senior management in many of these enterprises makes the situation more complicated. This way of functioning acts as a hurdle for analysts and institutional investors in figuring out the ultimate beneficiaries of this complicated ownership structure and the cross linkages between companies, families and individuals.

There are also concerns regarding unscrupulous actors such as how senior politicians help these companies and how in turn, the families pay them back. Granted, these things can take place anywhere but the likelihood of it happening is much higher when the government has more power to take policy decisions that could lead to big change in fortunes of business entities. This is what makes the companies from Emerging Markets much more prone to challenges emanating from poor corporate governance.

Why is South Korea a unique case?

The chaebol or conglomerate business structure of South Korea is a classic case here. Chaebol refers to a complex enterprise ownership structure that originated in South Korea in the 1960s, comprising of either a single large company or several group of companies. These enterprise ownership structures are controlled, and/or managed by the same family, generally that of the group’s founder. Samsung, Hyundai, SK Group, and LG Group are among the biggest and most prominent chaebols.

The story of South Korea’s transformation from being an economic minnow to becoming one of the world’s largest exporters owes a lot to these family-run conglomerates. These large, complex and multi-businesses enterprises have played a key role in South Korea’s rapid economic growth and the country’s transformation from a poor, agriculture dependent economy in the 1950s to the global export powerhouse that it is today, in a matter of few decades. There are very few parallels to what South Korea has achieved in its economic growth because of these large and dominant organizations. The positives that these chaebols have brought are unquestionable. But, is there a darker side to the story?

Chaebols and the infamous Samsung case of 2017

There are a number of criticisms of the Chaebol structure. They include their oversized influence and non-transparent relationship with the politicians and the government officials, which was very recently highlighted by an influence-peddling scandal that cost the country’s president and Samsung’s top executive their jobs. In 2017, Samsung’s top executive was jailed as part of the scandal that toppled the chair of Park Geun-hye, South Korea’s president. This scandal reverberated across the global business media and these developments also led to a revaluation of the investment decisions process for many institutional investors.

As a result of this scandal, Jay Y. Lee, the head of the Samsung Group, was sentenced to five years in prison, after a court convicted him of bribing his way to greater control of the Samsung Empire that his family had founded. But Lee appealed the conviction and in early 2018, the Seoul High Court let him free after reducing and suspending the sentence, thus sparking public anger. (South Korea’s highest court in August 2019 ordered retrials for Lee and Park.) But this wasn’t the first time that such an incident had occurred. In the past, business leaders, including Lee’s father, were convicted for corrupt behaviour only to be let off later.

Lee was accused of playing a role in the payment of tens of millions of dollars that Samsung made to benefit a close friend of deposed president Park. The Lotte retail group’s chairman was convicted in 2018 in another trial relating to Park and was handed a 30-month jail term. Eight months later, an appeals court suspended the term and released him. This also led to public outrage as protesters calling for the president’s ouster vented their anger at the conglomerates. Park was found guilty in 2018 of crimes ranging from bribery to coercion, abuse of power, leaking of state secrets and was sentenced to 24 years in prison.

The Disclosure Rules from the South Korean Exchange in January 2021

The South Korean Government is aggressively pursuing ESG-related policies. In November 2020, South Korea’s president, Moon Jae-in, announced the country’s pledge to achieve net zero carbon emissions by 2050. Government bodies and policy making institutions are also playing their part by going beyond the environmental issues. For example, financial institutions are being encouraged to promote better social outcomes in areas like financial inclusion, employment generation and SME financing. Hence, it was expected that there would be more steps along this direction and Sustainability or ESG would remain a focal area for the Government.

In January 2021, the South Korea Exchange (KRX) announced new mandatory ESG disclosure requirements which stipulates that the companies listed on the main KOSPI market with over KRW2 trillion (USD1.8 billion) in assets will have to disclose ESG reports by 2025. This requirement would be extended to all companies by 2030. Under the scheme which was released by the South Korean policymaking body (Financial Services Commission), the market watchdog (Financial Supervisory Service) and KRX, the disclosures would include response plans for environmental crises, efforts to improve the worker-management relations and bringing in a governance structure based on transparency and enhancement of trust.

Not ‘Too Little’ but surely ‘A Little Late’

This move was expected and the capital market participants were aware that something was in the pipeline. But the KRX announcement was met with mixed reactions. Those who hailed the move said that this was the beginning of a new era for South Korean companies and it would put them at the forefront of the movement that necessitates enhanced accountability for the business actions and choices of the companies. The critics said that offering such a long period for compliance defeats the very purpose of the move and there were high chances that the companies would find a way to circumnavigate these guidelines. In that case, the proposal to set up new disclosure rules would completely fail in ushering in the desired change.

To be fair, the near-term impact of the move could be much less significant due to the long lead-in time. This, in a way, could feel like a let-down. But there are a good number of companies which could voluntarily start disclosing the information on sustainability and ESG parameters. Because, broadly speaking, the KRX announcement is aligned with the global trend in which the Stock Exchanges and Markets across the globe are taking ESG more seriously. Some of these changes are related to the transformation the world has gone through in the last twelve months because of the Coronavirus pandemic. But it is an undeniable fact that the initial reluctance has given way to a more proactive approach.

What are the South Korean firms doing on ESG?

The mandatory disclosure of ESG information is the need of the hour. The ESG investment in South Korea is a trend which is picking up fast and the number was close to 33.2 trillion won as of 2019. However, this investment is largely driven by the state-run National Pension Service which accounted for nearly 90 percent of total ESG transactions in the country. There are many other interesting trends as well which EMAlpha’s AI-driven analysis has picked up:

  • South Korean companies have issued a combined 12.9 trillion won ($11.3 billion) worth of green, social and sustainability bonds from January to February 2021. In the first two months of this calendar year, social bonds accounted for nearly two-thirds of the total issuance of bonds aligned with ESG factors, followed by green bonds and sustainability bonds (hybrid of green and social).
  • Several leading South Korean financial firms such as KB, Shinhan, Hana and Woori have started pledging to go carbon-neutral. The immediate trigger is that an increased number of foreign investors are emphasizing the need for a better execution on ESG goals and are also nudging the South Korean financial firms to take more concrete steps for ESG.
  • The Samsung Group stated in November that all the group affiliates would phase out coal-related investments. In November 2020, Samsung Fire & Marine Insurance Co Ltd, Samsung Life Insurance Co Ltd and other financial units of the Group said in a statement that they would no longer make new investments in coal-power related businesses and would not invest in corporate bonds issued for the purpose of building coal-fired power plants.
  • Some of the leading South Korean insurance companies – including Dongbu Insurance, Samsung Fire & Marine Insurance and Shinhan Life Insurance – have signed up for the UN Environment Programme’s Principles for Sustainable Insurance Initiative, from as early as 2010.
  • Heads of many South Korean companies including SK Group, Hanwha and Posco emphasized the importance of implementing ESG management during their New Year’s address. There are also reports that SK, Hyundai and LG are expressing interest in issuing ESG funds.
  • In February 2021, Samsung Display announced that the company will further boost its ESG involvement from 2021. Samsung Display joined the Responsible Business Alliance (RBA), a leading industry coalition with a number of global standards to achieve a higher level of corporate ethics. The five critical sections of the RBA Code are – Labor, Health and Safety, Environment, Business Ethics, and Management Systems.

The Achilles’ heel: Governance

EMAlpha’s AI aided analysis tells us that while South Korean firms are making good progress on Environmental and Social issues, the record is not that good on Governance. This is strange because many of their global competitors do exceedingly well in Governance evaluation, thus helping their overall ESG scores. This good performance in Governance, despite a relatively poor E and S performance, gets the investors to be more interested in them. For example, a recent report published in Korea JoongAng Daily on 28th February 2021 ( ) speaks about how the South Korean companies seem to be doing quite well in environmental and social zone, but still have a long way to go in the governance zone.

Across several sectors, the South Korean companies usually perform better than their global competitors on the E (Environmental) and S (Social) evaluation, but they lag behind on G (Governance). A simple explanation is that in recent times, there have been many South Korean companies which have focused on reducing carbon emission and that is what is helping the E scores. But that also pushes G lower in the priority order. However, the scathing remarks from some critics points out structural issues such as the South Korean companies’ management style. For example, with most South Korean companies, the CEO holds absolute power in decision making and hence changes in their corporate governance system are difficult to bring about. Is legacy the reason behind this? The discussion on Chaebols earlier in this insight is clearly an indication that this may very well be the case.

What do we learn and how EMAlpha’s proprietary algorithms help?

There are important lessons for institutional investors to gain from what is happening in the ESG space in South Korea and the recent push from the Government and the companies along this direction.

  • No two ESG scores are same despite same headline figure – It is the composition that makes a big difference and all the three parameters that make up ESG need to be evaluated separately. The EMAlpha algorithms provide separate scores for E, S and G so that an investor can review the sectoral performance more transparently. Over and above, a key feature of EMAlpha’s NLP algorithms is that the attribution analysis is fairly simple and straight forward.
  • An ESG score without context and background is meaningless – The ESG is as much about intent as it is about execution. For this balanced evaluation, having an understanding of the local factors is very crucial. A very good ESG track record (probably more driven by excellent performance in E and/or S) may hide serious Governance related risks and the investors can only ignore them at their own peril. EMAlpha analysis meticulously incorporates this critical part of the ESG evaluation jigsaw puzzle.

EMAlpha Products and Services

In most Emerging Markets, information discovery is a major challenge. For example, even if global investors do show interest, how do they solve the problem of timely access to information? The world’s largest capital allocators hold USD 60 trillion and they include GPIF (Japan), GPF (Norway), ADIA (Abu Dhabi), GIC (Singapore) etc. However, only 10% of the capital gets allocated to EMs and ~90% goes to G10. The big hurdle for EMs is: Foreign investors cannot access relevant local information in a timely fashion.

Most market participants and investors from across the world realise that the low rates in G10 makes EM attractive for investors. But, a) Information access is usually a cost and time intensive process for investors, and b) In many EMs, language is a big barrier and because of multiple regional languages, there is a significant delay before news makes it to the mainstream English language. To address these issues, you need solutions like, a) Real time news collection from multiple languages and, b) Instantaneous machine translation and text analytics leading to actionable recommendations for investors.

There are further challenges such as ensuring that companies behave responsibly and that they adopt sustainable business practices. There is a need to ensure that the investors are contributing towards making the world a better place by making investment decisions which reward responsible behaviour of companies. Case in point, ESG (Environmental, Social & Governance) which is increasingly being used as a filter for investment decisions. There are other issues as well such as which data to use and a lack of a standardized framework for evaluation.

Some of these issues are too important to be postponed to a later date and it is in this regard that EMAlpha is making its contribution. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

EMAlpha also has solutions for Multilingual data collection and real time targeted information which are based on proprietary processes to collect relevant data across multiple markets. The coverage expands across emerging market equity, currencies and commodities and the work has also been very successful in testing the signals in some key markets for live trading strategies. This is a continuous cycle and a virtuous loop that allows for iterative improvement through AI-human feedback.

With developments in AI and technology in areas like NLP, there are considerable new possibilities to bridge the gap in information between Emerging Markets and the more Developed Markets. This is an area which is turning out to be very exciting because some of the tools mentioned were not available even a couple of years ago. This implies that the evolution in the field will only get faster as time goes on. While the Emerging Markets and the Capital Flow Conundrum is a complex one, there is now much more hope and optimism that with the usage of technology, things will only get better.

At EMAlpha, the ESG team is doing further research on why some issues like Social get more prominence as compared to others like Environmental or Governance issues. To look at specific cases in the context of ESG is a very intense yet interesting exercise and this has been an incredible learning experience for the EMAlpha Research team. The data, information and ratings are a humongous challenge for ESG and it takes time to reach to the depth of the issues as the field is evolving very quickly.

EMAlpha is making a solid contribution in tackling these challenges. EMAlpha has solutions for ESG which are practical, user friendly and although not too simplistic yet easy to use. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

We strongly believe that the entire ESG ecosystem requires multiple stakeholders to pull in the right direction in order to make it operational and that will be the most critically determining factor for ESG’s success in making the corporate responsibility actually work. Most importantly, the investors should view ‘E’, ‘S’ and ‘G’ individually and should not confound issues when it comes to the comprehensive ESG evaluation. It is important to understand the right reasons behind ESG investing because this bias could hurt their investment decision making and portfolio performance.

Research Team
EM Alpha LLC

For more EMAlpha Insights on Emerging Markets, please visit To know how you can use EMAlpha’s unstructured data and ESG (Environmental, Social and Governance) solutions for better investment decisions, please email us at [email protected].

About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

This insight article is provided for informational purposes only. The information included in this article should not be used as the sole basis for making a decision as to whether or not to invest in any particular security. In making an investment decision, you must rely on your own examination of the securities and the terms of the offering. You should not construe the contents of these materials as legal, tax, investment or other advice, or a recommendation to purchase or sell any particular security. The information included in this article is based upon information reasonably available to EMAlpha as of the date noted herein. Furthermore, the information included in this site has been obtained from sources that EMAlpha believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. Information contained in this insight article does not purport to be complete, nor does EMAlpha undertake any duty to update the information set forth herein. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information contained herein, by EMAlpha, its members, partners or employees, and no liability is accepted by such persons for the accuracy or completeness of any such information. This article contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of certain investment strategy. All are subject to various factors, including, but not limited to, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting the operations of the companies identified herein, any or all of which could cause actual results to differ materially from projected results.