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New Era of Self-regulation for Korean ESG Ratings

Three ESG rating agencies have adopted best practice guidelines, also launching new self-regulatory body. 

South Korea has implemented new guidelines establishing best practices for ESG ratings providers, which are expected to declare adoption or explain non-compliance.

The ESG Evaluation Agency Guidelines were announced by Korea’s Financial Services Commission (FSC) in May, with support from Korea Exchange (KRX), the Korea Capital Market Institute (KCMI) and three domestic ESG rating agencies.

The three ESG rating agencies – the Korea ESG Standards Institute, Korea ESG Research Institute and Sustinvest – developed the guidelines, and have been working to implement them as part of their own standards.

Best practice guidelines

The guidelines do not regulate specific rating or evaluation methods, instead presenting best practices for the procedures and standards used to perform ESG evaluation work.

They cover the establishment of internal control systems, the collection of source data, the management of non-public information, the disclosure of information about evaluation systems, the management of conflicts of interest, and the relationships ESG rating agencies have with companies that are subject to evaluation.

Under the guidelines, ESG rating agencies have to establish a compliance monitoring system, designate a dedicated compliance officer, and set up internal control systems to prevent conflicts of interest, unfair practices, and bribery with respect to the evaluation of target companies.

The guidelines also require ESG rating agencies to notify target companies of the contents of collected data before an evaluation rating is finalised, and provide adequate opportunities for the target companies to correct factual errors.

Each ESG evaluation agency has to voluntarily declare whether or not it adopts the guidelines, and provide explanations for why it is not compliant with any aspect of the guidelines.

Compliance declarations

On 1 September, the Korea ESG Standards Institute, Korea ESG Research Institute and Sustinvest formally declared their compliance with the guidelines and disclosed their compliance status through their websites.

In their compliance status reports, Korea ESG Standards Institute and Sustinvest said they comply with all 21 provisions of the guidelines, while Korea ESG Research Institute said that there is only one provision it is not in compliance with.

Each company also disclosed the ESG evaluation procedures and evaluation indicators they use, along with their evaluation methodologies. In the future, KRX will also publish the compliance status reports and evaluation methodology of all three ESG rating agencies on its ESG information platform.

Self-regulatory body

In parallel, the three ESG rating agencies launched a new ESG Evaluation Agency Council, as a self-regulatory body for the Korean ESG ratings and evaluation market. The FSC, KRX and KCMI are participating in the Council as observers to provide guidance in the early stages of implementation of the new guidelines.

The new Council is tasked with independently monitoring the effectiveness of the new guidelines in the Korean market, making recommendations, and supporting compliance by issuing additional guidance as needed.

The Council’s establishment is intended to help promote both “qualitative improvement” and “quantitative revitalisation” of the domestic ESG ratings market.

Other ESG rating agencies active in Korea – including foreign firms – can also participate in the new Council, subject to an application process.

Future plans

Based on the implementation of the new guidelines, the performance of industry self-regulation, and global regulatory trends, the FSC will consider whether it may also be necessary to legislate for the ESG ratings market, including rules on conduct.

“We expect that the reliability and transparency of the ESG evaluation market will improve with the implementation of the ESG Rating Agency Guidelines,” the FSC said in a statement.

The regulator said the government will continue work to expand the ESG evaluation market, improve ESG disclosures, and further develop ESG investing practices.

“We plan to establish an institutional foundation for the overall ESG ecosystem, and will continue to actively seek ways to improve the system by collecting opinions from experts,” the FSC added.

 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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