On a scale of S to D, just how confusing is ESG?
Environmental, social and governance (ESG) are buzzwords for companies all over the world, but conflicting ESG scores is the latest issue to confound companies and investors.
ESG management refers to a company’s commitment to do more than just seek profit, such as actively making efforts to contribute positively to the environment or social causes and to conduct themselves responsibly.
There are some 200 different ways to score a company on ESG criteria domestically and internationally. This means a company can receive different ESG ratings depending on the rating agencies that evaluate them.
Companies are expressing frustration over the inconsistency of the ratings, arguing that they have been given unfair scores from some agencies.
Hyundai Motor, the country’s largest automaker, received an A rating for ESG from the Korea Corporate Governance Service (KCGS). KCGS has seven levels of ratings — S, A+, A, B+, B, C, D — with S being the highest.
But the automaker got a B rating from Morgan Stanley Capital International (MSCI). MSCI rates companies on an AAA-to-CCC scale: AAA and AA are considered leaders; A, BBB, and BB are considered average performers; B and CCC are considered laggards.
MSCI’s ESG rating is one of the widely known rating systems that many global firms utilize when deciding to make investments. BlackRock, the world’s largest asset manager, uses MSCI’s ESG rating when making investments.
The situation is no different with other major Korean companies.
SK Innovation received an A rating from KCGS but a BBB from MSCI. Lotte Shopping got an A from KCGS while it received a B from MSCI.
LG Electronics had a different experience. The electronics maker received B+ rating from KCGS but got an A from MSCI.
“Whose tune shall we dance to?” said the head of the social responsibility department at one of the 10 largest companies in Korea.
A Korean company, one of 10 largest companies in Korea, recently complained to an ESG rating agency about the score it received.
“Some points were deducted just because our company’s head doesn’t participate in the board meeting,” said a spokesperson from the company. “The criteria they use to score ESG rating doesn’t suit with global standard.”
Experts say the short history of ESG is the biggest problematic reasons from the situation.
“ESG has short history as it is rooted in the United Nations’ Principles for Responsible Investment that was first introduced in 2006,” said Song Jae-hyung, head of ESG team at The Federation of Korean Industries. “As it’s not rooted in scholarly research, there can't be consistency in the standard.”
Kim Jong-dae, a business professor at Inha University, says there is no reliable standard for ESG evaluations as the process has been developed centering on private companies.
This situation is causing panic over Korean companies that vowed to dedicate themselves ESG management in 2021.
“We can neither just ignore the ESG rating, nor raise the scores in a short time,” said an executive from one of the 10 largest companies in Korea.
ESG rating agencies don’t reveal the specific details on how they make evaluations, companies argue.
Experts say companies must respond to the agencies by focusing on a few points that the agencies consider to be the most important factors when evaluating ESG scores.
“Korean companies must consider some factors that many rating agencies put great emphasis on in common, such as carbon neutrality, in the first place,” said professor Park Young-kyu, who teaches global business administration at Sungkyunkwan University. “The number of reliable rating agencies will be narrowed down to a few in the near future.”
BY KANG KI-HEON, CHEA SARAH [email@example.com]