In the midst of the COVID-19 pandemic, South Korea’s financial groups have been gearing up for the so-called “sustainable financing,” centered on environmental, social and governance factors, or ESG, but global ESG experts urged them to make their ESG disclosure system more sophisticated, according to research shared with the Korea Herald report Wednesday.

Sustainable financing refers to a bank’s financial services like loans for companies’ sustainable economic activities. It came into the limelight as global bankers and investors have increasingly considered non-financial factors in their investment process amid the prolonged pandemic.

Responding to the ESG boom, the nation’s four major financial holding firms, including Shinhan Financial, KB Financial, Hana Financial and Woori Financial, have placed a high emphasis on financial support for local businesses that incorporate a high level of ESG in their operations by launching top decision-making bodies for ESG financing.

The amount of corporate credit extended to ESG-oriented companies at Shinhan stood at 12.729 trillion won ($10.7 trillion), KB at 8.361 trillion won, Hana at 3.417 trillion won and Woori 46.635 trillion won, which accounted for 9 percent, 6 percent, 2 percent and 35 percent of the total, respectively, last year, according to data from Singapore-based ESG engagement specialist Asia Research and Engagement.

Woori Financial, which recorded the largest volume of ESG corporate loans, earlier issued ESG bonds worth a combined 200 billion won in March, under the goal of investing 100 trillion won in financial products associated with ESG factors, including credit loans and bonds, by 2030.

Along with gradually expanding ESG-related corporate loans, the financial groups have also supported the government’s policy drive for a carbon neutral society by global ESG-related regulatory standards or campaigns like the Equator Principles -- a risk management framework adopted by financial institutions for determining, assessing and managing environmental and social risk in projects.

“It is pleasing to see Korean banks adopting long term commitments for portfolio decarbonization. This will help them to align with national objectives and de-risk their portfolios. They need to accelerate from here with robust short and medium term implementation plans with concrete actions to move away from fossil fuels and high carbon industries,” said Benjamin McCarron, the founder and Managing Director of ARE. 

Founded in 2013 to bring the voice of investors to Asia’s sustainable development challenges, the boutique research agency specialized in responsible investment is conducting a review of 32 banks across 8 markets in Asia, including China, Japan and Korea, to assess their response to climate related risks and opportunities. Its review is aligned with the recommendations of the G20-backed Task Force on Climate-related Financial Disclosures.

On the back of their sustainability initiatives, the banking giants recently received high ESG ratings from the nonprofit ESG rating agency Korea Corporate Governance Service. The organization analyzed ESG efforts of 950 listed companies between January and October and announced an integrated rating for each firm that evaluates all the three ESG principles. Shinhan Financial and KB Financial both earned the integrated ESG rating of A+, while Hana Financial Woori Financial got the A rating, data showed.

Market experts, however, raised skepticism about the Korean banking groups’ ESG reporting and disclosure, which are critical to the ESG evaluations.

“All four Korean financial groups that ARE surveyed disclosed sustainable financing exposure by business segment and product types. This is the best practice we have seen in the region. But we couldn‘t compare their performance as each bank applied different definitions of sustainable finance and the scope of the related financial services vary. We hope to see efforts by Korean financial regulators to streamline the definition in line with the leading global and regional frameworks,” ARE said. 

Calls are rising for the authorities to come up with detailed guidelines for ESG disclosure exclusively for local financial institutions. 

Earlier in January, the country’s sole bourse operator Korea Exchange published a comprehensive framework for ESG reporting by Kospi-listed firms, but it doesn’t include specific criteria like the scope of sustainable financing or the risks of climate change by business sector.

“The need to strengthen companies‘ obligations to disclose their ESG efforts is growing, but there is a lack of thorough discussion on how to do it. The financial regulator should help banking groups and other market players to report ESG management in a standardized manner,” said Lee Sang-ho, a researcher at the Korea Capital Market Institute. 

By Choi Jae-hee (cjh@heraldcorp.com)