Sovereign wealth fund Korea Investment Corporation has established a good model for environmental, social, and governance (ESG), say experts, and the government should work with it to instil greater sustainable efforts in the economy.
They add that asset owners and fund managers in Korea need to better consolidate standards in ESG investing going forward, to minimise confusion.
KIC, which published its second annual Sustainable Investment Report on Friday (June 18), had invested $1.79 billion of its $183.1 billion funds into ESG bonds as of March this year.
It launched a new strategy in March to exclude certain industries and themes that fail to meet internationally accepted guidelines such as the UN Global Compact and OECD Guidelines on Multinational Enterprises in its entire portfolio - both in direct and indirect investments.
Companies in the selected industries and themes are updated quarterly, while target industries and themes are monitored yearly and shared company wide, KIC said in the 20-page report.
“It is good to see more specific ESG disclosures. As far as we are aware, KIC is one of the first in Korea to set out a sustainable report of such depth and scope in English," said Andrew Shin, head of investments for Korea with Willis Towers Watson.
"There is a general consensus in the industry that the awareness on ESG factors and integration into investment strategy is much higher now compared to years ago,” he added, noting that there have been a lot of similar ESG disclosures by pension funds and large asset owners in the UK.
In the report, KIC’s new chief executive officer Jin Seung-ho said that only 35 of the world’s top 100 sovereign wealth and pension funds published similar ESG report. In addition, KIC is the only one doing so in South Korea and one of only five in Asia.
Shin noted that there are now too many different approaches and philosophies in ESG, which could be confusing for asset owners in general.
“We hope that there will be a consolidation of standards when it comes to integrating ESG into investment policy so that there is common ground within the industry,” he told AsianInvestor.
Terry Pan, chief executive officer of Greater China, Southeast Asia and Korea with Invesco agreed with this assessment, noting that asset owners in Korea had already started to include ESG as part of their evaluation when selecting managers.
However, he added that these asset owners were still at an early stage when it came to deploying dedicated ESG mandates.
“So far, the interests are in a broad-based ESG applications rather than a separate focus for ‘E’, ‘S’ and ‘G’ but we have seen some interests in the ‘E’ factor through passive vehicles,” Pan told AsianInvestor.
Through taking part in the issuance process for the Korean government’s five-year green and sustainability bonds in June 2019, KIC has invested over $500 million in green and social projects using entrusted bond proceeds to enhance environmental and social value, according to the report.
Among all the green and social projects the sovereign wealth fund invested in, most went to green projects, including $328 million in green building projects in North America, $127 million in renewable energy infrastructure in South America, Africa, etc, while another $77 million was invested in waste management services in North America.
Gary Smith, managing director with Sovereign Focus, noted that $500 million is not a huge number compared to KIC's total AUM. However, he added that "this is an example of what all sovereign wealth funds should be encouraged to do by the governments”.
"The example being set by KIC is excellent, but the Korean government could allow KIC to do even more," Smith told AsianInvestor, noting that a government will determine what its SWF is allowed to do, and its financial expertise and knowledge of ESG issues should be better utilised to help the home market for a green transition.
“Governments around the world might want to look at widening the remit for their SWFs, in order to encourage investment in the research and development stage of green energy”, Smith said. “In many nations the money is sitting in the SWF, but existing rules on investment deployment are conservative, and do not allow for this. Now is the time for governments to loosen the shackles and let their SWFs act as seed investors in the green energy space.”
Korea's government has begun to raise its efforts to encourage more sustainability. President Moon Jae-in announced in late April this year that Korea would end all new financing for overseas coal projects and would soon set a more ambitious schedule for slashing carbon emissions.
The announcement is part of a “Green New Deal” proposed by Moon’s ruling party last year, which set ambitious goals of net-zero emissions by 2050. Korea is currently one of the largest greenhouse gas emitters in Asia.
Invesco’s Pan noted that institutional interest in ESG was predominantly driven by government-related bodies now.
“We expect further adoptions of ESG to the broader institutional client groups over time,” he said.
KIC’s report said it has reviewed $9.34 billion of assets in terms of ESG from January 2020 to March 2021. Noting that ESG review on outsourced assets and private assets on the alternative side is harder, Sovereign Focus’s Smith stressed a public fund needs to “work harder” and keep proactive communication with external fund managers regularly, to ensure they are ESG compliance.
For indirect investments in alternative assets, KIC said it uses an ESG questionnaire to assess the responsible investment status and plans of general partners (GPs).
“Due to the nature of GPs who handle alternative assets, they are evaluated qualitatively instead of with additional quantitative points, which is the case for external managers of traditional assets,” the report said. “In doing so, we encourage our GPs to actively consider policies and processes related to responsible investment.”
Between January 2020 and March 2021, KIC reviewed 37 traditional asset external managers, and 36 alternative asset investments, according to the report.