By Kim Eun-jung
SEOUL, March 10 (Yonhap) -- Major South Korean companies across manufacturing industries are accelerating their transition to a greener, more sustainable business as investors are increasingly taking account of environmental, social and governance (ESG) factors.
ESG investing focuses on companies that support environmental protection, social justice and ethical management practices.
Among the criteria, climate change has become a defining factor in companies' long-term prospects with a significant reallocation of capital happening a lot sooner than expected.
Dutch pension fund APG, one of the world's largest pension investors, sold its stake in the state-run Korea Electric Power Corp. (KEPCO) last year after the company approved the construction of new coal-fired power plants in Indonesia and Vietnam despite its opposition.
In response to growing pressure from investors, KEPCO CEO Kim Jong-gap said that the company has "no plans to build coal power projects abroad in the future" once the ongoing projects are completed.
Market watchers said the nation's biggest greenhouse emitting industries will face rising calls to align their business strategies to meet emission goals and have sustainable business operations.
"While ESG in the past drew attention from institutional investors as a way of an ethical investment, sustainability has actually been affecting returns in the clean energy sectors amid the COVID-19 pandemic," Kim Hu-jeong, an analyst at Yuanta Securities, said. "The trend is expected to grow in popularity and draw more money to ESG funds."
As investing in eco-friendly stocks and funds has become the latest investment trend, Korean companies across the manufacturing industries are exploring ways to go greener and cleaner through innovative technologies.
POSCO Co., the world's fifth-largest steelmaker by output, laid out plans to produce steel with hydrogen instead of coal as part of its transition to renewable energy sources.
The steelmaker's ultimate goal is to go carbon neutral by completing a hydrogen production capacity of 5 million tons by 2050 and achieving 30 trillion won (US$26.3 billion) in hydrogen sales.
Shipbuilders are also expanding investment in eco-friendly vessels as the International Maritime Organization last year adopted a new limit on sulfur content in fuel oil to improve air quality.
Hyundai Heavy Industries Co., the world's largest shipbuilder, said it will invest 1 trillion won over the next four years to develop eco-friendly fuel and vessel technology.
To raise funds, the company is pushing for the initial public offering later this year.
Automakers are also in a rush to bring in new fleets of zero-emission vehicles under tighter environmental regulations and capture a bigger share of the growing market.
Hyundai Motor Group said it will stop selling internal combustion engine cars in major markets, including the United States, Europe and China, after 2040.
Instead, the automotive group aims to sell 1 million EVs across Hyundai Motor, Kia and Genesis models by 2025 to have up to a 10 percent share of the global EV market.
As the automotive industry moves toward the electric future, battery suppliers are allocating more resources to expand their production capacities.
SK Innovation Co., the oil refining and battery making unit of SK Group, is turning its focus from its mainstay petrochemical business to EV batteries to capitalize on the new mega trend.
After reporting an operating loss of 2.6 trillion won in 2020 due to heavy losses in the refinery business, SK Innovation announced plans to invest 1.3 trillion won to build a third battery factory in Hungary to tap deeper into the European market.
Most recently, the company said it will sell its entire stake in U.S. shale oil mines to a Texas-based glycerin company as part of its business reorganization strategy.
Some companies even cut ties with businesses considered immoral to get rid of potential obstacles in doing business globally and securing investment.
In December, Hanwha Corp., a defense unit under chemical-to-energy conglomerate Hanwha Group, said it sold stakes in its cluster-bomb business in a move to conform with the ESG standards.
Some European countries ban investment in companies making controversial weapons, and Hanwha Corp. was blacklisted for its cluster-bomb business, which could potentially cloud renewable businesses by Hanwha subsidiaries.
Joining the global trend, some institutional investors are putting more value in the ESG investment strategy as a way to reduce risks by weeding out companies that fail to meet international standards.
The Korea Investment Corp. (KIC), the nation's sovereign wealth fund with 200 trillion won of assets under management, said it will incorporate more ESG metrics into its investment process and double the amount of investment dedicated to the ESG fund this year.
"As considering the ESG index not only contributes to higher returns but also reduces investment risks, it is an essential strategy to catch two rabbits at the same time," Choi said in a recent interview with Yonhap News. "KIC will make internal ESG investment guidelines to exclude companies from the portfolio if they fail to meet the standards."
While the social responsibility and governance metrics haven't been considered high priorities compared with environmental factors, observers say large conglomerates will face growing calls to have a sustainable business model under tightening financial regulations and upcoming ESG disclosure rules.
Companies listed on the benchmark KOSPI with total assets valued over 2 trillion won or more are requested to begin releasing their ESG data in 2025. The requirement will be expanded to all listed companies by 2030.
"Corporate valuations are expected to go different paths depending on their preparations for the low-carbon economy," Kim Dong-yang, an analyst at NH Investment & Securities, said.
"Internal trading among subsidiaries and the ratio of females among outside board members are expected to be integrated in phases, and corporate governance and the disclosure of ESG-related information will be considered for large business groups."
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