By Kim Hyung-keun

Head of portfolio management division at SK Inc.

Strange things have already started happening. While record-breaking heatwaves and wildfires ravaged Spain, torrential rains and flooding submerged one third of Pakistan. The rise in sea surface temperatures makes the timing and trajectory of typhoons unpredictable, catching many production facilities off guard and leaving behind unexpected damages. Economic losses sustained by industries continue to grow, serving as a wakeup call to the physical risks of climate change. Climate change is becoming more than a disaster as it devolves into a crisis.

Climate change is now the most relevant environmental, social and governance (ESG) factor for the decision making of institutional investors. According to the Bank of Korea's report, titled, "Climate Change: Implementation Risks and Financial Stability," share prices for carbon-intensive companies are expected to decline over the next 50 years. Indeed, the risks of climate change are directly affecting enterprise values.

In his annual letter to shareholders this year, Larry Fink, the chairman and CEO of BlackRock, the world's largest asset manager, which put ESG investing on the map, stated that ESG activities such as climate change response and improvements in the work environment have a positive impact on profit over the long term, and that companies that fail to cater to increasingly diverse employee needs in the wake of the pandemic are bound to face risks. On top of environmental issues, issues of discrimination and inequity, based on lack of attention to diversity and socio-economic inequalities, are also being highlighted from the investor's perspective.

In addition to internal efforts, ESG activities by companies also need to be proactively communicated with external stakeholders. A move in that direction is the recent decisions by regulators in the EU and the U.S. to mandate the disclosure of ESG practices. Earlier this year, the U.S. Securities and Exchange Commission (SEC) proposed that it would announce climate-related disclosure requirements for publicly traded companies this year and phase in the requirement for public companies in the U.S. at the beginning of next year.

SK Group measures and manages its exposure to ESG risks to remove potential threats to enterprise value while recognizing the importance of transforming its business model with ESG principles and communicating externally to be measured at fair value in the market.

Since 2018, SK has endeavored to convert the social impact of corporate management activities into currency values, and established the ESG Core Indicator Management System in 2021. The system enables SK to select and strategically manage key criteria in respective ESG categories reflecting demand from its stakeholders such as the Financial Society and ESG disclosure and evaluation bodies. It also includes the carbon neutrality goal set by the company and implementation indicators to achieve it.

In addition to these efforts, SK Inc., an investment holding company of SK Group, has established an integrated system to manage its portfolio from an ESG perspective.

SK Inc. plans to manage major ESG risks throughout the investment process from pre-investment review to exit, focusing on key ESG factors derived from respective industries by analyzing their financial impacts. This year, the sustainability report was published to communicate broadly as to how the company's core investment businesses are enhancing enterprise value from an ESG perspective. Notably, given that SK has pledged to achieve net-zero before 2050 by reducing carbon emissions by 200 million metric tons by 2030, which accounts for 1 percent of emissions globally, the sustainability report detailed SK's group-wide innovation strategy to push for decarbonization.

There is no denial that ESG seems like a burden on companies. The flurry of ESG policies and ESG disclosure obligations have been met with some skepticism. However, ESG is a matter of survival and an unavoidable path for companies to deliver sustainable growth as a member of society.

Despite many challenges, it is very encouraging that many Korean companies have declared their commitment to net-zero. That said, accurate measurement and management should be the first step in strategizing sustainability. Only what is measurable is manageable. SK's efforts are expected to create a new forum to discuss ways to promote systematic ESG management in Korea.

The writer is the head of the portfolio management division at SK Inc.