[Interview] In “quiet war” over ESG reporting standards, will Korea rise or fall?

Posted on : 2023-03-13 16:54 KST Modified on : 2023-03-14 15:21 KST
An interview with Ilcheong Yi, a senior research coordinator at the UN Research Institute for Social Development
UNRISD senior research coordinator Ilcheong Yi speaks to the Hankyoreh at the newspaper’s office in Mapo District, Seoul, on Feb. 28. (Kwak Yoon-sup/The Hankyoreh)
UNRISD senior research coordinator Ilcheong Yi speaks to the Hankyoreh at the newspaper’s office in Mapo District, Seoul, on Feb. 28. (Kwak Yoon-sup/The Hankyoreh)

“A quiet war is being waged around the world about enacting standards for ESG reporting.”

These were the words of Ilcheong Yi, 56, a senior research coordinator at the UN Research Institute for Social Development, referring to environmental, social and corporate governance reporting.

“The choice of international sustainability standards will have a huge influence on what things companies are required to disclose, which industries will live, and which will die, and where investments will be made. That’s why various countries are competing to set up their own standards,” Yi went on.

“For a country to be invited to the debate over international standards, it needs to have a standard of its own. Otherwise, the country will have to go along with [international standards], losing its autonomy and becoming a permanent colony of those standards,” Yi warned.

In late 2021, the South Korean government published ESG guidelines that were benchmarked on global ESG assessment indicators, but those guidelines haven’t had a clear impact on sustainability reporting standards.

The United Nations Research Institute for Social Development (UNRISD) is a UN agency located in Geneva, Switzerland, that researches development-related issues. Yi is a senior researcher coordinator at UNRISD in charge of research on Sustainable Development Performance Indicators (SDPI). These indicators were developed by UNRISD over four years to overcome the limitations of the ESG framework, which mainly focuses on sustainability within corporations, such as issues related to climate and corporate governance.

The Hankyoreh Economy and Society Research Institute met with Yi, who visited Korea in mid-February, to ask him about the SDPIs that were announced last fall, trends in establishing international standards for sustainability reporting, and South Korea’s tasks.

The interview with Yi was conducted in person on Feb. 28 at the Hankyoreh Economy and Society Research Institute in the Gongdeok neighborhood in Seoul’s Mapo District, with additional rounds taking place over the phone on March 3 and 4.

Hankyoreh: What brings you to Korea this time around?

Ilcheong Yi: I’m in Korea to meet with various government, public, and private organizations such as the Korea Legislation Research Institute and the Korea Association of International Development and Cooperation to explain our performance indicators and discuss ways for cooperation with UNRISD. On Feb. 17, we signed a memorandum of understanding with the Korea Legislation Research Institute for converging research on sustainable development and ESG.

Hankyoreh: The SDPIs are related to the UN Sustainable Development Goals (SDGs). Why did UNRISD develop these new performance indicators?

(The SDGs are goals that were adopted by the 70th UN General Assembly in 2015 to be achieved by 2030 for the sustainable development of humankind. There are 17 goals in total and 169 detailed target areas concerning universal human problems such as poverty, disease, climate change, pollution, labor, unemployment and more.)

Yi: The SDGs need to be fulfilled by states and are measured at the national level. Achieving these goals requires the participation of civil society and business. As such, the UN encourages local governments and businesses to help achieve these goals.

So far, companies have contributed to sustainable development through corporate social responsibility (CSR) or ESG. However, some point out that this is only aiming for a demonstration effect — that is, only showing the good things while hiding the bad. Companies cannot contribute to achieving the SDGs unless such problems are addressed. The result of thinking about how to change the ESG framework became these 61 performance indicators.

Hankyoreh: The SDPIs have come to fruition after four years of research since 2018. However, UNRISD does not receive financial support from the UN Secretariat to conduct independent research. Where did the funding come from?

Yi: SK’s Center for Social Value Enhancement Studies provided US$1 million. In general, when companies provide funding, conditions are attached. However, SK, unusually, had no conditions. I am very grateful.

Hankyoreh: You pointed out that there are some problems with ESG, what are they specifically?

Yi: We tried to solve five problems. The first is the problem of ignoring key issue areas essential to achieving the SDGs. The area of care is one main example. In Northern Europe, parental leave is often compulsory for men for the purpose of gender equality, but the ESG framework doesn’t have an indicator for this.

Also, while there is an indicator for the minimum wage, there is none for the living wage. People can’t live like human beings on minimum wage. In Northern Europe, guidelines based on the living wage instead of the minimum wage are used.

(Living wage is a system where workers must be paid a higher wage than the minimum in order for them to live a comfortable life. In South Korea, some local governments have begun implementing this system through ordinances, starting with Bucheon in 2013, but there is no legal basis for it yet. According to the Korean Confederation of Trade Unions Research Center, the average hourly living wage for local governments nationwide in 2020 was 10,008 won, 117% of the minimum wage.)

Hankyoreh: What is the second issue with the ESG framework?

Yi: There are several economic sectors in capitalism. There are the for-profit and non-profit sectors. There are also things like cooperatives that are part of the social economy. ESG indicators are tailored to commercial enterprises and lack measurements for the social economy. Many may think that cooperatives would do well with the ESG framework, but this is not necessarily the case.

What’s important for cooperatives is whether they are operating according to democratic principles and whether they are resilient in times of crisis. It’s also necessary to estimate to what extent they employ those belonging to vulnerable social groups and how much training and jobs are provided for the unemployed.

The world-famous Mondragon Corporation in Spain and the International Co-operative Alliance (ICA) are developing their own evaluation indicators. Among our performance indicators, 55 are aimed at for-profit enterprises and the social and solidarity economy (SSE) and six are specifically for SSE organizations and enterprises.

Kim Kye-hong, president of the Korea Legislation Research Institute, and UNRISD senior research coordinator Ilcheong Yi pose for a photo after reaching a memorandum of understanding on research collaboration on Feb. 17. (courtesy of the KLRI)
Kim Kye-hong, president of the Korea Legislation Research Institute, and UNRISD senior research coordinator Ilcheong Yi pose for a photo after reaching a memorandum of understanding on research collaboration on Feb. 17. (courtesy of the KLRI)
Hankyoreh: Some have also pointed to an issue of short-sightedness in the ESG framework, in which indicators are excessively focused on short-term performance.

Yi: That’s right. Most ESG reports only look at this year's performance compared to last year. We have no idea what was done the year before or before that. Our performance indicators do a trend analysis over the course of five years.

The fourth problem is the “magic of averages,” which tries to paper over bad points with the overall average figure. For example, if a company’s employees are made up of 40% women, this looks very good. However, if there are no women in the executive ranks then this can’t be seen as being truly faithful to the principles of gender equality.

The final important thing is context-based indicators. In order to make accurate judgments when hiking, we have to know the height, distance, and slope of the entire mountain, not just of a specific area. Most ESG indicators don’t show overall goals or the degree [to which they are implemented].

For example, if a company used 1,000 liters of water last year and 800 liters this year, the ESG report would show a reduction of 200 liters. However, if the maximum available water in the area where the company is located is 500 liters, then they would still need to reduce their water use by an additional 300 liters.

Hankyoreh: So how do you calculate a company’s water use limit?

Yi: We have developed a new methodology. If we input a satellite image of the company’s location, the number of employees, the value-added, the local population, and more, we can calculate the maximum available water in the area.

A company might have plenty of water resources outside its 100- or 200-kilometer radius but have a water deficit within a 50-kilometer radius. In that case, business owners need to recognize that they are hurting the people living in that 50-kilometer radius. Our SDPIs include 17 “context-based indicators” such as water use, wage gap between CEOs and workers, and tolerance for the proportion of gender diversity.

Hankyoreh: Samsung Electronics’ pay gap between registered directors and employees is 139.7 times as of 2021. The Justice Party has also proposed a so-called “fat cat law” to cap corporate executives’ pay. What is an acceptable pay gap?

Yi: We have taken a historical approach. Based on our research on model European companies from the 1960s and early 1970s, which is dubbed the golden age of capitalism, we came up with a ratio of 30:1 (based on the median, not the mean.) Some might think that’s too idealistic, but I think it shows what’s desirable.

Hankyoreh: How did you arrive at the norm for the proportion of women in managerial positions?

Yi: In 2008, Norway’s sovereign wealth fund became the first in the world to mandate a 40% female representation on all state-owned companies’ boards. In 2021, it decided to not invest in companies with less than 30% female representation. Our performance indicators are affected by this with a target of 40%.

(According to Deloitte Global, the percentage of women on the boards of companies in 72 countries around the world is 19.7%, as of 2021. South Korea was at 4.2%, ranking 68th.)

Hankyoreh: There are 20 Tier 1 (economic, environmental, social, and institutional) and 41 Tier 2 (environmental, socioeconomic, and institutional) performance indicators, can you explain these tiers?

Yi: Among the 169 SDG targets, there is a recommendation for companies to publish sustainability reports. The number of companies actually publishing those reports is an indicator of evaluation. The question is, what counts as a sustainability report? To solve this problem, the UN Conference on Trade and Development has created 30 “core indicators” that are required to qualify as sustainability reporting. Tier 1 distills these down to 20. Tier 2 is a set of indicators that address the five challenges of the ESG indicators. It also includes 17 “context-based indicators.”

Hankyoreh: How are you planning to induce corporations and agencies to use the SDPIs?

Yi: We launched the beta version of the online platform in November 2022. Users can log in, fill out their information, and it automatically generates a report of their results. The beta was a teaser, with only 16 of the “context-based indicators” available, but 127 for-profit companies and 147 social economy organizations signed up for it. The full version will be released in March, with the goal of having 2,000 users.

To this end, we are working with the International Cooperative Alliance (ICA) and plan to hold webinars with the American Sustainable Business Network (ASBN), which has 250,000 members, and Social Economy Europe (SEE), which governs the social economy in Europe. In the future, we will target countries such as South Korea and some in Europe that do not yet have clear guidelines for sustainability reporting to share our performance indicators.

Hankyoreh: The International Sustainability Standards Board (ISSB), part of the International Financial Reporting Standards Foundation (IFRS), released a general requirements exposure draft in 2022, and is currently discussing a finalized version for application beginning in the fiscal year of 2024. How does this relate to SDPIs?

Yi: A quiet war is being waged around the world about enacting standards for ESG reporting. In particular, we should pay attention to the International Accounting Standards (IAS) and the European Financial Reporting Advisory Group (EFRAG). There is a difference between the standards they create.

The IAS have a strong Anglo-American tradition and are not enforceable. On the other hand, EFRAG, which tries to preserve European uniqueness, is enforceable based on EU legislation. The EU’s Corporate Sustainability Reporting Directive, which is based on EFRAG, will require sustainability reporting starting in 2025 for companies that meet certain criteria, such as having 250 or more employees.

Beneath the surface of the battle over international standards is the competition for metrics that meet them. There are more than 4,000 metrics and more than 400 rating systems worldwide. Our SDPIs do not compete with them by default, but rather offer an alternative view of what is wrong and how to fix it. In the future, if a forward-looking, progressive international standard gains traction, our SDPIs will most likely be used.

Hankyoreh: Do you mean that many Korean companies doing business with Europe could be subject to mandatory sustainability reporting?

Yi: Yes. And not just companies themselves, but all the companies in their value chain. South Korea only cares about the IAS, which is hard to understand, given the large presence of Korean companies in Europe.

Hankyoreh: The South Korean government has decided to mandate ESG disclosures for KOSPI-listed companies with more than 2 trillion won in assets by 2025, and in late 2021, it released K-ESG guidelines benchmarked against key global metrics.

Yi: The choice of international sustainability standards will have a huge influence on what companies are required to disclose, which industries will live, and which will die, and where investments will be made. That’s why various countries are competing to set up their own standards. As Europe comes up with its “green” taxonomy (which defines the scope of environmentally sustainable economic activities), China comes up with its own green taxonomy. The US stock exchanges have also recently issued their own “greenhouse gas disclosure standards.”

Hankyoreh: How should South Korea respond to the international competition in sustainability reporting standards?

Yi: Generally speaking, every country needs to search for which elements of the international standards work for them. Based on those, they should create standards that consider their specificities. For a country to be invited to the debate over international standards, it needs to have a standard of its own. Otherwise, the country will have to go along with [international standards], losing its autonomy and becoming a permanent colony of those standards.

Creating sustainability reporting standards is one thing, but creating ESG metrics is quite another. It’s very important that standards or taxonomies be legislated through social consensus. It’s important [for Korea] to become involved in the war of international standards and make its voice heard in the global discussion.

Hankyoreh: What do you say to those who worry that if we emphasize specificities unique to Korea, it will turn into a cult, not unlike “Korean-style democracy,” which has fallen far from the essence of democracy.

Yi: We may draw on positive elements of international standards but must ensure Korean characteristics are incorporated. If something made in Korea is identical to something made under the IAS, can it be called “Korean”? Korea has a serious problem with industrial accidents. If that’s the case, the Korean standards could have more items related to industrial accidents. We shouldn’t try to hide problems specific to Korea, but try to fix and improve them.

Hankyoreh: What will become the international standard, the IAS or EFRAG?

Yi: The G20, a group of the world’s 20 largest economies, is more likely to adopt the IAS. However, there are many EU countries in the G20. EFRAG is EU-centric, so it’s not strictly “global.” The IAS, on the other hand, is a very global organization, but not a governmental one. No one knows what each country’s government will accept.

Hankyoreh: What is the international assessment of Korean companies’ level of ESG?

Yi: I think some companies, such as Samsung SDI, LG Chem, and SK Telecom get good ratings, but I don’t think that reflects the level of all Korean companies. What is encouraging is that SK Telecom is making a lot of effort. In particular, evaluating executives on their social value creation is an important step forward.

While there are issues with Korea’s chaebol structure, corporate change depends on the extent of company owners’ interest in ESG.

Hankyoreh: The ultimate goal of the UN’s Sustainable Development Goals is resolving inequality. The administration of previous Korean President Moon Jae-in proposed the vision of “inclusive growth” as a way to improve inequality. With that in mind, the Moon administration pushed for income-led growth and raised the minimum wage, but in the end that only seemed to make things harder for small and medium-sized businesses and vulnerable groups. What do you think of the fact that the SDGs emphasize a living wage, which is even higher than the minimum wage?

Yi: Scholars of economic development will tell you that the country with the best track record for growth and distribution was Sweden in the 1950s and 1960s. The Social Democrats, who were then in power, adopted the Rehn-Meidner model, which combined curbing inflation with a “solidaristic” wage policy that sought to ensure that people doing the same job in the same industry would receive equal pay. Given the government’s socialist bent, you might assume that they prioritized solidaristic wages, but in fact, they put a higher priority on tamping down inflation, since that was crucial for growth.

The economy always walks on two feet, one being growth (or production) and the other being distribution. The lack of growth means there’s nothing to distribute, and the lack of distribution has a negative impact on growth. I’ve heard that one of the reasons for the failure of income-led growth was that the emphasis on income prompted some to falsely assume that growth was unnecessary.

The policy of income-led growth sought to achieve growth based on domestic demand, instead of relying solely on the exports of a few conglomerates. If policymakers had chosen the goal of a balanced economy that prioritized both exports and domestic demand, the outcome might have been different. It’s possible to take a flexible approach of raising the minimum wage to boost domestic demand and then lowering income [to ensure corporate competitiveness] when exports are sluggish. In that case, Moon wouldn’t have had to apologize to the public for abandoning his pledge of raising the minimum wage to 10,000 won.

Hankyoreh: President Yoon Suk-yeol has come under fire for talking big about welfare for the disadvantaged and then reducing support for vulnerable groups in this year’s budget. Many critics say his administration’s emphasis on fiscal soundness is misplaced when expansionary fiscal policy is the only way to satisfy the growing need for welfare in an economic crisis when interest rates are being raised to combat inflation.

Yi: All politicians, no matter where they fall on the spectrum of left and right, say the government should adopt policies that benefit vulnerable groups. But they all have their own trusted approach, whether that be social insurance through redistribution or growth-based trickle-down economics.

After the peak of the COVID-19 crisis, many countries seem to be taking an approach that combines neoliberalism and green politics — stressing fiscal soundness while freezing or reducing welfare spending and instead boosting green budgets to make more jobs. This is disputed, but you could even argue that the Yoon administration’s emphasis on nuclear power is a green policy (as the EU recently said about nuclear power following the energy crisis triggered by the war in Ukraine), and growth-based trickle-down economics also appears to be a major policy direction. But the trickle-down effect isn’t very easy to actualize and takes a long time to have an impact on vulnerable groups. We ought to be thinking about solutions to that.

Hankyoreh: After studying political science at Seoul National University and completing a doctorate in public policy at Oxford University, you worked as a professor at Kyushu University in Japan and then joined UNRISD in 2008. What made you leave academia?

Yi: When you’re only studying theory, you can lose touch with reality. I wanted to try getting some experience in the field. Kyushu University allows teaching staff to take a sabbatical if they get a job at a place like the UN, but no foreign staff had taken advantage of that system before. Perhaps unsurprisingly for a “by the book” society like Japan, it took more than a year and a half for the university to reach a decision, and I eventually just gave up my professorship. I’d initially planned on spending three years at the institute, but given the fascinating nature of my work and the new projects they keep giving me, I’ve stuck around for 15 years now.

A “heterodox institute” at the UN that offers alternatives to the mainstream narrative

What exactly is the UN Research Institute for Social Development (UNRISD)? As the name suggests, it’s a UN-affiliated body that studies issues related to development. It was established in 1963 to find a new approach for defining social indicators given the perceived limitations of assessing growth and progress through economic indicators alone.

Swedish economist Gunnar Myrdal and Dutch economist Jan Tinbergen, two of Northern Europe’s best-known progressive economists and both recipients of the Nobel Memorial Prize in Economic Science, objected to the tendency to define development in narrow economic terms.

When Myrdal and Tinbergen proposed establishing an institute that could broaden that perspective to include social development on the grounds that the social issues that accompany development shouldn’t be disregarded, the UN took them up on the idea.

From its inception, UNRISD was given the role of being a “heterodox institute” that challenges mainstream narratives and offers alternatives.

When the mainstream was talking about the “green revolution,” the institute argued that letting landowners keep all productivity gains would worsen inequality.

When the mainstream was talking about indicators for economic development, the institute was creating indicators for social development.

When the mainstream was arguing that developing countries can’t afford to bother with social policy, the institute explained how developing countries could engage in social policy, too.

And when the mainstream was emphasizing the ESG framework, the institute identified its limitations and devised ways to overcome them.

UNRISD’s development of Sustainable Development Performance Indicators — which can be used to assess the level of sustainability at various governments and corporations — is part of those efforts.

To ensure it has the freedom to carry out critical research on politically sensitive issues, UNRISD doesn’t receive a single cent in support from the UN Secretariat, which represents the mainstream narrative. Even its establishment was funded by the Netherlands.

By Kwack Jung-soo, senior staff writer

Please direct questions or comments to [english@hani.co.kr]

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