hankyoreh

A wind farm off the coast of Jeju Island in Korea. (Yonhap)

Apple and Intel in the US, Samsung Electronics and SK Hynix in South Korea, and the Taiwan Semiconductor Manufacturing Company, better known as TSMC — these are the stars of the global IT, or information technology, industry. They have demonstrated their competitive edge in the market while pioneering innovation in IT.

These “big five” companies that have come to dominate the global IT market have also generally received strong ratings for ESG management, which refers to standards for environmental, social and governance issues. In short, they’re regarded as model ESG companies.

However, an assessment based on the Sustainable Development Performance Indicators (SDPI) devised by the UN Research Institute for Social Development (UNRISD) has had markedly different results. All five of those companies only score 50-60 points on sustainability performance, placing them squarely in the “average” category. In short, they have a long way to go before achieving true ESG management or sustainability.

The Hankyoreh Economy and Society Research Institute (HERI) used the SDPI to assess the sustainability performance of the “big five” global IT companies in the first SDPI-based assessment of corporate sustainability levels in Korea.

HERI will be presenting the results of its assessment in a research paper titled “Sustainability Analysis of Global IT Companies: Focusing on the ‘Big Five’ Companies” at the 14th Asia Future Forum at the Grand Hall of the Korea Chamber of Commerce and Industry in Seoul on Wednesday. The Hankyoreh has concluded an MoU with UNRISD regarding cooperation on SDPI assessments.

An SDPI assessment covers a total of 61 indicators. There are 20 indicators in the first tier, which focuses on financial statement items including profit and eco-friendly investment, and 42 indicators in the second tier, which focuses on sustainability goals.

HERI selected 22 second-tier indicators for which corporate data was available that demonstrate SDPI’s distinctive nature and then chose 14 of those indicators with provided sustainability thresholds to compare the companies’ respective performance.

The indicators covered by HERI can be divided into the following areas.

There are three indicators in the environmental area: greenhouse gas emissions, hazardous waste treatment, and renewable energy; five indicators in the area of diversity and inclusion: gender pay gap, gender diversity in hiring, gender diversity in promotion, proportion of women in managerial positions, and number and percentage of women board members; four indicators in the area of sustainable management practices: CEO-worker pay gap, context-based triple bottom line accounting, amount of total fines paid or payable, and amount of corruption-related fines paid or payable; and two indicators in the area of staff safety and quality of life: caregiving support programs and frequency/incident rates of occupational injuries.

Providing sustainability thresholds is one of the SDPI’s distinctive characteristics. While other assessment indices generally focus on performance relative to the previous year, the SDPI is much stricter in that it judges performance against standards that need to be met for sustainable development — that is to say, sustainability thresholds.

Furthermore, the SDPI also assesses indicators that have been mostly ignored by other indices, including percentage of women in management, percentage of women board members, amount of total fines, and amount of corruption-related fines.

While the CEO-worker pay gap does come up in other assessment indices, the SDPI takes a novel approach to calculating that gap. The SDPI compares CEO pay to the median wage of workers in the lowest-paid quartile. That produces a bigger gap than other assessment indices, which tend to compare CEO pay to the average wages of all workers.

Ilcheong Yi, a senior research coordinator at the UNRISD said, “In an extreme scenario, we still might not be able to ensure the sustainability of our lives and environment even if every company on earth were to receive the highest ESG rating with strong performance compared with the year before.”

“The SDPI sets standards that companies need to meet for the sustainability of our lives and environment and evaluates how much individual companies have actually met those standards in order to guide them toward business approaches and practices that truly contribute to sustainable development,” he explained.

The basic aim of the SDPI is to encourage changes in behavior based on companies’ self-assessments. Accordingly, it does not assign its own performance scores or rankings to businesses. Instead, it presents “sustainability thresholds” for different indicators, using them as a metric for assessing execution on a five-point scale.

To attempt an objective comparison of company performance, HERI adopted an approach of assigning scores based on levels of results.

Three-point “sustainable” ratings were given in cases of sustainability or near-sustainability; two-point “average” ratings were given in cases where companies were moving in the direction of sustainability; and one-point “unsustainable” ratings were given in cases deemed to be unsustainable or significantly different from sustainable. No points were given in cases where information was not provided.

The highest possible score was 42, representing sustainable performance in all 14 indicators. The highest scores found for the companies examined were 26 points each for TSMC and Intel, followed by 25 for SK Hynix and 24 for Apple. Samsung Electronics came in last place with 22 points.

When company scores were converted to a scale where 100 points represented the maximum, TSMC and Intel tied with 61.9 points, followed by SK Hynix with 59.5, Apple with 57.1, and Samsung Electronics with 52.4.

The results showed that Samsung Electronics and SK Hynix — two representative companies in the South Korean IT industry — fell short of TSMC and Intel in their sustainability performance. SK can at least take comfort in having come in ahead of Apple.

In the area of environment (including greenhouse gas emissions), the top score was 8 points for Intel, followed by a three-way tie among TSMC, SK Hynix, and Apple with 5 points and Samsung Electronics in last place with 3 points.

Apple relies on overseas partner companies such as China’s Foxconn for much of its production. This gave it something of an advantage over the other big five companies in obtaining a high score on an environmental assessment. It’s also something that may have Samsung protesting the unfairness of the system after winding up dead last in both the overall total score and environmental score.

In the area of diversity and inclusiveness (including gender-based wage gaps), TSMC scored highest with 9 points, followed by a tie between Intel and Apple with 7 points each and a tie between Samsung Electronics and SK Hynix with 6 points each.

In terms of sustainable management practices, the top score was a three-way time among TSMC, Samsung Electronics, and SK Hynix with 10 points each, followed by Apple with 9 and Intel with 8. One factor contributing to Samsung and SK sharing the top spot was the fact that they both received maximum scores of 3 points for the wage difference between the CEO and workers.

But South Korean companies provide information only on average wages for all workers, rather than the median wage for the lowest-earning 25% of workers as the SDPIs demand. The actual might be lower if the companies complied with the SDPI standard.

On the whole, TSMC received strong ratings both in its total score and in individual areas. South Korean companies were shown to be relatively weak in the area of diversity and inclusiveness, which corresponds to the “governance” part of the ESG framework. Apple enjoyed an advantage in environmental assessments, but its poor overall rating and mediocre environmental rating showed the need for improvements.

Proper assessments of ESG and sustainability require companies to disclose information in a transparent manner.

Apple declined to provide information for four of the 14 assessment indicators. Samsung Electronics failed to furnish information for two, while Intel and SK Hynix omitted details for one each. TSMC, which came out on top in the assessment, disclosed all the requested information.

Comparison of the SDPI-based sustainability performance ratings for the big five companies with the ESG scores shared by Korean and overseas assessment organizations leads to some intriguing findings.

In a 2022 rating of the big five’s ESG performance, the globally recognized US-based assessment organization MSCI (Morgan Stanley Capital International) gave TSMC a rating of AAA, while Intel received an AA, Samsung Electronics and SK Hynix both received an A, and Apple was given a BBB.

This year, MSCI raised Intel’s raising one notch to an AAA. Its decision to rate TSMC and Intel the highest out of the big five also tallies with the SDPI scores, as does its assignment of a relatively low rating to Apple. But while the SDPI-based rating had Samsung Electronics receiving the lowest score, the MSCI’s rating found Apple to rank lowest.

At the same time, differences were also observed in the SDPI and MSCI’s absolute assessments. MSCI assigns a total of seven ratings: AAA (excellent), AA (good), A (favorable), BBB (average), BB (inadequate), B (poor), and CCC (very poor).

TSMC and Intel both received the highest possible rating, while Samsung Electronics and SK Hynix earned favorable ratings. Only Apple was rated as having average performance.

In contrast, the SDPI-based rating had all five of the companies performing in the range of 50 to 70 points out of 100.

Domestically, the Korea Institute of Corporate Governance and Sustainability (KCGS) gave an A rating to Samsung Electronics and a B+ to SK Hynix. In terms of the institution’s seven-point scale, Samsung received the third-highest score (favorable) and SK the fourth-highest (average). This means the KCGS’s rating was closer to the SDPI rating than to MSCI’s.

When it comes to the different ESG and sustainability indicators, it is impossible to reach conclusions about which are more accurate. But one important thing the SDPI ratings show is that even companies that earned strong ESG ratings from renowned assessment institutions can underperform in terms of sustainability.

In addition to the 14 indicators representing sustainability thresholds, HERI’s SDPI research report also includes findings from an assessment of eight “transformative disclosure” indicators that examine whether companies are collecting or managing related performance data.

For these indicators, the SDPI approach may assign “yes” or “no” values based on whether such performance data are collected or managed, or it may simply disclose the data. Assessment findings for the transformative disclosure indicator data — including areas such as workplace harassment, discrimination, union enrollment rates, and collective bargaining coverage — are also to be presented at the 14th Asia Future Forum.

Additionally, Katharina Herzog, CEO of the Austrian ESG assessment and consulting company money:care, will be attending the forum to personally share results from an SDPI assessment conducted on 166 listed companies in 30 countries. Of the 61 indicators used for SDPI, money:care selected 12 in particular, using artificial intelligence (AI) to extract data from information made publicly available by the companies.

The international community continues to release final proposals for standards for the reporting ESG and sustainability data. South Korea is in the midst of formulating a detailed roadmap for gradually making ESG disclosures mandatory starting in 2025. But corporations say they’re not ready and are pushing to delay the implementation of reporting standards. With ESG and sustainability reporting increasingly becoming the norm around the world, Korean companies must swiftly make substantial preparations so that they are becoming of global standards.

“Measuring the sustainability for the global big five IT firms based on SDPI assessments shows the importance of not just looking at the sorts of effort companies are making, but what the actual sustainability standards [indicators] are that companies should be realizing are and seeing how much they are achieving in comparison,” said Yi, the senior research coordinator.

“I look forward to contributing to creating a genuine sustainability reporting system in preparation for Korea making ESG reporting mandatory starting in 2025,” he added.

■What are the Sustainable Development Performance Indicators?

The SDPIs are indices developed by the UNRISD, a UN-affiliated research agency, for assessing sustainability performance. After releasing a beta version in 2022, the research institute plans to complete the final version this month. There are said to be around 4,000 different indices for measuring ESG performance around the world, many of which are tailored to provide assessments that fit the prerogative of companies. For that reason, there’s been plenty of criticism that the systems have become nothing more than a means for ESG-washing. There are concerns that if these problems aren’t ameliorated, corporations won’t properly contribute to achieving the Sustainable Development Goals adopted by the UN on responses to poverty, disease and climate change. The SDPIs were developed to overcome ESG-washing by corporations and elicit real contributions to achieving the SDGs.

By Kwack Jung-soo, senior staff writer at the Hankyoreh Economy and Society Research Institute

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