On 14 January 2021, the Financial Services Commission (FSC) announced a series of measures to improve corporate disclosure rules in South Korea, including initiatives to promote environmental, social and governance (ESG) and responsible investing (the "Measures"). The Measures include the implementation of mandatory ESG disclosures for listed companies and potential changes to the Korean Stewardship Code to strengthen fiduciary duties related to ESG matters. In a press release, the FSC recognizes the "growing significance of ESG factors and responsible investing" and concludes that "it is necessary to set up an appropriate regulatory environment."

This Legal Update discusses these new Measures, the sustainable finance regulatory environment in South Korea more broadly, and the implications for foreign investors in South Korea. We discuss the global evolution of ESG for asset managers and investors and provide additional practical advice in our comprehensive article, "Private Equity for the Public Interest: The Evolution of ESG and Considerations for Asset Managers and Investors".

Sustainable Finance in South Korea

The FSC's announcement of the Measures builds upon significant sustainable finance developments in South Korea last year. In June 2020, the Korea Exchange (KRX) launched a platform dedicated to Socially Responsible Investment (SRI) Bonds to promote green, sustainability and social bonds. Issuers can register bonds on the platform by demonstrating compliance with international standards (e.g., International Capital Market Association (ICMA)'s Green Bond Principles or Climate Bonds Initiative (CBI)'s Climate Bonds Standard) and completing a review process. As of January 2021, there are approximately 550 products registered on the platform. KRX is also a member of the UN's Sustainable Stock Exchanges Initiative and, as noted below, will issue guidance on ESG disclosures in the future.

In July 2020, the Ministry of Economy and Finance announced the "Korean New Deal", an ambitious national development strategy to support recovery from the COVID-19 crisis focused on digital transformation, improving the social safety net, and a "Green New Deal" to promote the transition to a low-carbon economy. The Korean New Deal provides for approximately US$140 billion of investment by 2025, including funding for green transition of infrastructure (e.g., turning public facilities into zero-energy buildings), the promotion of low-carbon and decentralized energy and innovation in green industry.

Regulators in South Korea continued to progress sustainable finance market development activities in August 2020, when the FSC convened the first meeting of its Green Finance Task Force. The Task Force will work to develop the green finance regulatory environment in South Korea by establishing a monitoring system for climate-related financial risks, promoting the integration of environmental risks into investment decisions, combatting greenwashing and promoting membership in international networks such as the Network of Central Banks and Supervisors for Greening the Greening System and Task Force on Climate-related Disclosures (TCFD).

Mandatory ESG Disclosures

According to the Measures, KRX will issue guidance on ESG disclosures to promote voluntary disclosure by listed companies until 2025. KRX will then phase in mandatory ESG disclosures (by reference to company size) until 2030, when all KOSPI-listed companies will be required to disclose ESG information. The Measures highlight the importance of governance disclosures in particular, noting that covered entities will be required to report information about codes of conduct and conflict of interest prevention, controls and analytic capabilities.

The new Measures track global trends toward the implementation of mandatory ESG-related disclosures, including significant commitments to implement the Recommendations of the TCFD in two of the world's leading financial centres, the United Kingdom and Hong Kong. For more information about Hong Kong's plans to implement TCFD-aligned climate-related disclosures by 2025, please see our Legal Update here.

For foreign investors, the implementation of mandatory ESG disclosures for listed companies should increase the amount of data relevant to sustainable investment decisions in South Korea and could therefore make the market more attractive as interest in sustainable investing grows globally. The effectiveness of this regime, however, will depend on the quality of disclosures. As the FSC and KRX release more details of South Korea's mandatory ESG disclosure regime, investors should take note of any related enforcement mechanisms and incentives, which can be critical to ensuring compliance.

Fiduciary Duties and ESG

The Measures also provide for potential changes to the Korea Stewardship Code to strengthen fiduciary duties related to ESG. The Stewardship Code consists of a voluntary set of seven principles and guidelines for institutional investors in listed companies to fulfil their fiduciary duties as stewards managing assets entrusted to them by others. As of January 2021, 137 institutional investors have adopted the Stewardship Code, including 46 asset managers and 43 private equity fund managers.

While changes to Korea's voluntary Stewardship Code may not directly impact asset managers or other institutional investors outside of Korea that have not adopted the Stewardship Code, the FSC's attention to fiduciary duties is noteworthy as directors and officers increasingly struggle to resolve the tension between traditional notions of shareholder primacy and more recent requirements to consider ESG-related factors in decision making processes. Any guidance from regulators in this respect can serve as a benchmark for institutional investors seeking to improve governance processes and integrate ESG-related factors into their investment processes. Further, limited partners and other fund investors could look to a Korean asset manager's adoption of a revised Stewardship Code as evidence of good ESG-related governance.

Additional Disclosure Measures

In addition to the ESG-focused initiatives discussed above, the Measures seek to improve corporate disclosures more broadly. The Financial Supervisory Service will improve its Data Analysis, Retrieval and Transfer (DART) System and Korean regulators will work to strengthen disclosure duties for tech companies and foreign holding companies listed on KRX. The Measures also provide for an overhaul of the sanction regime for noncompliance with the disclosure rules. All investors should benefit from these improvements to the DART system and enhanced disclosure requirements for listed tech and foreign holding companies.

Conclusion

While the Measures will improve South Korea's disclosure regime and promote ESG and responsible investing practices related to listed companies, it remains to be seen whether the FSC or other regulators in South Korea will apply similar principles to unlisted companies. This approach is taking hold among regulators elsewhere in Asia, as the Monetary Authority of Singapore recently issued guidelines for asset managers, banks and insurers asking these licensed entities to disclose information related to their environmental risk management practices, whether or not they are publicly traded. The Securities and Futures Commission in Hong Kong recently consulted on similar guidelines that would require certain asset managers to make specific disclosures of climate-related information. For more information about these developments, please see our Legal Updates here and here, respectively.