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Entered 2024.02.18 13:11 Modified 2024.02.18 13:12
ESG disclosure guidelines outline
‘Scope 3’ exemption for the first 3 years
Implemented after 2026… There is still great disagreement over the timing
Image created with ChatGPT Scope 3 greenhouse gas emissions disclosure, predicted by companies as the ‘biggest challenge’ regarding ESG (Environment, Social Responsibility, Governance) disclosure scheduled to be introduced from 2026, will be exempted for 3 years after introduction of the system It is a prospect. Scope 3 is the widest standard for calculating greenhouse gas emissions. Direct and indirect greenhouse gas emissions are calculated from the company’s product production process, product use and disposal stages, partners, and distribution networks.
ESG disclosure, ‘Scope 3’ exemption for the first 3 years
According to the financial investment industry on the 18th, the Financial Services Commission plans to announce a draft ESG disclosure system containing these contents as early as next month. The goal of ESG disclosure is to make it possible to compare ESG-related issues that companies have voluntarily disclosed according to different standards in accordance with the disclosure standards. It starts with exchange disclosure for about 240 companies listed on the Korea Stock Exchange (KOSPI) with assets of 2 trillion won or more, and gradually becomes mandatory for all listed companies. Financial authorities are creating domestic disclosure standards together with the business community, accounting industry, and academia based on the ESG disclosure standards of the International Sustainability Standards Board (ISSB).
Financial authorities plan to exempt disclosure of greenhouse gas emissions within the value chain (Scope 3), including partner companies, for the first three years after the introduction of the system. There has been some relaxation compared to the international standard, which excludes disclosure requirements only in the first year of introduction. It appears that the authorities believed that more preparation period was needed in line with the characteristics of the domestic industry, which focuses on manufacturing and has overseas production bases.
Scope 3 encompasses domestic and overseas production bases, product distribution networks, and partner companies. In principle, companies can disclose estimates, but the general consensus among companies is that just measuring and verifying the basic data that will serve as the basis for the estimates will take more than a year. The standard for measuring greenhouse gas emissions is expected to be the international standard GHG Protocol.
Non-major subsidiaries are also expected to be exempt from disclosure
According to sources inside and outside the authorities, domestic ESG disclosure will only give priority to climate disclosure among ESG disclosure areas such as climate, biodiversity, and human rights. In addition, it was decided to leave it up to companies to decide whether to disclose sustainability-related issues.
The goal of mandatory climate disclosure is to disclose how climate factors will affect a company’s financial and performance outlook. If demand for products is expected to increase in a specific region due to climate change or if there are plans to make some changes to the business model, such as increasing eco-friendly businesses, this will be announced.
The authorities plan to allow companies to omit disclosure of expected climate impacts in cases where a company’s financial status or performance has little to do with climate factors. Initially, the policy was to require companies to describe the basis for their decision to omit disclosure, but it has been reported that it has been decided that only the fact of omission needs to be specified. The ESG disclosure standards were decided to be the same as those for companies reporting financial statements. In the case of a controlling company that prepares consolidated financial statements, it must disclose information about itself and its subsidiaries. It has been reported that the financial authorities have decided to have each subsidiary decide on its own whether to include disclosures based on importance. Previously, companies voluntarily chose the reporting scope. In most cases, the information focuses on the parent company, excluding overseas corporations.
Internal carbon prices will also be announced in the future.
The authorities expect companies to include executive compensation policies, including management performance indicators such as ESG performance, in the ESG disclosure form. The policy is to encourage management to focus on ESG in management activities. We also plan to require companies to disclose their ‘internal carbon price’, which is the price they set for the greenhouse gases they emit.
Companies are struggling with this. First of all, the position is that listing executive performance indicators in detail in public disclosure is excessive. Existing domestic companies disclose executive compensation limits in business reports. In most cases, details such as linking specific performance indicators are not disclosed. The general consensus is that disclosing internal carbon prices will not be easy. This is because the price must be set to reflect expectations of how future carbon prices will change. ESG disclosure is expected to be first introduced through exchange disclosure and then gradually expanded to statutory disclosure. If a company makes false ESG-related disclosures, sanctions may be imposed on the basis of violation of the Capital Markets Act. The authorities plan to minimize the level of sanctions in the early stages of introduction to ensure the system is established, but companies believe that clearer and more detailed standards are needed to avoid problems.
The Financial Services Commission plans to provide support for the construction of data infrastructure. It is known that plans are being considered to come up with detailed guidelines and incentive systems prior to introduction.
The timing is key… The business world is ‘after 2029’
The biggest remaining key is the timing of introducing ESG disclosure. The authorities originally planned to make ESG disclosure mandatory in stages, starting with KOSPI-listed companies with assets of more than 2 trillion won in 2025, but postponed it until 2026 at the end of last year. This is due to the fact that the ISSB disclosure standards, which are the standard ESG disclosure standards for each country, were only released in June of last year.
There is a clear difference of opinion regarding the timing of introducing ESG disclosure. The business world is generally in the mood for 2029. This is the year that the European Union (EU) mandates ESG disclosure for companies from outside the EU. This means that until now, separate domestic standards were not applied and time was given to collect and verify ESG-related data and establish a response system.
On the other hand, the financial investment industry, accounting firms, and the legal community are of the position that the sooner the better. Asset management companies that are increasing ESG investment are demanding the rapid introduction of ESG disclosure so that they can use it as an investment indicator. Accounting firms and the legal community are also advocating for mandatory ESG disclosure and the introduction of an external certification system for ESG disclosure. This is because the ESG disclosure audit and certification business can become a new source of growth for these industries. The government plans to later confirm the specific timing of introducing ESG disclosure through consultation with related industries and relevant ministries. On the 14th, Vice Chairman Kim So-young of the Financial Services Commission said, “We will introduce ESG disclosure in stages, considering the preparation status of companies,” adding, “We will introduce it first at large listed companies affected by overseas regulations and the global capital market, and then gradually introduce it to target companies taking into account domestic market conditions.” “We plan to increase the number of companies,” he said.
Reporter Seon Han-gyeol/Kim Ik-hwan always@hankyung.com
2024-02-18 04:11:30
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