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A Voluntary Guidance for ESG Rating Agencies is Established

According to Newsis,

Korea issued a new guidance to enhance transparency on the methods and procedures used by credit rating agencies to perform ESG bond certification evaluations. It contains objective ESG scoring methodology and ways to prevent conflicts of interest. The guidance will be implemented starting September after a 3-month grace period. The authorities plan to put it into law by 2025, and until then ESG compliance will be left up to each corporation.

Backed by the Korean government, Korea Exchange (KRX), and Korea Capital Market Institute (KCMI), major ESG Rating Agencies (KCGS, KRESG, SUSTINVEST) came up with a voluntary guidance for ESG rating agencies, said The Financial Services Commission (FSC) on May 24.

ESG evaluation focuses on non-financial information, including environmental, social, and governance factors, helping investors to apply it as part of their analysis process to make an investment decision. However, it is true that there has been a rising concern over the credibility and transparency of ESG scoring process.

First and foremost, investors questioned its credibility because there hasn't been a uniform set of standards for measurement in Korea covering the ESG certification process. When you, as an entrepreneur, receive different ESG scores from different rating agencies, they will give you wrong signals and eventually erode your determination to pursue ESG management.

Worse, when these inconsistent ESG scores are intertwined with other issues, such as possible conflicts of interest among corporations and lack of information about evaluation procedures open to the public, credibility and transparency of the ESG scoring market itself will be undermined, let alone its further growth.

Therefore, major ESG rating agencies in Korea, backed by the government, KRX, and KCMI, made a new set of guidelines for ESG rating agencies as 'voluntary guidelines'. Put differently, the guidance is not meant to regulate specific assessment methods of each rating agency, but to provide exemplary processes and criteria as a guidepost.

They explained that the level of ESG rating requirements in the guidance are lower than those of credit rating, since Korea's ESG rating market is still in its nascent stage.

The guidance states ▲ establishing an internal control system that includes contents such as a compliance monitoring system and preventing conflicts of interest, ▲ disclosing the evaluation methodology and results, ▲ prohibiting unfair acts and bribery against companies subject to evaluation, etc.

Guidance will be operated as a self-regulation by forming an 'ESG evaluation consultative body', joined by not just ESG rating agencies, but FSC, KRX, and KCMI as observers.

Each ESG rating agency will disclose its current status of its compliance with the guidance, while the consultative group (or KRX) will compare and analyze the disclosed date in a regular basis and distribute it as a press release.

An FSC official said, "The guidance will be implemented starting September 1 after a 3-month grace period." and "After implementing it by 2024, we will consider legislating on regulations about entry and certain practices while keeping in touch with the role and operability of the guidance, and related global trends."
Source Text

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Source: Newsis (May 24, 2023)

** This article was translated from Korean.

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