Sustainability in Korea: Performance & Trends 2013

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Results of the 6th annual Korean ESG review: sustainable companies continue to outperform the market

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Sustainability in Korea: Performance & Trends 2013

  1. 1. Corporate sustainability korea 2013corporate sustainability2013korea 6th annual esg review strategic sustainability corporate governance energy
  2. 2. Disclaimer About SolAbility SolAbility is a sustainability service specialist based in Korea, providing sustainable management advice to corporate clients and advanced sustainable investment research covering Pan-Asian equities for institutional investors. SolAbility’s corporate clients have been recognised as sustainability leaders in their respective business fields by various global corporate sustainability benchmarks and indexes, including the Dow Jones World Sustainability Index (DJSI) and the FTSE4Good Index. Three companies who have implemented sustainability strategies and management systems developed and designed by SolAbility are recognised as global super-sector leaders by the DJSI (most sustainable company globally in their respective industry). SolAbility 802 Meritwin 856 Ilsan, South Korea www.solability.com contact@solability.com Disclaimer No warranty This publication is derived from sources believed to be accurate and reliable, but neither its accuracy nor completeness is guaranteed. The material and information in this publication are provided "as is" and without warranties of any kind, either expressed or implied. SolAbility disclaims all warranties, expressed or implied, including, but not limited to, implied warranties of merchantability and fitness for a particular purpose. Any opinions and views in this publication reflect the current judgment of the authors and may change without notice. It is each readers responsibility to evaluate the accuracy, completeness and usefulness of any opinions, advice, services or other information provided in this publication. Limitation of liability All information contained in this publication is distributed with the understanding that the authors, publishers and distributors are not rendering legal, accounting or other professional advice or opinions on specific facts or matters and accordingly assume no liability whatsoever in connection with its use. In no event shall SolAbility be liable for any direct, indirect, special, incidental or consequential damages arising out of the use of any opinion or information expressly or implicitly contained in this publication. Copyright Unless otherwise noted, text, images and layout of this publication are the exclusive property of SolAbility. Republication is welcome. No Offer The information and opinions contained in this publication constitutes neither a solicitation, nor a recommendation, nor an offer to buy or sell investment instruments or other services, or to engage in any other kind of transaction. The information described in this publication is not directed to persons in any jurisdiction where the provision of such information would run counter to local laws and regulation. February 2013page 2 corporate sustainability review korea 2013
  3. 3. Table of contents Sustainability trends and performance: overview 4 Financial returns: distinctive outperformance 6 The Chaebol issues: “corporate governance” 7 Strategic sustainability: sustainable business development 10 Energy: energy security & corporate response 13 Sector comparisons 17page 3 corporate sustainability review korea 2013
  4. 4. Sustainability trends 2013 Increasing management awareness for business value Changing perception: from compliance to business value Number of CSR report by KOSPI 100 companies 10 years ago, a majority of Korean companies100 would not have know how to define corporate 90 sustainability, In the best case, they would have 80 referred to their social contributions and internal (ethical) Codes of behaviour. Only a handful of 70 companies published sustainability-related 60 performance and activities. 50 Much has changed since then. 40 30 Increasing management awareness 20 Virtually all of the large Korean companies now 10 publish dedicated sustainability reports (and some 0 companies have already moved on to integrated 2007 2008 2009 2010 2011 2012 financial-sustainability reports in the meantime). Percentage of KOSPI 100 companies disclosing sustainability However, reporting is now considered a minimum, information & performance data, 2007-2012 and does not necessarily reflect the real sustainability. The increase of the average sustainability performance of 19% since 2007 has Sustainability Level Best Average been achieved through improvements in90 management systems and performance have across most relevant sustainability criteria,80 including strategic sustainable product development, reflecting increased awareness for70 the intangible business success factors.60 Late starters, fast catching up50 However, one has to keep in mind that most Korean companies, partly due to Korean40 government policies, partly due to culture, started late and at a lower level compared to globally30 leading companies. Initial improvements are easier 2007 2008 2009 2010 2011 2012 to achieve. Nevertheless, the pace of implementing sustainability management has Evolvement of the average sustainability performance of Koran companies, 2007-2012: 19% increased (Source: SolAbility ESG research) been impressive, reflected in three Korean companies making the list of “most sustainable company” in their respective business fields according the DJSI in 2012. The turning point: financial crises 2008/2009 The big turning point for the recognition of the business value of sustainability management was the collapse of the financial system geared to maximise short-term gains with a complete neglect of long-term profitability. In 2009, the Korean government defined a new “National Green Growth Policy”. While there are controversies to what extend the policy is truly green, there is a clear focus on increased resource efficiency and green technologies, and identifies a set of core technologies that the country wants to achieve leadership status in, including energy efficiency, smart applications, and solar energy. page 4 corporate sustainability korea 2013
  5. 5. Sustainability trends 2013Green growth, resource efficiencyContinued improvements, acceleratedsince 2009Strategic sustainable improved, governance Economic Sustainability Best Averagestagnating 90A fairly unique and interesting characteristic of 80Korea is the high level of interaction betweengovernment and the industry. Since the officialgreen growth policy has been defined, sustainable 70business opportunities have been pursued activelyby many companies. In addition to improved 60strategic sustainability, risk management systemshave been improved at many companies. 50However, the close relationship betweengovernment and economic entities also have 40negative aspects, reflected in stagnant corporategovernance practices across where true checks 30 2007 2008 2009 2010 2011 2012and balance remains non-existent. Evolvement of the average economic sustainability increased only 10.3% from 2007-2012. (Source: SolAbility ESG research)Energy efficiency, climate risk managementAvailability of cheap energy was considered a Bestcornerstone for successful development in Korea. Environmental Sustainability Average 90Due to low taxes on energy and cross-subsidisingof industrial user through private consumers, 80energy efficiency was a minor concern for mostcompanies until the rise in global energy prices 70over recent years, leading to low energy efficiencycompared to similar economies. However, energy 60measuring, fuel replacement, and process-relatedenergy efficiency improvement measurements 50have and are being addressed vigorously acrossall industry sectors as a result of rising energy cost. 40In addition, new regulation requires all companiesof a certain seize to establish and report on GHGemissions. What gest measured gets done – the 30 2007 2008 2009 2010 2011 2012fundaments for improved energy efficiency (andtherefore lower operational costs) are laid in most Environmental management capabilities have increased 27.5% fromcompanies. 2007-2012. (Source: SolAbility ESG research) Best Social SustainabilityElaborate HR management, but low awareness for 90 Averagesupply chain risks & costLarge Korean companies have gone far in 80implementing elaborate HR developmentprograms and employee incentive systems 70However, the same cannot be said about thesmaller second-tier companies that provide the 60bulk of jobs, effectively leading to a two-classsociety. This might be a result of the previous lack 50of attention paid to supply chain management.Risks and opportunities in the supply chain beyond 40procurement cost have insufficiently beenevaluated and managed up to this point in time. 30Leading companies have only recently started to 2007 2008 2009 2010 2011 2012implement non-financial supply chain Social sustainability performance have increased 230.2 % from 2007-management measurements. 2012. (Source: SolAbility ESG research) corporate sustainability korea 2013 page 5
  6. 6. The business value: Sustainable management yields higher returns Long-term investment value ESG performance: 1.1.2012-31.12.2012 2012 YoY: 2.7% gain against the market120% The most sustainable companies stock value115% outperformed the market by 2.7% in 2012. a110% somewhat disappointing performance against 108.92% sustainable out-performance reached in previous 106.22%105% years: Since the inception of SolAbilitys ESG100% portfolio in 2007, the outperformance was never 99.74% below 5% against the market. The lower 95% performance in 2012 is attributed to the high market fluctuation, investor alienation in light of 90% unclear future market developments and the on- 85% going detachment of the financial markets and the real economy. 80% 1/2012 4/2012 7/2012 10/2012 DJSI Korea KRX SRI KOSPI SolA 50 Long-term investment value: significant Year-on-year performance (2012): 2.7% outperformance against the market (data sources: KRX, DJSI, SolAbility) outperformance Sustainable investment, by definition, is geared towards long-term investment and performance.120% ESG performance: 1.2011-12.2012 Sort-term returns are modestly higher than the market (2.7% in one year, 6% over two years).110% However, the long-term performance of the SolA 50 (the 50 most sustainable companies in Korea100% 103.14% according to SolAbility ESG research) shows a 96.47% clear and significantly outperformance, underlying 90% the value of sustainable investment value for 85.41% investors with a long-term perspective. 80% ESG does not equal ESG 70% Unfortunately, ESG does not equal ESG (or SRI). While companies have made significant progress 60% 1/2011 7/2011 1/2012 7/2012 in implementing sustainability, most ESG research DJSI Korea KRX SRI KOSPI SolA 50 still builds have stagnated and are based on Tw-year performance (2011-12): 6% outperformance against the simplified indicators (reporting, certificates, market (data sources: KRX, DJSI, SolAbility) policies) as proxy while neglecting sustainability performance and the strategic sustainability ESG performance: 1.2009-12.2012 direction (sustainability affects the bottom-line:350% cost, customer perception, revenue generation). The increase in sustainability-related reporting and300% 283% compliance driven formulation of policies to satisfy250% rating agencies makes it nearly impossible to identify outstanding sustainable management200% capabilities and hence sustainable investment 187% 173% value with such methodologies.150% 154% The SolA 50 not outperforms the market by a large100% margin, but also other ESG/SRI indices (DJSI Korea, KRX SRI).50% For more information on SolAbilitys ESG 2.0 methodology, please follow this link. 0% 12/2008 6/2009 12/2009 6/2010 12/2010 6/2011 12/2011 6/2012 12/2012 DJSI Korea KRX SRI KOSPI SolA 50 Long-term performance: significant outperformance against the market and other SRI indices(data sources: KRX, DJSI, SolAbility) page 6 corporate sustainability korea 2013
  7. 7. “corporate governance” the chaebols & the governance question
  8. 8. No development in sight: The Chaebol governance issue Corporate Governance Best Average The formal Korean governance100 Due to legal requirements, Korean companies 90 oday comply with formal governance “best 80 practices”: they have “independent” boards 70 (majority of non-executive on the Board of Directors), separated CEO-Chairman functions, 60 remuneration and Director selection committees, 50 audit committees composed of independent 40 Directors, and in some cases even ethical or 30 sustainability committees. The problem is that the 20 Boards do not have any real power. Being a Board member of a Korean company is not considered a 10 role that controls and checks the management; it 0 is a role of honour after a long life in academics, 2007 2008 2009 2010 2011 2012 government positions, or in jurisdiction. And the Formal Corporate Governance structures has improved by 14% bigger the company, the bigger the honour. No from 2007-2012 (Source: SolAbility ESG research) wonder that Boards approve more than 99% of management propositions. And for the unlikely Ownership structure Best case that they shouldn’t, the Chaebol structure Average100 ensures that a critical Director can be fired 90 anytime. Which is probably why there never has been any critical independent Director in the 80 history of Korean conglomerates to this date. 70 60 The Chaebol structure 50 History and culture have lead to form of corporate 40 organisation unique that it received its own name 30 (“Chaebol”) and a dedicated Wikipedia page. 20 The word “Chaebol” is composed of “Chae” 10 (meaning wealth, or property) and “pol” (meaning clan, or family), which would suggest that 0 2007 2008 2009 2010 2011 2012 Chaebols are family-owned enterprises. They’re not. They are family-controlled. Average corporate control has been stagnant over the years at a low level (Source: SolAbility ESG research) Chaebols are characterised by an elaborate structure whereby different companies of the Best conglomerate own parts of other group Management transparency100 Average companies. This structure can be circular, (whereby each company owns a share in another90 group company, ending in a circle), defined by80 cross-ownership (whereby all companies own parts70 of other group companies in a net-like structure),60 or in a top-down circle (companies organised in a50 formal holding structure, whereby holding subsidiaries control the holding company). The aim40 of this structure is to guarantee absolute control30 over all conglomerate companies to a small group20 of minority shareholders, normally the heirs of the10 company founder. In other words: Chaebol are 0 structured as kingdoms with the aim of keeping the 2007 2008 2009 2010 2011 2012 power within the dynasty, and passing it on to the heirs. Average governance transparency remains low, while top companies increased transparency. However, executive compensation disclosure remains a taboo in Korean culture page 8 corporate sustainability korea 2013
  9. 9. Formal governance and real governanceUnpredictable risks remain Real FormalChaebol issues Company governance governanceEmpiric evidence from Europe and the US suggest rank rankthat family-run businesses are more successful on KT 1 1 Daum Communication 3 4the long-term than listed companies: family POSCO 4 17management or ownership is not necessarily a Kookmin Bank 6 23negative thing. NHN 7 12However, power tends to corrupt human beings. KT&G 19 65Of Koreas 10 major conglomerates, 4 chairmen Seoul Semiconductor 24 76have been sentenced to prison terms for illegal Yuhan Corporation 32 79 Korea Exchange Bank 35 57financial transactions and shady business practices Korea Gas Corporation 39 56between group companies to increase family AMOREPACIFIC 42 112control, miss-use of company assets, creating Daewoo Shipbuilding 44 60secret slush funds to influence (bribe) officials and Kumho Tire 51 82prosecutors, and illegally diverting company assets KEPCO 66 28into their own pockets. They all have been Woori Financial Group 68 111pardoned, or their sentences overturned. Daewoo Construction 73 80 Hana Financial Group 74 117This creates two main national problems: Hyundai Steel 83 186 • A two-class legal systems, whereby the have’s Hankook Tire 85 20 are treated differently then the no-have’s Shinhan Financial Group 86 79 • According to surveys, the lack of real Hanjin Shipping 87 145 LG Holdings 96 129 governance is the single biggest barrier to Hanjin Shipping Holdings 98 61 increased foreign direct investment in Korea CJ Corporation 99 126 OCI Chemical Company 100 210Investor perspective LG Chem 101 159 SK Hynix 104 137 This structure that gives near absolute power to Doosan Corporation 105 91single individuals leads to certain risks for investors LG Display 106 18in these companies: Korea Air 108 172 • a constant (and not foreseeable risk) of GS Holdings 115 118 incidents/scandals that might affect the GS E&C 126 93 LG INNOTEK 130 49 company value and continuity Samsung Life Insurance 131 162 • risk of sudden restructuring of companies (e.g. Kumho Petrochemical 136 74 moving a division from one company to STX Corporation 143 43 another without proper compensation), shady SK Telecom 146 54 transaction between group companies Doosan Infracore 147 194 negatively affecting the value of one of the Hyundai Heavy Industry 151 87 Samsung Techwin 153 82 companies LG Electronics 155 85 • risk of continued feuds between family LS Corporation 157 174 members (heirs) over control of the Hanjin Heavy Industry 163 134 conglomerate, making strategic decisions Samsung Heavy industry 165 126 impossible Samsung Electro-Mechanics 172 84 Samsung C & T 173 165 • Risk of discontinuity: next-generation leaders Samsung Electronics 180 119 are chosen based on birth, not based on merit. LG Household & Health Care 183 142 If they do not possess the foresight required to Samsung SDI 188 75 steer a company, the company is in risk of Doosan Heavy Industry 191 109 loosing its edge SK Holdings 197 134 Hyundai Construction 202 112Given the level or normality of these structures, Kia Motors 206 105and the lack of investment alternatives (the only Samsung Fine Chemicals 209 172exceptions to Chaebol structure are former state- Hyundai Motors 211 155enterprises such as KT, POSCO, etc.), Korean Difference between formal governance (excluding controlinvestors generally are willing to accept those risks. structure and governance scandals) and real governance for selected Korean companies corporate sustainability korea 2013 page 9
  10. 10. strategic sustainability green growth: status of integrating sustainability
  11. 11. Investing in the future Pursuing sustainable business opportunities Sustainability management & business development Stratgic sustainbaility Best Average The classic approach to sustainability/responsibility100 corporate development can generally be divided90 in 4 stages of evolvement: do some good80 (distribute some profits through charitable donations), do no bad (implement systems that70 prevent corruption and major pollution), control60 costs (implementing systems that reduce50 operation cost, e.g. through resource intensity40 reduction), and finally, make money form doing30 good (i.e. investing in new business lines in line with sustainability trends). Korean companies have by20 and large followed the same path, albeit – due to10 a later start - at a faster pace. 0 Sustainable management integration has 2007 2008 2009 2010 2011 2012 increased by 25% over the period of 2007-2012, Development of strategic sustainability management due to better structure and assignment of performance in Korea, 2007-2012 (Source: SolAbility ESG research) responsibility for sustainability management, better definition of performance measuring, and Green growth strategy Best increased R&D and investment in sustainable Average100 business opportunities. However, there is currently90 no Korean company that has a truly and fully integrated sustainability management80 performance system that would integrate70 sustainability KPIs in financial performance60 measuring.50 Sustainability management performance is not40 only about protecting the reputation, maintaining customer and stakeholder trust, and controlling30 operational cost. Sustainable corporate20 development and sustained business success also10 involves identifying and actively pursuing new 0 business opportunities, i.e. incorporating 2007 2008 2009 2010 2011 2012 sustainability not only in management systems, but Development of pursuing green business opportunities in Korean in strategic business development decision companies, 2007-2012 (Source: SolAbility ESG research) making. Successful implementation of sustainable business development strategy beyond reputation protection and cost control requires 2 main stages: • Identification of future trends, risks, and opportunities arising from those risks • Allocating adequate resources and making the right investments, taking into consideration competitor behaviour and market trends page 11 corporate sustainability korea 2013
  12. 12. From fast adaption to technology leadershipIncreasing allocation for R&DGreen growth and accelerating R&DFollowing the governments announcement for R&D spending (% of GDP)national green growth strategy in 2009, Koreanbusinesses have started to explore green business 4growth opportunities in their respective fields (or 3.5beyond), namely related to solar energy, Korea 3electricity storage (batteries), water treatment, as OECDwell as pharmaceutics and bio-engineering. 2.5 JapanHowever, blindly following and copying others (i.e. 2paying insufficient consideration to changing Finland 1.5regulations, competitor moves and market tends) USAcan lead to over-capacity in the market. For 1 Germanyexample, nearly all large Korean companies have 0.5set up solar PV business lines (manufacturing ofsolar panels) over the past 5 years as a first step 0 2000 2001 2002 2003 2004 2005 2006 2007 2008towards green business just like everybody else.The resulting over-capacity lead to diminishing Spending on R&D in Korea, 2000-2008 (latest available data;revenues and profits; negative experiences that source: World Bank)could affect perception of the viability of futureinvestments. R&D personal (per 1 million inhabitants)Large companies like Samsung and LG haveearmarked significant investments for green 9000facilities as well as sustainability-related R&D, and 8000car makers have announced increased resource 7000allocation for R&D (albeit form a level below Koreaglobal lading companies)– presenting moves in 6000 OECDthe right direction. 5000 USAKorea finds itself at a crossroad: economic 4000 Germanydevelopment and relative wealth have ben 3000 Japanachieved on the back of the combination of price 2000competitiveness, quality, and the ability to adapt Finland(or copy) new trends. However, cheaper and 1000technically fast advancing nations are pushing 0 2000 2001 2002 2003 2004 2005 2006 2007 2008from behind (China), requiring Korea to become atrue technology leader in the face of cheaper Employees active in R&D in Korea, 2000-2008 (latest availablecompetition in order to sustain future growth. data; source: World Bank)International comparison shows that Korea hassurpassed the OECD average in terms of R&Dspending and manpower allocation in the pastdecade, and is approaching the levels of high-tech exporters such as Finland and Japan.Future success is a combination of many factors,including innovation, quality, pricecompetitiveness, governance, education, andwork ethics. The government strategic directionsetting in the 70’s has laid the foundation for thesuccess of Korean companies today inconstruction, electronic appliances, car & shipbuilding, and other sectors. With the blend of anew national strategic industrial direction,combined with increasing R&D allocation(financial, educational, and manpower), the basisfor sustained growth are laid. corporate sustainability korea 2013 page 12
  13. 13. energy:resource efficiency& supply roadmap corporate efficiency management “low carbon green growth”… ?
  14. 14. High exposure to market fluctuations & oil price increase97% of Korea’s energy needs are importedHigh reliance of energy imports National energy intensity (kg TOE/U$ 1000 GDP)Without energy, an industrialised society cannot 250function. As energy is – predominantly, to this day –a commodity, the cost is subject to fluctuations. 200Why energy is particular importance in the futuredevelopment of Korea has three main reasons: 150• Korea has no natural energy resources of its own to speak of. More than 97% of Korea’s energy 100 consumption depends on imports• While energy efficiency has been increasing, the 50 national energy intensity is 30% above the average of OECD countries, and close to 60% 0 higher compared to leading industrial nations 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011• Energy imports account for 12% of Koreas GDP Korea OECD Japan Germany (2010), up from the long-term average of 5% National energy efficiency (energy consumption per GDP), 2001- 2011: Korea uses 30% more energy than OECD average, and 60% more than leading countries(source: World Bank)Lack of incentives leading to low efficiencyThe high energy intensity of Koreas economy is Primary energydue to two main factors: Nuclear, Hydro, 3%• Compared to most other industrialised countries, 12% Korea has a higher activities in energy intensive heavy industries (steel, shipbuilding, petro- Antracit, 2% chemicals, etc.) Oil, 40%• Low energy cost as a pillar of development since the early 70s, with low tax on electricity and primary energy, regressive tariff systems (the higher the consumption, the lower the per-unit price), and cross-subsidising of the industry through private consumers Bituminous (coal- based), 27%Low efficiency, increasing cost: implications LNG, 16%The combination of energy intensive industries, Primary energy sources: predominately based on fossil energy(comparable) low energy efficiency, and low (coal, gas, oil account for more than 80% of primary energy).taxes has several implications for the Korean (Source: Korea Energy Institute)economy and Koran corporations: Energy import cost Energy usage & import cost• Vulnerability to oil price increases Energy usage per capita 6 3000• Due to the low energy tax levels, the government does not have much levee on prices in case of a 5 2500 global price shock (taxes cannot be lowered to absorb a shock as compared to other countries 4 2000 with higher energy tax)• Decreasing competitiveness if energy efficiency 3 1500 is not addressed in face of rising energy prices• The proportion of the GDP spent on energy 2 1000 imports could rise to unhealthy levels in the near 1 500 futureThe combination of these factors require Korea – 0 0and Korean company’s – to take steps to increase 1980 1985 1990 1995 2000 2005 2010energy efficiency and dependence on Energy usage has increased by 500% since 1980, while energycommodity market fluctuations. import cost per capita has increased by more than 2000%, reaching U$ 2500 per capita. (source: Korea Energy Institute) corporate sustainability korea 2013 page 14
  15. 15. Corporate resource efficiency Strongly improved, but significant further savings potential Corporate resource efficiency performance Environmental managememyt systems Best Average Regulations100 Environmental requirements to prevent major 90 pollution in Korea have steadily been tightened 80 over the years. In addition, Korea has the highest 70 number of ISO 14001 certifications issues after Japan. However, actual management of 60 resources and resource efficiency is a fairly new 50 concept in Korea (other than in the real energy 40 intensive industry sectors where energy usage was 30 a significant cost factor regardless of the global 20 energy m prices, e.g. steel processing). 10 0 GHG inventory requirement introduction 2007 2008 2009 2010 2011 2012 Following the “low carbon green growth Development of environmental management performance in declaration”, Korea introduced new legislation, Korea, 2007-2012 (Source: SolAbility ESG research) requiring all companies of a certain size to report GHG inventory. This requirement led to all large companies (and many smaller companies) to Best Climate change risk management Average establishing a GHG inventory (which is not that big100 an investment – calculating emissions from energy 90 bills). Many companies have gone further than 80 that by implementing an infrastructure to regularly 70 collect and centrally register environmental performance (energy, GHG emissions, water, 60 waste, etc.) through IT-based environmental 50 accounting systems. 40 30 Corporate efficiency improvements 20 This systems have allowed many companies to 10 actually track internal performance, compare 0 different business units, and identify savings 2007 2008 2009 2010 2011 2012 potential. What gets measured gets done. Development of climate change risk management performance Energy resources have been substituted (oil to gas, in Korea, 2007-2012: improved by more than 100% (Source: SolAbility ESG research) district heat systems), measurements have been taken to reduce cooling in summer and heating in Environmental efficiency Best Average winter (by adjusting temperature, insulation), and100 active steps are being taken to reduce energy90 usage in processes.80 As a result, a large majority of Korean companies70 have significantly improved internal energy efficiency (as measured by energy usage per60 output). However, the total usage has still be rising50 in many cases due to increased production40 nullified the efficiency in absolute terms. In30 combination with increased private energy20 consumption, Koreas energy usage and GHG emission have risen in absolute (total) numbers in10 the past years - despite remarkable efforts and 0 public education campaigns. 2007 2008 2009 2010 2011 2012 However, performance data suggest that there is Industrial resource efficiency has improved by 23% from 2007- further significant savings potential. 2012.(Source: SolAbility ESG research) page 15 corporate sustainability korea 2013
  16. 16. Lack of a bold national energy visionThreat to long-term competitiveness?National energy policy:“Low carbon green growth”?The Korean “low carbon green growth strategy” Oil & gas Commercia Public l , 8% services, 2%(formulated before Fukushima) lists severalmeasurements and future core energy Residential, 11% Industry,technologies (including solar PV, efficiency 59%management, batteries) to improve energysecurity. However, the main strategy is: going Transport,nuclear. Nuclear power output is scheduled to 19%increase from currently 33% to 49% by 2024, with 11new nuclear power plants planned atop theexisting 23 reactors – despite a series of recentemergency shut downs, and public safetyperception having fallen from 70% to less then 35% Industrialsince Fukushima. In addition, new coal and gas- rawfired generation capacity are also being, with 8 materials,new coal-fired power plants approved in February 22%2013 (capacity: 2740 MW) . Oil and gas consumption: industrial, commercial, and for rawForm a conservative point of view emphasising materials (petrochemical industry).)(Source: Korea Energy Institute)energy security, such a policy would have seemedseem straightforward in the past. However, there Electricityare several problems with this strategy: Public services, 6%• Safety concerns related to nuclear generation, waste treatment, and waste disposal Industry,• Building energy supply on non-renewables 51% (uranium, coal, LNG) does not ease Korea’s Commercia dependence on energy imports and therefore l , 28% global energy price fluctuations. Considering that energy prices are forecasted to increase further, this strategy does not sufficiently address cost aspects• The high capital investment required will not allow sufficient investments in alternativesAn interesting aspect is also the absolute absence Residential, Transport, 14% 0%of wind (and tidal) energy in the “low carbongreen growth” strategy, reflected in low-key Electricity users in Korea: predominantly industrial and commercial (i.e. highest savings potential)(Source: Korea Energyrelated industrial activities & investment, as well as Institute)being marginal in the plans of the national electricutility (KEPCO) - while common sense would Energy import cost as % of GDP scenariossuggest that the Korean industry (electric 20%manufacturing, off-shore rig building, construction) 18%would be predestined to capitalise on the wind 16%energy boom. Combined with the focus on 14%nuclear and fossil electricity generation, it is not 12%difficult to understand why NGOs do not consider 10%the strategy as actually green. 8%Energy consumption data shows that by far the 6%biggest part is consumed by the industry and 4%commercial sectors. The industry therefore has byfar the largest savings potential, which is addressed 2%only vaguely in the policy documents. 0% 1980 1985 1990 1995 2000 2005 2010 2015The lack of vision beyond conventional thinking in 4% GDP growth 2% GDP growththe strategy could lead to further energy import Energy import cost could reach more than 20% of GDP by 2020,cost increase, threatening national with energy prices increasing in line with 5-year average (Source:competitiveness in the long run. Korea Energy Institute; future calculation: SolAbility)) corporate sustainability korea 2013 page 16
  17. 17. sector overviews
  18. 18. Sector comparison:Overall sustainability & management sustainabilityThe telecoms sector has the highest average Average Bestsustainability performance amongst the 13economic sectors. However, the communications Telecomssector contains a limited number of largecompanies (including KT and SK Telecom which Utilitiesare considered globally leading companies),somewhat biasing the performance. Utility Electronicscompanies, due to their business nature, have a Transport & logisticshigh exposure to sustainability risks, and consist to aof many formerly state-controlled companies that Financialsgenerally speaking have higher governance andsocial standards than purely private companies. Energy & chemicalsThe electronics sector, with its international (global) Constructionexposure, was one of the driving forces ofimplementing sustainability management. Pharma & cosmeticsSamsung SDI was the first Korean company thatwas selected to the DJSI World Index back in 2003 Industrials(the 2012 DJSI World lists 17 Korean companies, Consumer servicesthree of which enjoy “super-sector leader” status).On the opposite side of the spectrum, sectors that Metalsare dominated by mid-sized companies cateringto the domestic market (little or limited overseas Consumer goodssales) are slow in picking up and truly Holdings & tradingimplementing sustainability management. Holdingsand trading companies represent the tail end of 0 10 20 30 40 50 60 70 80 90the sustainability performance.The financial industry score the highest average Average Besteconomic scores, mostly to higher developed riskmanagement systems due to the nature of their Financialsbusiness. It is also noteworthy that no Korean bankcame into serious trouble after the financial crises Utilities2008/2009, which might partly be explained byregulation requiring a clear separation of Telecomsinvestment banking and core banking business. Consumer servicesWhile ethical management systems and policieshave been refined across all companies, and the Electronicscorporate culture of exchanging amenities in Transport & logisticsfavour of contracts have been tackled at thelower employee levels, the same cannot be said Pharma & cosmeticsfor top management levels: many of the lowerperforming sectors are still affected by price Consumer goodsagreements and bid rigging (construction, Constructionchemicals, electronics, pharma,…).The difference between companies with Energy & chemicalsinternational exposure and domestic marketcaters is particular obvious in the metals sector – Industrialsthat show the highest single performance with the Holdings & tradinglowest average at the same time. Metals 0 10 20 30 40 50 60 70 80 90 corporate sustainability korea 2013 page 18
  19. 19. Sector comparison: Environmental & social sustainability The utility telecoms and electronics sector show Average Best the best average environmental sustainability performance, with an electronics company Utilities showing the most advanced single environmental Telecoms management and performance score. At the far end, sectors that have traditionally been Transport & logistics driven by compliance to regulations rather than the business value show the worst average Electronics performance. The low average performance inEnergy & chemicals these sectors suggest a significant cost savings potential for many of these companies. Construction A challenge merely addressed by most Korean Industrials companies – even the leading companies - is water. Korea has water resources and sufficient Holdings & trading annual rainfall to replenish resources, but the annual withdrawal rate (the amount of water used Metals for human activities – private, agricultural, and Consumer goods economic) of available water resources is higher than 40%. According to the UNEP definition, thisPharma & cosmetics makes Korea a country that is in serious “water- stress”. However, the cost of water is marginal, Financials and there is no danger of an imminent water Consumer services scarcity, which has lead to limited willingness to improve process efficiency and water usage 0 10 20 30 40 50 60 70 80 90 beyond legal requirements. Average Best Average social sustainability performance is lead by communications, utilities, and electronic Telecoms companies. Average scores have increased during all the 6 annual ESG reviews, mainly due to Utilities improved HR development programs and safety management. However, other areas have not Construction seen any improvement. Electronics Stakeholder engagement remains non-existent (other than with first–tier stakeholders: customers,Energy & chemicals suppliers, investors) and is set to stay at this level Financials thanks to AA 1000’ reduction of “stakeholder engagement” to a yearly “materiality survey”. Metals Corporate citizenship remains an obligation for Korean corporations, but there is little evidence Transport & logistics that social activities are actually managed or Consumer services strategically aligned, and budgets tend to fluctuate with the corporate balance sheet. Industrials Supply chain management consists of ensuring Holdings & trading quality and achieving the lowest possible price – which has also become a political issue, essentiallyPharma & cosmetics dividing Korea’s economy in a two-class systems with the large companies dictating prices to their Consumer goods suppliers. However, leading companies have 0 10 20 30 40 50 60 70 80 90 started to implement sustainability evaluation and education programs in the supply chain.page 19 corporate sustainability korea 2013
  20. 20. Corporate sustainability korea 2013corporate sustainability2013koreaSolAbility802 Meritwin 856Ilsan, South Koreawww.solability.comcontact@solability.com

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