As companies grow, social and environmental risks also increase, making ESG (environment, society, governance) management essential these days. Let’s think about the scope of ESG application in corporate social responsibility (CSR) and finance, and the future direction of products.
First, corporate social responsibility emphasizes the responsibility to have a positive impact on society beyond economic activities, and since transparent management must be conducted in accordance with laws and ethics, social contribution is often used as a concept that is included in corporate social responsibility. In addition, corporate social responsibility is increasingly emphasized due to changes in the external environment and stakeholder demands. A company's good organizational culture can enhance its image through social contribution, and by contributing to the local community, a company can increase its social reputation and value. In terms of the necessity of corporate social responsibility, responsibility is emphasized because companies and society are in an interdependent relationship, and it is possible to demand that companies fulfill their responsibilities through social participation. Depending on the support and evaluation of a company's social participation, the growth and possibility of being eliminated by a company are also determined.
The types of corporate social responsibility are largely divided into economic responsibility, legal responsibility, ethical responsibility, and philanthropic responsibility. Economic responsibility aims to improve product quality, increase productivity, and create jobs. Legal responsibility is to comply with laws and regulations, and to comply with laws related to hiring employees. Ethical responsibility refers to management that is in line with social ethics rather than profit. Philanthropic responsibility is to contribute to society and encourage employees to participate in volunteer activities.
Through social responsibility, companies can strengthen their internal capabilities and external competitiveness, and a virtuous cycle is formed between social responsibility and corporate performance, thereby improving the market value and competitiveness of the company. Social responsibility is an essential strategy for sustainable corporate management. Such corporate social contribution can be seen as having a decisive impact on corporate image and reputation. In addition, various social contribution activities such as volunteer work, donations, educational support projects, and scholarship projects contribute to expanding the social influence of the company.
The introduction of ESG has also brought about significant changes in the financial environment in many aspects. This has a wide-ranging impact on financial institutions’ investment strategies, risk management, regulatory compliance, product development, and the way they interact with customers. The major changes can be summarized as follows:
1│ Expanding sustainable investment
Financial institutions are focusing on sustainable investment considering ESG factors. This can be seen as part of efforts to strengthen environmental protection, social responsibility, and ethical governance while pursuing long-term profitability. By integrating ESG criteria into investment portfolios, they aim for performance that takes sustainability into account in addition to traditional financial performance.
2│ Risk Management
Financial institutions are also analyzing the impact of climate change on financial risks and developing strategies to manage them. For example, they are reducing investments in companies that rely heavily on fossil fuels and increasing investments in renewable energy companies. They are recognizing that social and governance factors such as human rights issues, labor conditions, and ethical management of companies can act as risks and are developing risk management measures that reflect this.
3│Regulatory Compliance and Reporting
As ESG-related regulations are strengthened, financial institutions are transparently disclosing ESG data to comply with them. The U.S. Securities and Exchange Commission (SEC) and others are requiring companies to disclose ESG. Financial institutions are standardizing ESG reporting standards to provide investors with reliable information. They follow international standards such as the U.S. Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) or develop and use their own reporting standards.
Three Key ESG Products in the Financial Sector
ESG-related products required in the financial sector are focused on promoting environmental protection, social responsibility, and ethical management. These products play a necessary role in practicing financial institutions’ sustainability and responsible management. Major ESG products can be summarized as follows.
Environmental Products
Green Bonds and Green Investment Funds are bonds and funds that invest in environmentally friendly companies or projects. They invest in renewable energy, energy efficiency improvements, clean transportation, and environmentally friendly technologies or buildings.
Social Products
Social Bonds are bonds that finance projects that create social benefits. They invest in education, healthcare, job creation, etc. Impact Investment Funds are funds that invest in projects or companies that aim for social and environmental impact. Products for supporting low-income housing and small business support are increasing. Finally, Inclusive Finance Products are loans and financial services that target groups with low financial access. For example, financial products for low-income earners, small business owners, and female entrepreneurs are included.
Governance Products
Ethical Investment Funds are funds that invest in companies that meet ethical standards, focusing on anti-corruption, transparency, and fair trade. Governance Improvement Loans are loan products that aim to raise funds to improve corporate governance. These include loans for board diversity and strengthening internal controls.
Integrated ESG products are funds that integrate ESG factors to make investment decisions. They invest in companies that perform well in terms of the environment, society, and governance. In addition, Sustainability-Linked Deposits are products whose deposit interest rates fluctuate depending on whether the financial institution achieves its sustainability goals, allowing depositors to receive higher interest rates when the goals are achieved.
ESG-related products are important tools for financial institutions to practice sustainability and social responsibility. These products promote environmental protection, social contribution, and ethical management, and contribute to improving long-term financial performance. Financial institutions should strive to build a sustainable financial environment by developing and providing these ESG products. In addition, the ESG financial environment is becoming an essential element for financial institutions to secure long-term competitiveness, fulfill social responsibility, and move toward sustainable growth, beyond simple regulatory compliance. We hope that the improvement and development of the ESG financial environment will continue through financial products.