Case Analysis / Legal Updates

ESG Risk | ESG Set to Change from 2026: What If It Becomes a Second Set of Financial Statements?

From 2026 onward, ESG risk management is establishing itself as a core management variable that directly affects corporate decision-making and accountability structures as a whole, rather than a supplementary indicator.

1. ESG Risk | ESG as a "Second Set of Financial Statements"

Importance of managing ESG risk as a second set of financial statements

ESG risk has now become an area that can no longer be managed separately from the financial statements.


This is because ESG disclosure no longer remains a recommended or voluntary report, and around 2026, the shift to a mandatory disclosure framework under law and regulation is beginning in earnest.


Until now, ESG information has been closer to reference material that companies disclose selectively, but after 2026, it is expected to be incorporated, under global standards, as an official disclosure item directly linked to financial performance.

∙ Past ESG
: selective disclosure and reference information

∙ ESG after 2026
: subject to mandatory disclosure, comparison, and verification

∙ Key change
: sustainability reporting ⇒ financial risk explanatory material

The Lee Jae-myung Administration's ESG Policy Direction

In Korea as well, ESG is rapidly moving from a mid- to long-term policy task to a standard reflected directly in the corporate disclosure framework.

Even before taking office, the Lee Jae-myung administration presented responding to the climate crisis and the decarbonization of the industrial structure as core pledges, setting the strengthening of ESG as a clear policy premise, and it has since been giving concrete shape to its institutional design, centered on the early implementation of mandatory ESG disclosure and the overhaul of the evaluation framework.

In particular, the finalization of ESG disclosure standards and the presentation of a roadmap are perceived not as "a system to be introduced someday" but as a practical disclosure task for which companies must check their readiness.

This shows that ESG is shifting from an optional management activity to a management standard that must be incorporated into financial and disclosure frameworks in advance.

Why ESG Changes in Character to "Mandatory Disclosure" Starting in 2026

In line with the domestic policy stance, countries are adopting ESG disclosure systems or aligning their existing systems using the ISSB (IFRS S1 and S2) as a common standard.


This is a change that converts ESG information into a disclosure item that must be prepared in accordance with set standards.

As disclosure items, calculation methods, and scope of application are standardized, companies are placed in an environment in which they must submit ESG information as data that can be compared and analyzed in the same way as financial information.


As a result, ESG disclosure comes to function not as a perfunctory sustainability report but as material that explains a company's financial condition and risks.

Category

Past ESG Disclosure

ESG Disclosure After 2026

Nature

Voluntary and recommended

Mandatory

Standards

Varying by company

International standards (ISSB)

Use

Image and reputation

Financial and risk analysis

The Structure by Which ESG Disclosure Becomes Subject to Financial Statement Verification

The reason ESG information is called a "second set of financial statements" is that, after 2026, ESG disclosure becomes subject to verification not as mere explanatory material but as figures connected to actual costs and profit or loss.

A representative example is the EU Carbon Border Adjustment Mechanism (CBAM).

CBAM has required quarterly reporting of carbon emissions during the transitional period (October 1, 2023, to December 31, 2025), and from January 1, 2026, it enters the definitive period, fundamentally changing the character of ESG data.

Changes in the CBAM Structure

∙ Transitional period : centered on emissions reporting

∙ Definitive period (from 2026) : application of the Actual Data principle

∙ Default Value : permitted only exceptionally

After the definitive period, in principle, only "actual emissions data (Actual Data)" calculated by an accredited method is recognized, and where it is difficult to secure accurate measured data, this can lead to direct sanction risks such as administrative fines and delays in or refusals of import approval.

In addition, from 2026, the obligation to purchase and surrender CBAM certificates linked to the EU ETS (Emissions Trading System) price, based on the carbon embedded in products, begins to take full effect in stages.


Although this is nominally a purchase of certificates, in substance it operates as a cost structure equivalent to a tariff that is directly reflected in export unit prices and margins.

Factor of Impact

Financial Significance

Lack of Actual Data

Sanctions and import disruptions

ETS price fluctuations

Direct impact on cost and margin

Carbon intensity

Determining factor for the scale of cost

In this way, ESG disclosure centered on CBAM requires management at the same level as the financial statements, within a structure that proceeds from data accuracy → external verification → reflection in cost and profit or loss.

2. ESG Risk | Management Points for Companies

ESG risk management points for companies

With respect to ESG risk management, as ESG enters a stage of being verified together with the financial statements around 2026, a company's ESG response likewise needs to shift from being "reporting-centered" to being "management-centered."


What matters now is not how well a report is written but whether the disclosed ESG information can be explained in finance and legal terms, as well as to investors and the financial markets.

The Standard for ESG Management Is Not "Timing" but "Explainability"

ESG risks for the most part do not arise suddenly at year-end or just before disclosure.


Carbon emissions, supply chains, and human rights and safety issues accumulate from the time they arise, and it is difficult to secure consistency with the financial statements by retroactively adjusting the figures.

∙ Organizing just before disclosure
: expansion of risks that cannot be explained

∙ Management at the time of occurrence
: securing consistency in finance and legal terms

∙ Key standard
: "Can it be explained at any time?"

In other words, even if the timing for mandatory ESG disclosure in Korea has not been finalized, it is necessary to prepare to the extent that one "can explain it immediately once it becomes mandatory".

Key ESG Items from a Finance and Legal Perspective

After 2026, ESG risks need to be managed not as individual issues but as risk units directly connected to the financial statements.


In particular, the following items require simultaneous financial and legal verification at the disclosure stage.

∙ Carbon and environmental data
: connected to cost structure, capital expenditure, and CBAM costs

∙ Supply chain human rights and environmental issues
: connected to contractual liability, damages, and the risk of transaction suspension

∙ Safety- and labor-related indicators
: connected to provisions, and the risk of litigation and administrative sanctions

The moment these items are recorded in an ESG report, they become subject to review that also encompasses consistency with the financial statements and the possibility of legal liability.


Accordingly, ESG risk management is shifting from being the work of an individual department to a matter that must be handled within the company's overall risk management framework.

Establishing an Internal ESG Management Framework at the Level of the Financial Statements

Rather than treating ESG as a separate reporting area, companies need to prepare to incorporate it into their finance and legal management framework.

Preparation Item

Review Points

ESG data management framework

Clarification of calculation standards, scope, and cycle, and management of the change history

Linkage structure with the financial statements

Review of connectivity with financial items such as investment, costs, and provisions

Internal verification process

Prior review from a finance and legal perspective before disclosure

Allocation of responsibility

Clarification of the internal line of responsibility when errors occur in ESG figures

What is especially important is establishing a structure in which the company can internally explain who calculated the ESG data, by what standards it was calculated, and how it connects to the financial figures.


This constitutes a minimum management requirement for reducing subsequent risks arising from disclosure errors or distortions, and for maintaining the trust of investors and financial institutions, not only for external audits and regulatory response.

3. ESG Risk | Key Preparations for Companies

ESG risk key preparations for companies, corporate attorney

ESG risk management will no longer be a means of image management but will become core management information that is verified together with the financial statements and evaluated by the market.


ESG disclosure is managed on the premise of verification by an external third party or an accounting firm, and the results are moving toward a structure in which they are used as decision-making material for investors and financial institutions, beyond regulatory response.

∙ ESG data = financial risk indicator

∙ Management failure = decline in cost, accountability, and trust

∙ Proactive response = long-term competitiveness

If a management framework and internal verification process at the level of the financial statements are not put in place first, ESG disclosure can become a new burden.


Conversely, if a systematic ESG management structure is established from now on, ESG can become a strategic asset that strengthens market trust and long-term competitiveness rather than a regulation.

In particular, considering the recent ESG policy stance of the Lee Jae-myung administration, ESG disclosure is closer to a management task already at hand than to "a system to prepare for someday".

If you need to respond to ESG disclosure, review its linkage with the financial statements, or examine your internal management framework, you are welcome to proactively check the risks through an advance diagnosis from the perspective of a 🔗corporate attorney, accounting, and compliance.

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