ESG Disclosure Becomes a "Second Set of Financial Statements"; A Company-Wide Review of Management Is Needed

For ESG disclosure, the development of domestic standards is currently being pursued with the Korea Sustainability Standards Board (KSSB) at the center.

The KSSB, under the Korea Accounting Institute, is in the process of developing sustainability disclosure standards that secure consistency with international standards while also taking the domestic corporate environment into account.

The purpose of the KSSB standards is to provide investors with the information they need to assess a company's sustainability-related risks and opportunities, and they are being discussed as a framework that encompasses not only climate change but also social factors and governance factors.

In particular, whereas existing sustainability reports were often prepared according to each company's voluntary standards, the KSSB standards are being reviewed in a direction that enhances comparability and reliability by applying consistent criteria to the scope and content of disclosure.

ESG disclosure is also closely connected with the standards developed by the International Sustainability Standards Board (ISSB).

In 2023, the ISSB published IFRS S1 and IFRS S2, which are international disclosure standards.

IFRS S1 sets out the general requirements for the disclosure of sustainability-related financial information, and IFRS S2 presents the disclosure standards for climate-related risks and opportunities.

A distinctive feature of the ISSB standards is that they approach sustainability information not as a concept separate from a company's financial performance but as a factor that affects corporate value.

In other words, the purpose is to enable investors to use sustainability-related information in the process of assessing a company's future cash flows and management performance.

Accordingly, in Korea as well, the ISSB standards are being used as an important reference in the process of developing the KSSB standards, and companies with a high proportion of foreign investors or those participating in global supply chains need to review international standards trends as well.

ESG disclosure is also related to the sustainability disclosure roadmap that the Financial Services Commission is pursuing.

While reviewing the introduction of a sustainability information disclosure system, the Financial Services Commission has been discussing a plan to pursue the phased mandating of disclosure for listed companies above a certain size.

It is also reviewing the disclosure standards, the entities subject to them, and the methods of disclosure so that investors can more accurately grasp a company's sustainability-related risks and opportunities.

Recently, discussions have continued on whether to expand the scope of the entities subject to disclosure and on the possibility of introducing a statutory disclosure framework.

ESG disclosure is being discussed in a direction that expands the scope of the information that companies must disclose going forward.

Whereas companies could previously be examined mainly through their financial statements and business reports, going forward various types of sustainability information, such as climate-change response strategies, carbon-emission management, supply-chain risk, human-rights management, and internal-control systems, may also become subject to review.

In particular, investors tend to analyze not only a company's current financial position but also the risks and opportunities that may arise in the future, and within this trend, ESG disclosure is being used as an important means of explaining a company's management strategy and risk-management system to the outside.

Therefore, rather than viewing ESG disclosure as a separate reporting task, companies need to review it as part of a management system linked to finance, legal affairs, compliance, and management strategy.

If a discrepancy arises between the content stated in an ESG disclosure and the information reflected in the financial statements, issues regarding the reliability of the disclosure may be raised.

For example, where a company has disclosed a plan to reduce production facilities or to transform its business structure in order to achieve carbon-neutrality goals, it must also confirm whether that plan is a matter that affects asset value, cash flows, provisions, and the like.

If facility-restoration costs are anticipated in the course of responding to environmental regulations, a review of provisions may be necessary, and if the company holds financial assets exposed to climate-change risk, the related factors may be considered in the credit-risk assessment process.

Therefore, it is crucial to check, from the stage of preparing the ESG disclosure, whether the business plan, the investment plan, and the direction of accounting treatment are consistent with one another.

Because an ESG disclosure is official information that a company discloses to the outside, it must be prepared on the basis of objective supporting materials.

Where a company states matters such as carbon-emission reduction targets or plans to expand the use of renewable energy, it must also manage the basis for calculating the relevant figures and the status of their implementation.

In addition, overseas business partners and investment institutions often request materials on the status of supply-chain management, human-rights-related policies, partner-company management systems, and the like, so it is advisable to manage such information systematically as well.

Greenhouse-gas emissions, energy usage, occupational-safety indicators, supply-chain information, and the like are often dispersed across multiple departments, so it is crucial to clearly establish the criteria for collection and the management procedures.

It is also necessary to operate verification and approval procedures at the stage prior to disclosure and to specify the roles of each responsible department.

Because the demand for external assurance of ESG information has recently been expanding, a company may also consider building a management system in which not only the ESG department but also the finance department, the legal department, and the compliance support organization participate together.