south Korea
Contributing law firm: Shin & Kim LLC
Contact: Soo Young Song, Partner
Yoonjae Jang, Advisor
ESG in APAC - South Korea by Shin & Kim LLC
Please click on the podcast above for a snapshot of the three key themes of ESG reporting, transition planning and greenwashing in respect of South Korea. Scroll down for further information on each key theme.
A. ESG Reporting
1. Are there legal or regulatory requirements for companies to make ESG disclosures in your jurisdiction?
There is a voluntary disclosure regulation on the publication of sustainability reports by listed companies.
There are currently no mandatory disclosure regulations in place, but they are likely to be introduced soon. In 2021, the Financial Services Commission (FSC) announced that ESG disclosures will be mandatory for KOSPI-listed companies with assets of KRW 2 trillion (approx. US$ 1.56 billion) or more from 2025. By 2030 all KOSPI-listed companies will be required to make ESG disclosures. Q&A A.2 to A.8 below give more information on the FSC’s plan.
2. What are the key legislative and regulatory sources for ESG disclosure requirements and to whom do they apply?
ESG disclosure requirements are primarily aimed at listed companies:
Under Article 8, Paragraph 7(e) of the Enforcement Rules of KOSPI Market Disclosure Rules of the Korea Exchange (KRX), sustainability reports are included as voluntary disclosure items. Accordingly, listed companies are currently publishing sustainability reports voluntarily.
However, with the FSC’s decision to make ESG disclosure mandatory for certain listed companies (with assets of KRW 2 trillion or more) starting in 2025, it is expected that these companies will be required to report their ESG related information.
For the purpose of providing guidance on the fundamental principles for companies to voluntarily disclose ESG information, KRX has published the ESG Disclosure Guideline (ESG Disclosure Guideline), which are recommendations and does not have legally binding effect.
For the ESG fund disclosure, the Financial Supervisory Service (FSS) operates the Capital Market ESG Supervision Task Force team, which selects ESG fund disclosure matters, prepares disclosure items and standards related to fund management, and is in the process of revising relevant laws and regulations relating to ESG fund disclosure matters.
3. Are the requirements mandatory or do they apply on a comply-or-explain basis?
The Corporate Governance Report has adopted a comply-or-explain approach to voluntarily describe compliance with 10 core principles of corporate governance. Other than this, there are currently no ESG-related disclosure requirements that are on a mandatory or comply-or-explain basis.
However, as mentioned above, sustainability information will be required to be disclosed from 2025 by certain listed companies.
For ESG fund disclosures, disclosure standards are expected to be finalized in the first half of this year, but it is unclear whether they will be mandatory.
4. Which aspects of ESG do the requirements focus upon?
For listed companies, environmental, social and governance aspects are all covered.
For disclosure of ESG funds, there is currently no specific requirement.
5. Are the disclosure requirements based on international standards? If so, which one(s)?
Most companies selectively adopt various international standards such as GRI, SASB, and TCFD.
However, FSC is planning to prepare (through the Korea Sustainability Standards Board) sustainability reporting standards based on the IFRS’s ISSB sustainability reporting standards in consideration of domestic conditions.
6. Are there any mandatory requirements for the disclosure of Scope 3 GHG emissions?
Given that the sustainability reporting is currently voluntary, disclosure of Scope 3 GHG emissions is not mandatory.
Even though the relevant regulation, “Framework Act on Low Carbon, Green Growth” and “Act on the Allocation and Trading of Greenhouse-gas Emission Permits”, requires disclosure of the status of emission facilities by places of business, the status of emissions by places of business, and the status of emissions by emission activity, there is no disclosure obligation for Scope 3 GHG emissions.
However, we expect that the disclosure obligation of Scope 3 GHG emissions will be introduced after a grace period of several years.
7. Are there assurance requirements?
Not mandatory.
8. Are voluntary ESG disclosures customary?
Many listed companies reference international standards (such as the TCFD and SASB) in their ESG reports even though it is not mandatory.
9. Is there a local taxonomy? Is it mandatory and what is its scope of application?
In December 2022, the Ministry of Environment revised the Guidelines for the Korean Green Classification System and published a detailed explanatory book, which was implemented on 1 January 2023. The guidelines are not mandatory.
On 8 December 2021, FSS entered into business agreements with financial companies to develop a K-taxonomy application system so that a stable K-taxonomy can be established.
10. Are there plans to adopt the ISSB sustainability and/or climate-related disclosure standards? If so, to what extent will the standards be mandatory, to whom will they apply and what is the timeline?
In response to the ISSB’s release of its draft standards in 2022, FSC has been actively engaging with stakeholders’ views from the outset. FSC has stated that it will consider the ISSB’s final disclosure standards, trends in major countries overseas, and opinions of domestic and foreign stakeholders, including corporates, to prepare a plan to improve the ESG disclosure system.
11. Other upcoming developments / direction of travel
As outlined above most of the reporting will be set up and improved in the future.
In December 2022, FSC announced that the relevant agencies will jointly set policy directions and prepare detailed plans for the overall domestic ESG disclosure system within 2023. This will include more specific details such as the schedule for mandatory ESG disclosure, applicable companies, disclosure items, disclosure standards, and verification/ assurance systems.
In May 2023, the Vice Chairman of FSC, Kim So-young, announced that FSC would release a “ESG disclosure system roadmap” that includes the scope of covered companies, reporting standards, and third-party verification in a seminar open to public on “ESG disclosure and improvement of the retirement pension system” held at the Korea Exchange.
B. Transition planning and net zero
1. Has your jurisdiction set decarbonisation targets and strategies?
Yes, to reduce Korea’s carbon emissions by 40% before 2030 (compared to 2018).
The Korean government has also outlined four major decarbonisation strategies: “low-carbonization of the economic structure”, “creation of a low-carbon industrial ecosystem”, “fair transition to a carbon-neutral society” and a “strategy of strengthening the foundation for a carbon-neutral system".
2. Are there carbon trading markets? If so, please give details. If not, are there plans for such markets?
Yes. In May 2012, the Emissions Trading Act was enacted, and in January 2015, the KRX launched the emission trading market (K-ETS).
The Korea government sets its greenhouse gas emission reduction targets roadmap, and accordingly allocates mandatory greenhouse gas reductions targets and emissions allowance for trading to companies whose greenhouse gas emissions exceed a certain scale, and if designated as an allowance allocated company, it can trade through the emission exchange. In other words, it is a mandatory compliance market for certain companies.
K-ETS’s participants are only governmentdesignated companies and market makers who are also designated by the government. They are Korea Development Bank, Industrial Bank of Korea, Hana Financial Investment, Korea Investment & Securities and SK Securities.
However, the Korea Chamber of Commerce and Industry plans to open the first voluntary carbon market exchange in Korea in the second half of this year.
3. Are there mandatory requirements for transition plans and/or their disclosure? If so, please give details (including whether there is any standard or guidance on transition plans and/or requirement to consider the social impact of the plan). If not, are there plans for such requirements?
It is not mandatory to have a transition plan. To date, ESG disclosure standards do not have clear disclosure items, timing of disclosures, and industry-specific standards, and there is no obligation to disclose transition plans.
However, as mentioned above, details with respect to the disclosure of transition plans are likely to be included in the “ESG disclosure system roadmap” at the end of the third quarter.
4. Are there mandatory requirements to set, meet and/or disclose climate-related targets? If so, please give details. If not, are there plans for such requirements?
Korea currently has no mandatory requirements for companies to set, meet and/or disclose climate-related targets. However, the Korean government is enacting ESG disclosure standards according to the mandatory disclosure to be applied from 2025, based on the ISSB’s sustainability reporting standards. However, the details have not yet been released and as noted above, are expected to be released at the end of the third quarter of 2023.
5. Other upcoming developments / direction of travel
In order to achieve the 2030 carbon reduction target of 40% compared to 2018 carbon emissions, goals and implementation measures for each sector such as energy conversion and industry were established in 2021, and revised in March 2023.
Specifically, the Government revealed plans to (1) accelerate energy transformation, (2) innovate high-carbon industrial structures, (3) transition to future mobility and (4) reduce urban and local carbonization. In particular, the Government plans to accelerate the transition to clean energy such as solar and hydrogen and a balanced energy mix through harmony between nuclear power and renewable energy.
C. Greenwashing risks
1. Are there any recent examples of legal proceedings, regulatory actions or investigations against or into greenwashing in your jurisdiction?
In February 2023, the Ministry of Environment issued an administrative guidance against SK Enmove’s advertisement of carbon-neutral lubricants.
In September 2022, SK Enmove launched engine oils and advertised them as carbonneutral because they were made by purchasing carbon credits from Verra, a U.S. carbon credit certifier. However, the advertisements were criticized as greenwashing, as carbon credits alone cannot permanently eliminate carbon from petroleum products.
In response, the Ministry of Environment issued an advance notice of corrective order in December 2022, but given that the advertisement and product sales were suspended, it was ultimately an administrative guidance, which is not enforceable and is a recommendation to be careful about the use of related terms in the future.
2. Are there any laws or regulations specifically dealing with greenwashing?
The Act on Fair Labelling and Advertising restricts unfair labels and advertisements in general, and the “Guidelines for Examination of Environmentally Related Labels and Advertisements” stipulates specific examination criteria for unfair labels and advertisements related to the environment, including greenwashing.
3. What are the likely grounds on which such proceedings, action or investigations can be instigated?
Likely grounds include:
(a) Breaches of the Act on Fair Labelling and Advertising and the Guidelines for Examination of Environmentally Related Labels and Advertisements – e.g. providing false or exaggerated information about the environmental performance of a product.
(b) Disclosure liabilities under the Financial Investment Services and Capital Markets Act and the Securities Market Disclosure Rules of the Korea Exchangelink – e.g. providing materially false or misleading information in listing documents or other corporate disclosure documents.
4. Other upcoming developments / direction of travel
In June 2023, the KFTC announced the draft revised “Guidelines for Examination of Environmentally Related Labels and Advertisements”, stating that the amendments are aimed at preventing greenwashing by refining the examination criteria for labels and advertisements related to the environment and adding various examples to increase consistency in law enforcement and predictability of offenders.
Specifically, the amendments (a) clarify that in order to advertise improved environmental performance, the improvement must occur throughout the entire life cycle of a product, including the acquisition, production, distribution, use, and disposal of raw materials; (b) provide examples of commonly prohibited unfair labels and advertisements practices related to the environment; and (c) create a simplified checklist for businesses to self-assess whether they are in violation of the law.
This material is provided for general information only. It does not constitute legal or other professional advice.
Built with Shorthand