November 28, 2024

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Four out of six South Korean companies picked the European Union’s upcoming due diligence act as the No. 1 concern for their ongoing environmental, social and governance efforts this year, saying heightened regulations could pose a direct threat to export-driven companies that are not yet fully ready.

A survey of 300 companies affiliated with the Korea Chamber of Commerce and Industry, the nation’s biggest lobby, showed Sunday that 40.3 percent of the responding companies selected the tightened EU rules, called the proposed Corporate Sustainability Due Diligence Directive, as the key ESG issue for this year.

The EU due diligence act lays down rules for companies doing business in Europe, including those that export to the region, to reduce environmental impacts or human rights violations in the whole process of supply chains. Companies that fail to come up with corrective measures will face both administrative penalties and civil liabilities.

"As the ESG due diligence act takes effect in Germany this year and expands to the entire EU starting next year, we are seeing more and more cases of domestic and foreign conglomerates that are being asked to conduct ESG due diligence," said Lee Jae-hyuk, a professor from Korea University.

"Companies seem to be paying keen attention to conducting ESG due diligence because transactions or contracts with customers may be suspended depending on the result (of due diligence)," he said.

However, data found that Korean companies on average had no tangible plans for how to respond to the EU due diligence act, as the survey showed that when asked about their short-term plans, 47.6 percent of the companies surveyed on average said they had nothing specific planned for the upcoming EU diligence act.

The survey also showed that for companies' long-term response plans, 37.3 percent selected multiple response for why “there are no plans in the long run.”

The KCCI report also showed that many of the responding companies had no tangible plans for ESG mandatory disclosures that will start in stages beginning in 2025, even though the filing rules were selected as the second key issue for businesses to consider for this year's ESG-related activities.

In fact, 36.7 percent of the surveyed companies said they had no specific plans on how to respond to the forthcoming mandatory disclosure of companies' ESG-related activities and performances.

Meanwhile, the survey also showed that 61.6 percent companies think ESG management will be more essential than ever, despite the slowdown in economy.

While 2.4 percent said it would become less important, 36 percent responded "it will be similar to last year," with the reasons being that "(ESG-related) demands from domestic and foreign customers will increase."

The survey showed that companies further thought practicing ESG values would be as important as last year -- as ESG regulations will be applied to companies (35.1 percent) and investor demands will increase (7 percent).

Consumer demands (4.9 percent) were selected as the least popular reason.

When asked about what the companies were having the most trouble with in regards to practicing ESG values, 58.3 percent of surveyed companies chose "cost burden" and 53 percent chose "lack of internal professionals."

The list was followed by "lack of interest by the executives" (16.3 percent), "lack of interest and cooperation from the business departments (in the company)" (11 percent) and "lack of incentives for practice" (9 percent).

For policies required for effective ESG management, 39.3 percent said the government should provide public ESG guidelines that are specific to each industry.

The list was followed by "support in ESG diagnosis, due diligence and consulting" (28 percent), "expansion of tax support such as tax reduction and deduction" (24 percent) and "ESG professional training" (20.7 percent).

"Companies need to think of ESG not just in terms of costs, but as a key competitive advantage to overcome the economic slowdown and bring about corporate growth," said Woo Tae-hee, executive vice chairman of KCCI.

"The government should provide active support such as financial support, tax reduction and ESG guidelines for companies that have difficulty implementing ESG management policies due to lack of funds and manpower," he added.

Meanwhile, KCCI launched a KCCI ESG Due Diligence Supporting Center last year to support small and medium-sized enterprises with ESG policy diagnosis and due diligence.

By Lee Yoon-seo (yoonseo.3348@heraldcorp.com)