[Contribution] ‘Lee SG’ speeds up mandatory disclosure… What are the corporate risk factors?

With the recent introduction of the Corporate Sustainability Reporting Directive (CSRD) by the European Union (EU), mandatory ESG disclosure has become a global, irreversible trend. In this trend, President Lee Jae-myung, during his candidacy, argued that the mandatory ESG disclosure period should be brought forward from 2026 to 2025. The goal is to ‘improve corporate transparency in line with global standards and resolve Korea’s chronic discount.’

This leads to expectations of positive effects in the long term, such as attracting global investment, improving corporate trust, and expanding sustainable management infrastructure. However, there are growing concerns that early implementation in situations where institutional and practical preparations are insufficient may result in serious burdens and risks for companies. In particular, small and medium-sized companies do not have sufficient resources and capabilities to establish an ESG disclosure system, so there is a high possibility of trial and error and side effects.

So, what specific risk factors could early mandatory ESG disclosure pose to companies?

First of all, various legal disputes may arise due to incomplete disclosure. Producing highly reliable ESG data requires significant time and cost, including improving existing systems and receiving verification from external professional organizations. However, if disclosure is rushed without sufficient internal system maintenance or external verification amid pressure for early implementation, the accuracy and reliability of the data will inevitably decline. Such unverified information or exaggerated performance can become a catalyst for a shareholder lawsuit directly targeting management pursuant to Article 125 of the Capital Markets Act (Liability for compensation due to false statements, etc.).

In particular, 'greenwashing', which is packaging non-environmentally friendly activities as if they are eco-friendly, is not limited to a simple reputation issue and is highly likely to lead to actual sanctions, such as fines from the Fair Trade Commission for violating the Labeling and Advertising Act. Such unverified disclosures may spark legal disputes for companies.

Second, excessive response burden occurs due to ambiguity in evaluation standards and inconsistency in standards for each institution. Currently, domestic and international ESG evaluations are carried out in different ways by various organizations without internationally unified standards. For example, global rating agencies MSCI, S&P Global, and Korea ESG Standards (KCGS) apply different evaluation indicators and industry-specific weights. In fact, according to a report analyzing 55 of the top 100 domestic companies in 2021, the ESG ratings of each institution differed by an average of 1.4 levels. In other words, a company that receives an 'excellent' rating from one agency may be judged 'poor' by another agency.

Such inconsistencies and ambiguities are rapidly increasing companies’ response costs. ESG reports, audit data, improvement plans, etc. must be duplicated to suit the needs of each organization, and consulting costs and manpower burden also increase. This poses a huge risk, especially to small and medium-sized businesses with limited financial and human resources.

Third, ‘disconnection risk’ may occur throughout the supply chain. ESG disclosure is difficult to complete solely through the efforts of individual companies. Various indicators such as carbon emissions, human rights, safety, and ethics require securing and managing data throughout the entire supply chain. In particular, carbon emissions data requires information from partner companies. However, many partners lack understanding and preparation for ESG, and their manpower and capacity to build systems are limited. As a result, partner companies that have difficulty responding to ESG face the risk of being excluded from the supply chain of large companies. This could soon lead to the ‘risk of supply chain disruption’.

The discussion surrounding the timing of mandatory ESG disclosure is a process for our society to move in a better direction. Whether in 2025 or 2027, this huge wave of change is bound to come. The important thing is not ‘when to start’ but to gather wisdom on ‘how to prepare well.’ ESG will become a stepping stone for our companies and capital markets to take a leap forward only when we minimize the side effects caused by hasty implementation and fully realize the purpose of the system through thorough preparation. We need to navigate this important transition wisely.

Small Business Team

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[Contribution] Mandatory disclosure of 'Lee SG' speeds up... What are the corporate risk factors? (Shortcut)