EU’s ESG drive to hit Korean companies
Korea’s key export industries will face increased challenges in Europe following the legislation of a due diligence law on the environmental, social and corporate governance (ESG) of supply chains led by the European Commission, the administrative arm of the European Union, according to Korea’s trade ministry and market watchers, Thursday.
The law will diminish the competitiveness of up to 110 manufacturers of cars, automotive parts, semiconductors and biopharmaceutical products, weakened further by higher costs needed to comply with the European Commission’s guidelines with greater emphasis on human rights and environmental awareness, according to market watchers.
Experts say the government should help firms better prepare for the strengthened guidelines, mostly concerning drafting ESG reports and disclosing ESG-related information. Timely and flexible adaptation will turn the risk into growth opportunities in the long term, they added.
The EU law seeks to foster sustainable and responsible corporate behavior throughout global value chains, according to the European Commission.
Firms will be “required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights, such as child labor and exploitation of workers, and on the environment, for example pollution and biodiversity loss,” it said.
The administrative arm believes the law will bring legal certainty and level the playing field for businesses, as part of an overarching policy objective of advancing green transition and human rights protection in Europe and beyond.
ESG risk management
The Ministry of Trade, Industry and Energy held a meeting to review the trade implications of the European Commission’s move on local firms.
An ESG risk management project was launched to help assess the scope and extent of the rule change, with plans to provide consultation services.
Firms that establish effective countermeasures will be granted incentives in export insurance and government assistance in expanding overseas.
The measure coincides with key EU countries embracing the new law, including Germany and the Netherlands.
Germany has mandated the submission and disclosure of ESG reports for firms with over 3,000 employees starting next year. This will be expanded to firms with over 1,000 employees in 2024.
Korea Institute for International Economic Policy (KIEP) research fellow Moon Jin-young said the impact of the new law will reach not only large firms but also their smaller partners.
“All entities on the supply chain will face overall greater responsibilities, primarily in the form of higher costs. How far-reaching the rules may become remains to be seen, in light of lingering geopolitical uncertainties, notably the Ukraine crisis,” he said.