Responsible Investment for Green Growth in Korea Karl Chun Seung Yang, Executive Director KoSIF

Responsible Investment for Green Growth in Korea Karl Chun Seung Yang, Executive Director KoSIF 1

Definition Responsible Investment: An approach to investment that explicitly acknowledges the relevance to the investor of environmental, social and governance (ESG) factors, and the long-term health and stability of the market as a whole. (UN PRI) Green Growth: a new model of economic growth that simultaneously targets key aspects of economic performance, such as poverty reduction, job creation and social inclusion, and those of environmental sustainability, such as mitigation of climate change and biodiversity loss and security of access to clean energy and water. (Global Green Growth Institute) Today s issue is how to link RI with GG. 2

Market Size of Responsible Investment in Korea The total SRI Funds scale is 8.1 billion$ on 2013. (Except private Eq.) From 2011, the size of Public offering SRI Funds is continuously decreasing. (2011: 2.7 billion$, 2012: 2.3 billion$, 2013: 1.6 billion$) On the contrary, that of Pension SRI Funds is continuously increasing. (2011: 3.5 billion$, 2012: 5.5 billion$, 2013: 6.5 billion$) Scale (Billion $) Pension SRI Funds Public Offering SRI Funds 2009.12 2011.12 2013.12 1.3 3.5 6.5 1.2 2.7 1.6 Total 2.5 6.3 8.1 accumulated figure Source: KoSIF 3

Market Size of Responsible Investment in Korea: Pension Fund vs Public Offering SRI Fund Among Total Market Size 8.1 billion Dollar on 2013 Source: KoSIF 4

Responsible Investment by Pension Fund The major institutional investors are NPS, The Korea Teachers Pension, Public Employee Pension and Korea Post. NPS is leading the market with AUM $6,261 mil, which is 95.71% of total Pension Funds market. Pensions (million Dollar) 2006 2007 2008 2009 2010 2011 2012 2013 National pension Service (NPS) The Korea teachers pension Public employee pension 91 413 595 1,283 2,363 3,450 5,244 6,261 - - - 10 20 50 110 150 - - - 20 50 70 110 90 Korea post - - - - - - - 40 Total 91 413 595 1,313 2,433 3,570 5,464 6,541 Source: data from NPS, KTP, PEP 5

Scale (million dollar) 4 대원칙 Responsible Investment by Pension Fund As a result of NPS s heavier market portion about ESG investment, total AUM of Pension Fund is also increased to $6,541 million at the end of 2013. Though Fund s market shrunk due to domestic economic recession, SRI of Pension Fund grew up dramatically. $8,000 Pension Fund's scale up $6,000 5,464 6,541 $4,000 3,570 $2,000 2,433 1,313 $0 413 595 91 2006 2007 2008 2009 2010 2011 2012 2013 연도 Total Source: data from NPS, KTP, PEP 6

Responsible Investment by Public Offering Funds As of Dec. 2013, the number of Public Offering SRI Funds are 61. Most SRI PO fund focuses on equity and domestic market. Yr 2009.DEC 2011.DEC 2013.DEC Classification Investment Strategy Investment Zone # of Funds Portion(%) # of Funds Portion(%) # of Funds Portion(%) ESG 18 29 23 38 22 36.1 Governance 4 6 7 23 8 13.1 Environment 41 65 36 60 31 50.8 Domestic 33 51 41 68 43 70.5 Overseas 30 38 18 30 15 24.6 Mixed 7 12 3 4.9 Equity fund 49 78 52 87 49 80.3 Fund type Mixed Fund 9 14 9 15 9 14.8 FOF 5 8 5 8 3 4.9 Total Copywrite@KoSIF. 63 All right reserved. 66 61 출처 : 금융투자협회 7

Responsible Investment by Public Offering Funds At the end of 2013, the scale of public offering SRI funds is 1,584 million dollars. # of Governance funds are only 8, though its portion is 13.1%. However, its scale is 1,232 million Dollar, and it s 77.8% of total Public offering Funds scale. Classification Yr Market value (million Dollar) 2009.DEC 2011.DEC 2013.DEC Portion(%) Market value (million Dollar) Portion(%) Market value (million Dollar) Portion(%) Investment Strategy Investment Zone ESG 259 21.62 240 8.72 103 6.5 Governance 154 12.87 2,064 75.17 1,232 77.8 Environment 784 65.51 442 16.11 249 15.7 Domestic 499 41.71 2,475 90.13 1,447 91.3 Overseas 697 58.29 240 8.76 136 8.6 Mixed 0.00 31 1.12 885 0.1 Equity fund 1,136 94.95 2,719 99.01 1,571 99.2 Fund type Mixed Fund 42 3.48 19 0.70 10 0.6 FOF 19 1.57 8 0.28 3 0.2 Total 1,196 Copywrite@KoSIF. 100.00 All right 2,746 reserved. 100.00 1,584 100.0 8 Source: Korea Finance & Investment Association

Green Growth Plan in Korea The 1st Green Growth 5 Years Plan (2009-2013) Achievement: 1) Green Growth as the nation s basic strategy 2) Institutionalization of green growth national system 3) Setting of national emission reduction target (30% less than BAU by 2020) 4) Aggressive investment for renewable energy ($108.7bil by the government plus $11.5bil by private - $24.04bil/year) Limitation: 1) Government failure in the Development Project of the Waterfronts in the Four Great River 2) Increase of GHG emission from 605.4mil ton in 2008 to 697.7mil ton in 2011 3) Failure in demand control (energy consumption increase from 4.92toe/person in 2008 to 5.56toe/person in 2012) and black-out crisis in 2011. 9

Green Growth Plan in Korea The 2 nd Green Growth 5 Years Plan (2014-2018) Vision: To achieve wellness of people through sustainable development in terms of economy and environment Objectives: 1) De-carbonized economic and social structure 2) Creative economy through convergence of green technology and ICT 3) Safe and convenient life free from the threat of climate change Policy Direction: 1) Effective GHG emission reduction 2) Sustainable energy system 3) Ecosystem for green and creative industries 4) Sustainable society 5) Global Copywrite@KoSIF. green cooperation All right reserved. 10

Green Growth Plan in Korea The 2 nd Green Growth 5 Years Plan (2014-2018) Major Policies 1) Implementation of concrete GHG reduction plan to achieve 30% reduction from BAU by 2020 (669mil ton in 2010 to 604mil ton in 2018) 2) Emission Trading Scheme from 2015 and promotion of carbon market 3) National reduction plan for post-2020 4) Investment for carbon sink (1.5bil ton in 2013 to 1.7bil ton in 2018) 5) Stricter management of energy demand side (energy intensity 0.252toe/$1000 in 2012 to 0.233toe/$1000 in 2018) 6) Increase of renewable energy supply (renewable energy ratio 3.18% in 2012 to 4.7% in 2018) 7) Establishment of distributed generation system (5.0% in 2013 to 12.5% in 2018) 11

Green Growth Plan in Korea The 2 nd Green Growth 5 Years Plan (2014-2018) Major Policies 8) Resource recycling industries (renewable energy industry sales $6.5bil in 2012 to $11.2bil in 2018) 9) Converged green technology 10) Green and creative industries 11) Climate change adaptation capacity building 12) Low carbon lifestyle (carbon labeling certificate 1,284items in 2013 to 3,649 items in 2018) 13) Energy welfare (number of people who can not access to energy service 1.8mil in 2011 to 170,000 in 2018) Budget for 2014: $10bil 12

Green Growth Plan in Korea The 2 nd Green Growth 5 Years Plan (2014-2018) Major Policies 8) Resource recycling industries (renewable energy industry sales $6.5bil in 2012 to $11.2bil in 2018) 9) Converged green technology 10) Green and creative industries 11) Climate change adaptation capacity building 12) Low carbon lifestyle (carbon labeling certificate 1,284items in 2013 to 3,649 items in 2018) 13) Energy welfare (number of people who can not access to energy service 1.8mil in 2011 to 170,000 in 2018) Budget for 2014: $10bil 13

Other Issues on RI and GG in Korea Proposed Amendment of Financial Investment Services & Capital Markets Act Proposed by two members of Korea National Assembly The main content of the proposed amendment is to make it mandatory for the listed companies to disclose non-financial ESG issues including working conditions, environmental policies, anti-trust policies, balance between work and life etc. This legislation is expected to be passed by the plenary session of the Assembly. Expected Effect: Every stakeholders including investors and government will be able to gather ESG information from the companies more easily and take it into consideration in decisionmaking, which will promote Corporate Social Responsibility and Socially Responsible Investment as well. 14

Other Issues on RI and GG in Korea Proposed Amendment of National Pension Service Act Proposed by a Member of the National Assembly with coordination with KoSIF. The main content of the amendment is to make it mandatory for NPS to declare whether it will consider ESG issues when it makes decision on any investment. If NPS will not consider ESG issues, it must declare why it decided not to do. Expected Effect: This new amendment will make the management of NPS asset more transparent and promote SRI practices by NPS asset managers. NPS is planning to develop its own SRI index to make use of it as a benchmark when comparing stock performance of each managers. 15

Other Issues on RI and GG in Korea Cap-and-Trade Emission Trading Scheme starting from 1 st Jan. 2015 Korea ETS 1 st Phase is scheduled to start from 1 st Jan. 2015 till end of 2017 Government already allocated (mostly by grandfathering) 573mil ton in 2015, 562mil ton in 2016, and 550mil ton in 2017 respectively, which covers 94.7% of total national emission. Banking and borrowing are allowed. Early action is accepted in the first phase only with 2.5% of allocated allowances. 16

Other Issues on RI and GG in Korea Cap-and-Trade Emission Trading Scheme starting from 1 st Jan. 2015 Offsetting is also accepted. Market stabilization mechanism: In case average price of KAU for 3 months is over $10/ton By 2020, total allowance will be 543mil ton compared with BAU emission 776mil ton. Financial players are not allowed to participate in this market yet. I am afraid this ETS may not work because there will be less supplier of KAU compared with more demand. (If the price is expected to keep rising, everybody will choose bank for 2018 but the government has only 5.3% reserves.) 17

Perspectives of Responsible Investment for Green Growth in Korea There is big mismatch between demand and supply of RI for GG At the moment, there are lots of bottlenecks in linking RI with GG in Korea. -There are quite high uncertainty in policy signals. (Green growth strategy of the former government is now changed to Creative Economy.) - Conventional industrial structure is an obstacle to GG. (Low oil price may do harm to heavy emitters like steel and cement.) -Still the disclosure of ESG issues by the companies are not active. (CSR reporting by less than 100 companies) - Financial industry is too slow to proactively initiate green finance. (There is no Korean bank in the signatory list of the Equator Principle and only 6 signatories in UN PRI.) - There is no reliable commitment to improve RI from NPS, who is supervised by the Ministry of Health & Welfare. 18

Perspectives in Responsible Investment for Green Growth in Korea Optimistic Future for RI/GG in Korea But the future of RI/GG in Korea will keep growing in the long run. - The profitability of conventional industries will decrease while that of green industries will improve over time. (cost down and political/public support) - NPS plans to increase SRI portion in its asset management. - Other pension funds including the Korea Teachers Pension, Public Employee Pension and Korea Post started to adopt SRI strategy recently. - ESG research industry is growing and providing a good soil for responsible investment. - Legislators began to understand the importance of CSR/SRI for sustainable development. - Social awareness on CSR/SRI is growing continuously. 19

about KoSIF Full Name Korea Sustainability Investing Forum ( 韓國社會責任投資论坛 ) Represented by Mr. Kim Young Ho (the former minister of Industries and Energy) Founded on 3 rd April 2007 Registered at Type of Organization website Korea FINANCIAL SERVICES COMMISSION Non Profit (NPO) www.kosif.org KoSIF The only organization of responsible investors, aiming at the promotion of sustainable development SRI CSR CDP - Research, Policy Development, Education, Promotion of SRI theory and practices - Awareness Raising on ISO 26000 - Support for CSR Report publishing - CDP s Partner in Korea 20

Thank you for your attention! TEL. 02-738 1142 FAX. 02-738- 1143 Mobile. 010-9360-7742 E-mail. karlcsy@hanmail.net l karlcsy@gmail.com 21