ESG Disclosure Requires Precision in Design

Since the Financial Services Commission (FSC) first announced its plan to mandate environmental, social, and governance (ESG) disclosure in 2021, a concrete roadmap was finally unveiled last month. As the Korean saying goes, "sweet comes after bitter." The wait and the labor pains were long indeed. This is welcome news in that it has largely resolved the uncertainty that companies and markets had been grappling with. The plan to phase in mandatory disclosure starting in 2028 with KOSPI-listed companies holding 30 trillion won ($22 billion) or more in consolidated assets can be assessed as a realistic decision that considers easing the corporate burden and ensuring a soft landing for the system. However, several points remain to be examined before the full sweetness can be savored.

First is the method of introducing the system. Starting with a high asset threshold in consideration of corporate readiness is meaningful. Yet much of Korea's corporate structure already operates through consolidated subsidiaries, effectively linking smaller firms to group-level disclosure frameworks. Even companies with smaller asset bases are, in practice, already embedded in the same disclosure system. Given this, it is necessary to examine whether the current asset threshold will actually lead to a meaningful reduction in burden. The higher the starting threshold, the more sharply the number of covered companies increases each time the threshold is lowered, potentially amplifying the shock of adoption. Securing a certain level of representativeness from the outset could help enhance international alignment while mitigating the adoption shock.

In the same vein, the duration of the roadmap is also a critical issue. Major countries have generally completed system adoption within roughly three years. The longer the timeline, the more early movers accumulate capabilities while latecomers must build their entire disclosure infrastructure at once when the mandate takes effect. Sustainability disclosure, in particular, is not a "big bang" approach like the adoption of International Financial Reporting Standards (IFRS) but rather a structure where new standards are continuously added. This means latecomers could face the cumulative weight of regulatory requirements all at once. The asset threshold and roadmap duration need to be designed with both adoption shock and the gap in corporate preparedness taken into account.

The disclosure channel is another contentious point. A transition from exchange-based disclosure to statutory disclosure has been proposed, but what concerns companies is not the location of disclosure but rather the inherent nature of sustainability information. Data gaps and the prevalence of forward-looking estimates fuel significant concerns about legal liability. Some argue that if a safe harbor structure is clearly designed, handling sustainability disclosure within the statutory framework from the start could reduce the burden of liability and dual costs while also aligning with international standards.

The timing of disclosure also deserves attention. Requiring simultaneous submission of financial reporting and sustainability disclosure by the end of March is a meaningful decision in terms of international alignment and timeliness. However, given that domestic disclosure practice customarily follows a late-June timeline, the transitional provision allowing submission by the end of the first half in the initial year should be explicitly reflected in the roadmap, and the need for additional transition periods should also be reviewed. Furthermore, the three-year grace period for Scope 3 greenhouse gas emissions disclosure could also spark debate. While the grace period itself is unavoidable, if information excluded from mandatory disclosure continues to appear in voluntary reports, investor confusion may arise. Policy guidelines on the relationship between the two reports are also needed.

Sustainability disclosure is ultimately a question of what level of information our capital market will demand. Little time remains before the final confirmation next month. The longer the discussion drags on, the more uncertainty resurfaces. What is most needed now is to finalize the roadmap through vigorous yet swift deliberation, so that companies and markets can begin preparing.