The US$201 billion the Korean Investment Corporation (KIC) is the latest sovereign wealth fund to commit to fighting climate change ahead of the COP26 Summit in Glasgow, Scotland next week.
At today’s 2021 Korea Times Global ESG Forum, KIC Chairman and CEO Jin Seoung-ho said, “We'll come up with a model that can successfully counter higher risks from climate change, implement it for all the KIC's investment portfolios and make it as an example for international institutional investors to follow.”
Jin added, "We'll come up with a model that can successfully counter higher risks from climate change, implement it for all the KIC's investment portfolios and make it as an example for international institutional investors to follow.”
The move comes after the Korean parliament amended the KIC Act in March to lay the legal foundation for KIC’s responsible investments, stating the fund “may consider factors such as environmental and social impact and governance structure for long-term and stable returns.”
This month, the KIC sought to affirm its climate credentials by joining the One Planet Sovereign Wealth Funds (OPSWF), which was formed in 2017 in accordance with the 2015 Paris Climate Accords. Funds that endorse the OPSWF Framework pledge to integrate climate change risks and invest in the transition to a Paris-aligned low emissions economy. However, the lack of standardization of greenhouse gas auditing and reviews of progress towards targets makes judging OPSWF's real world impact difficult to measure.
The KIC is also Korea's first institutional investor to publicly advocate the Task Force on Climate-related Financial Disclosures (TCFD), which was formed in 2015. The TCFD framework involves a set of voluntary, consistent disclosure recommendations and is regarded by investors and governmental bodies as the benchmark disclosure guidance.
Global SWF research found that SWFs’ failure to fully grasp the opportunities provided by energy transition and reduced exposure to carbon-intensive sectors has had a negative impact on their returns. Global SWF CEO Diego López said, “We have done some work on the liquid markets space and have found that several SWFs still hold significant O&G stocks and that if their transition had been faster, they would have made a lot more money in these past four years. So, returns can no longer be an excuse, and SWFs can do better.”
Jin said today that the SWF would ensure that ESG principles would not undermine returns, which last year hit 13.1%. He added, “We'll come up with a model that can successfully counter higher risks from climate change, implement it for all the KIC's investment portfolios and make it as an example for international institutional investors to follow.”
KIC is examining ESG models used by the California Public Employees' Retirement System (CalPERS) and Norway’s Norges Bank Investment Management (NBIM).
The SWF has already set out its approach. In May, KIC established new ESG strategy funds that include ESG Core and ESG Global Strategies. In its latest sustainability report, KIC states that the ESG Core Strategy is “an active strategy that builds concentrated portfolios of companies with high sustainability, growth and profitability, through active bottom-up analysis,” aiming for a high rate of return and “a positive impact from proxy voting and engagements.” The ESG Global Strategy is an enhanced strategy “based on analysis of ESG evaluations and of ESG index construction,” aiming for a stable rate of return.
The fund has received a high score in Global SWF’s 2021 GSR Ranking with 84% overall, up 24% from the previous year as a result of its ESG efforts, and 80% in its sustainability score. In comparison, CalPERS had an 80% GSR score (down 8%), while NBIM is one of the highest ranked with 96%.