Corporate governance and the institutionalization of socially responsible investing (SRI) in Korea

Abstract

The past few decades have seen a marked increase in socially responsible investing (SRI), an investment strategy that incorporates environmental, social and governance (ESG) issues in the decision-making process. While there has been substantial investment and research in predominantly advanced economies, we have seen striking growth in key Asian markets in recent years, suggesting broader proliferation of more responsible corporate and investment practices. Because socially responsible investors take both financial and social considerations into account when allocating investments, this raises questions about the viability of SRI as an investment strategy and motivations behind individuals and institutions engaging in it. To investigate this further, this study analyses the emergence of the SRI market in South Korea given very public corporate governance concerns following the Asian financial crisis of the late 1990s and recent visibility of SRI investments by the country's largest institutional investor, the National Pension Service (NPS). This study contributes to corporate governance and new institutionalist theory by highlighting that the need to address gaps in corporate governance has served as an important motivation for investment and research institutions to enhance socially responsible investments in Korea. Supported by anecdotal evidence from leading members of the local SRI community, this study suggests that while we have seen the primacy and evolution of existing institutions in the SRI market, SRI growth has been buttressed by the emergence of new institutions, such as research organizations and the Korean Sustainability Investing Forum, and reinforcement by international institutions in the form of the UN-backed Principles for Responsible Investment, global indexes and international CSR guidelines. As such, this study provides a more nuanced understanding of SRI's emergence in Korea by highlighting institutional layering and dynamics that have led to changes in the local market while eschewing the idea that the emergence of SRI was simply the result of a deliberate effort to 'westernize' institutions. Indeed, in Korea's case, while SRI is a borrowed concept, its primary function has been to address corporate governance issues rather than to generate superior financial returns. In addition to theory-building, findings also highlight practical implications, including opportunities for more rigorous corporate social performance analysis and investment advisory, greater market coordination and awareness-building, and the need to monitor corporate social performance and financial performance going forward.