[비즈한국] Although the domestic ESG (Environmental, Social, and Governance) fund market has grown significantly in a short period, investigation results show that investment portfolios often include numerous fossil fuel companies with high carbon emissions. Critics point out that domestic financial authorities' ESG regulations remain focused on a disclosure-based system that does not mandate specific asset allocation percentages, failing to prevent the discrepancy between actual capital flows and fund names.
According to the report "How to Solve ESG Fund Greenwashing: Focusing on Overseas Regulatory Cases and Implications for Korea," published by Solutions for Our Climate on the 29th, an analysis of 84 domestic funds—including 54 equity ESG funds and 30 bond-type funds—revealed that many held substantial securities in high-carbon emitting industries, such as coal-fired power generation, natural gas, oil, and steel production.
The report, which used criteria from the Global Coal Exit List (GCEL), Global Oil and Gas Exit List (GOGEL), and the Financial Exclusion Tracker to identify 38 domestic fossil fuel-related companies, found that only six funds excluded these companies entirely. The remaining funds allocated a portion of their portfolios to stocks or bonds of fossil fuel-related entities, with the inclusion rate for each fund ranging from 5% to 20%.
Representative assets held by the surveyed funds include financial products issued by Korea Electric Power Corporation (KEPCO)015760 and its power generation subsidiaries. According to the Paris-Aligned Benchmark (PAB) and Climate Transition Benchmark (CTB), which are EU carbon reduction investment indicators, companies deriving more than 1% of their revenue from thermal coal mining or generating over 50% of their electricity from coal are highly likely to be excluded from investment.
KEPCO's five power generation subsidiaries derive most of their revenue from coal power, making them highly likely to fall under these criteria. KEPCO headquarters is also highly likely to be classified similarly if the standard practice of evaluating the entire group's operations based on consolidated financial statements is applied. However, it has been confirmed that financial products from these high-emission companies are being held in domestic ESG funds. Contrary to the intentions of investors who contributed capital expecting an eco-friendly transition, this can result in the continuous supply of capital to high-carbon industries.
Limitations of Disclosure-Based Regulations and Absence of Quantitative Guidelines
The regulatory approach of domestic financial authorities is cited as the backdrop for this phenomenon. The Financial Supervisory Service (FSS) introduced and implemented the "ESG Fund Disclosure Standards" in February 2024. Accordingly, asset managers must mandatorily state the investment objectives, strategies, operational capabilities, and ESG-related investment risks in securities registration statements when using terms like "ESG" or "sustainable" in fund names. The purpose of this system is to provide clear information to investors to prevent misunderstanding.
However, the current system has limitations in that it focuses solely on "disclosure regulations" that encourage asset managers to transparently state their investment strategies and methodologies. There is no quantitative threshold regarding what percentage of a fund's assets must meet ESG criteria or how far the inclusion of fossil fuel companies should be restricted.
The current Capital Markets Act only sets an investment requirement exceeding 50% based on asset types such as equity or bonds, but does not impose separate weight restrictions for specific themes like ESG. As long as asset managers state in their prospectuses that they use an ESG integration strategy and that some high-emission companies may be included, there is no structure to subject them to quantitative regulations even if they include a large number of high-carbon corporate assets.
Regarding these loopholes in the regulatory system, Lee Jong-oh, Secretary General of the Korea Sustainability Investing Forum (KoSIF), explained, "The disclosure standards currently required by the Financial Supervisory Service remain at the level of having them declare their 'sustainability objectives' or 'investment strategies and methodologies' in advance. Unlike overseas cases, there is no threshold that forces the portfolio to be composed in a way that truly matches the name 'ESG'."
Major Overseas Nations Enact Naming Regulations and Minimum Investment Percentages
In contrast, major developed countries apply quantitative regulations that link fund names to the composition ratio of portfolios to prevent misinformation among financial consumers and ensure the soundness of the financial market. They have moved beyond simply requiring explanations of management methods to mandating actual asset composition that aligns with the fund's name.
The most prominent example is the "Names Rule" in the United States. The U.S. Securities and Exchange Commission (SEC) amended the Names Rule to mandate that if a fund's name includes terms like ESG, sustainability, or specific environmental themes, at least 80% of its net assets must be invested in assets consistent with the investment strategy suggested by the name. This provided legal guidelines so that investors can intuitively trust the nature of the portfolio just by looking at the fund's name.
The European Union (EU) has also increased its level of control by upgrading the Sustainable Finance Disclosure Regulation (SFDR) and establishing guidelines for fund names. The European Securities and Markets Authority (ESMA) requires a minimum investment weight of 80% to use ESG and sustainability fund names. Beyond weight regulations, the EU has established negative screening criteria through PAB and CTB to force the exclusion of fossil fuel-related companies from portfolios. The Monetary Authority of Singapore (MAS) also mandates that retail ESG funds invest at least two-thirds of their net asset value in line with their stated ESG strategies. Overseas authorities are blocking greenwashing risks by operating systems that go beyond ensuring disclosure transparency to securing consistency with actual asset composition.
Calls for Stronger Law Enforcement and Quantitative Standards
Suggestions are emerging that institutional supplements at the level of major overseas nations are urgent to improve the soundness of the domestic market and ensure the effectiveness of capital flows. Experts point out that in the long term, through amendments to the Capital Markets Act, it is necessary to set a legal minimum investment requirement of around 70-80% for funds using the name ESG in Korea and to introduce guidelines for excluding fossil fuel companies that do not meet eco-friendly purposes in stages. The necessity of building an audit infrastructure that allows the financial authorities to periodically monitor and verify the actual management details of funds is also mentioned.
At the same time, considering the time it takes to enact or amend new laws, some suggest that the short-term legislative vacuum should be filled by proactive enforcement of the current legal system. The analysis suggests that even without creating new regulatory mechanisms, greenwashing can be cracked down on by effectively utilizing existing provisions within the Capital Markets Act.
In Australia, although there is no separate ESG regulation law, they crack down on greenwashing by major asset managers by applying provisions that prohibit misleading the nature or quality of financial services specified in the Australian Securities and Investments Commission Act (ASIC Act), imposing tens of millions of Australian dollars in fines.
Lee Kwan-haeng, a U.S. attorney on the legal team of Solutions for Our Climate, said, "Regardless of whether they have enacted dedicated ESG laws, countries like the U.S., EU, and Australia have actively utilized existing securities and financial law provisions against 'false disclosures and inducing investor misunderstanding' to respond to greenwashing," adding, "Since similar provisions exist in the Korean Capital Markets Act, I believe sanctions are not inherently impossible even within the current legal framework."