[INTERVIEW]

 National Pension Service set for ESG investments overseas to boost profits

National Pension Service (NPS) Chairman and CEO Kim Yong-jin speaks during an interview with

This article is the fourth in a series of interviews with ESG experts intended to make suggestions for Korea's financial, industrial and public sectors to come up with better ESG strategies for sustainable growth. ― ED.

State pension fund CEO believes values-based criteria can prevent tail risk

By Park Jae-hyuk

JEONJU, North Jeolla Province ― It has already been 15 years since the National Pension Service (NPS) started to manage its "responsible investment fund" to keep pace with its peers in developed countries and top-tier asset managers, that had agreed with the United Nations Principles for Responsible Investments (UN PRI), launched in 2006, to incorporate environmental, social and corporate governance (ESG) issues into their decision-making processes.

Given the fund has excluded so-called "sin stocks" related to climate change, war and health problems from its portfolio, ESG is not a "new concept" at all for the NPS, unlike most Korean businesses that have begun to follow the global trend, again belatedly.

However, the pioneer of ESG investments in Korea is still seeking improvements in its sustainability, instead of choosing to maintain the status quo.

With total assets under management (AUM) reaching 860 trillion won ($768.54 billion) in February, the world's third-largest state pension fund is now taking steps forward, preparing to make responsible investments in assets outside the country.

"Starting this year, we will take into account ESG, when investing in foreign stocks, and will broaden the range of responsible investments to domestic and foreign bonds," NPS Chairman and CEO Kim Yong-jin told The Korea Times at his office in Jeonju, North Jeolla Province.

The pension fund plans to come up with shareholder engagement guidelines to engage in dialogue with foreign companies regarding ESG issues. It will also make responsible investments account for 50 percent of its entire AUM by the end of next year.

Such a strategy is not just intended to fulfill its social responsibility ― the plan is one among measures to enhance the long-term profitability of the fund.

The NPS chairman seemed to be optimistic about the profitability of ESG investments, although he was aware of the controversy about the correlation between ESG ratings and financial performance.

"The greatest advantage of ESG investing is the ability to manage risks," he said. "There is no doubt that ESG is a useful tool to manage tail risk."

Tail risk, or fat tail risk, refers to the risk of an event that can have a significant impact on the value of an asset, although the event has only a small probability of happening. Kim emphasized ESG investments showed a positive correlation with performance and share prices, according to the results of research by reliable institutions.

"It has been proven with achievements and performance," he said.

The NPS itself has also improved its profits, amid its continuous pursuit of ESG strategies. It earned 72 trillion won ($65 billion) with a 9.7 percent rate of return in 2020, after earning 73 trillion won at an 11.3 percent rate the year before.

From that standpoint, Kim advised private enterprises to follow the policies of public institutions by putting more of their focus on the "process" than the "outcome." He stressed that both the private and public sectors should make their profits through socially valuable conduct from now on.

"Only one failure can tear down a company, despite 99 successes," he said. "ESG is essential for their survival."

Divestments from firms using coal

As part of its efforts to expand ESG investments, the NPS is also having an internal discussion about selecting "critical control points" regarding environmental and social factors, after having been advised last year to focus more on climate change and industrial accidents.

In particular, its Fund Management Committee reviewed the introduction of "negative screening" during a meeting last month to consider excluding firms mining coal, and those generating electricity from it, from the pension fund's investment portfolio.

This came after the NPS faced criticism from environmental activists for its continued investments into coal-related industries. They have held rallies in front of the service's buildings nationwide to demand it stop investing in coal-fired power plants here and overseas.

Although the committee members did not draw a conclusion at the meeting, investors started to consider selling their shares in coal-related companies as concerns have grown over any large-scale divestments by the pension fund.

As of last month, the NPS held a 6.94 percent stake in KEPCO; 12.17 percent in OCI; 8.67 percent in GS; 8.02 percent in Kumho Petrochemical; and 9.72 percent in LG International, so their share prices dropped sharply after the committee decided to talk about negative screening.

Kim, however, dismissed concerns about any extreme and abrupt divestments, although he emphasized the final decision will be made by the committee members.

"We should keep pace with the whole economy as a responsible investors in the financial market," he said. "The decision will be made reasonably, considering the government's long-term policies for the power generation industry."

Who is Kim Yong-jin?

Born in 1961, Kim obtained a bachelor's degree in education from Sungkyunkwan University in 1986 and a master's degree in public policy from the KDI School of Public Policy and Management in 2016.

With around a 30-year career as a government official, he was appointed NPS chairman in August 2020, after serving as an adjunct professor of social welfare at Seoul National University's College of Social Science from June 2019 to August 2020, and second vice minister of economy and finance from June 2017 to December 2018.

He was also the CEO of the Korea East-West Power Corp. between January 2016 and June 2017.