How Public Assurance Systems Improve ESG Disclosure and Investor Trust

Environmental, Social, and Governance information—non-financial corporate data—has become increasingly important in today's market. According to Bloomberg earlier this year, global ESG investments amounted to USD 30 trillion in 2022 and are expected to surpass USD 40 trillion by 2030. As studies continue to show that ESG performance influences corporate value, financial outcomes, and borrowing costs, ESG disclosure is now taken more seriously than ever.

However, the legal framework for ESG disclosure remains incomplete, leaving consumers and investors vulnerable to misleading practices such as ESG washing. ESG investments are rapidly growing and influencing business activities, yet concerns^[1] persist over greenwashing—where companies falsely promote or exaggerate the environmentally friendly attributes of their actions or products. International organizations and regulatory authorities across various countries are working to establish and strengthen non-financial disclosure requirements, but a universal regulatory framework is unlikely to emerge quickly due to the complexity and diversity of ESG information.^[2]

Despite these challenges, such a regulatory framework is essential, as greenwashing fosters false perceptions among consumers and investors, leading to misunderstanding and potential harm. A notable example is the 2015 Volkswagen emissions scandal, in which the company deliberately manipulated diesel engine performance during emissions tests, misleading regulators and consumers alike.^[3] More recently, concerns have been raised that banks with weak ESG evaluations have greenwashed their performance by increasing lending to companies with stronger ESG ratings.

While establishing a legal framework to impose sanctions for misleading ESG disclosures would help mitigate greenwashing risks, developing such a system is expected to take significant time. Although ESG disclosure obligations are strengthening worldwide, variations in mandatory reporting content and format between countries will likely persist for the foreseeable future. Ensuring consistency, accuracy, and comparability in ESG disclosures remains a complex challenge.^[4]

Moreover, non-financial information—such as environmental, governance, and social data—often presents greater information asymmetry between companies and investors than financial metrics. Quantifying and standardizing this information is difficult, as its relevance varies by industry, making it challenging to define uniform disclosure standards. Additionally, some ESG disclosure obligations have not been introduced based on investor materiality but rather due to historical factors, such as responses to industrial accidents, social concerns, environmental damage, or governance failures.^[5]

As a result, reporting obligations for many critical ESG indicators that matter to investors remain absent or incomplete. Yet, markets and investors must continue making decisions based on these fragmented disclosures, increasing the risk of confusion and financial loss.

To improve the credibility of publicly available ESG information, major countries are adopting external assurance obligations. However, concerns remain about the credibility of external assurance itself. Several countries have already introduced or are considering ESG assurance, using standards established by the International Auditing and Assurance Standards Board (IAASB). Assurance institutions and agencies may include consulting firms, accounting firms, and other organizations.^[6]

Introducing such an assurance obligation in the Republic of Korea (ROK) could also help mitigate greenwashing risks, but a lack of reliable agencies for ESG information assurance presents a challenge. Even if suitable agencies exist, implementing legal requirements for an assurance system is expected to take considerable time.

Given the difficulties ROK faces in rapidly strengthening legal obligations related to ESG disclosure, investor confusion stemming from incomplete and inaccurate information may persist, hindering sound investment decisions during the prolonged transitional period. Therefore, a public entity should be established to conduct ESG assurance for public companies or supervise assurance institutions and agencies for a certain period. Such a measure would not only reduce the risk of greenwashing but also foster more robust investments and business activities.

^[1] S.Y. Lee. 2021. Growing Risks of ESG Investment and Policy Implications. Financial Research Brief. Vol. 21 No. 11. Korea Institute of Finance.

^[2] The two most prominent frameworks for ESG disclosure requirements are the EU’s Corporate Sustainability Reporting Directive (CSRD) and the SEC’s climate disclosure rules.

^[3] The UN has identified several forms of greenwashing, including: (i) claims of reducing carbon emissions to net zero without a credible plan; (ii) intentionally vague or unspecific information regarding a company's operations or the raw materials it uses; (iii) misleading labels such as 'green' or 'environmentally friendly' that lack standard definitions and are easily misunderstood; (iv) exaggeration of minor environmental impacts as if they were major, or promotion of products with minimal regulatory requirements as if they exceed industry standards; (v) highlighting a single environmental impact while overlooking others; (vi) emphasizing the avoidance of illegal or non-standard practices that are unrelated to the product; and (vii) promoting a product's sustainability apart from branding activities, or vice versa (e.g., clothing made from recycled materials but manufactured in a high-carbon-emitting factory).

^[4] On the other hand, the disclosure framework and its associated sanctions for financial information have been relatively well-established over a long period.

^[5] For example, governance-related disclosures have been introduced to enhance transparency in response to stricter governance discipline.

^[6] According to the CSRD, companies must have their reported information verified, meaning that a third-party auditor must issue a written report confirming that the sustainability report is free of material errors.

Korea Institute of Finance website.