McKinsey partner shares investors’ concerns over ESG

‘Key issue is protection of minority shareholders’ This article is the third 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 sustainabl

Domestic private equity firms (PEFs) have not been an exception among Korean companies that are emphasizing environmental, social and corporate governance standards (ESG) as their core management strategy for this year, as they speed up efforts to follow their foreign peers that have already established investment guidelines to take ESC into account.

MBK Partners, which signed the U.N.-supported Principles for Responsible Investment (PRI) in 2012, said in co-founder Michael ByungJu Kim’s annual letter last month that it had worked with its portfolio companies more closely than ever last year to advance numerous ESG initiatives.

IMM Private Equity plans to conduct “ESG due diligence” starting this year, while STIC Investments formed an in-house policy taskforce. Hahn & Company has encouraged its portfolio firms to organize their own ESG committees.

These measures are viewed as “beneficial” to the firms themselves by McKinsey & Company Senior Partner Richard Lee, head of private equity and principal investing practices in the global consulting firm’s Seoul office.

“PEFs are doing this because they know there’s money to be made,” he said in a recent interview with The Korea Times. Hanon Systems, a vehicle air-conditioning and heating systems manufacturer owned by Hahn & Co., can be seen as an example of a PEF-held portfolio company related to the environmental sector, which is considered an area of great growth.

The private equity industry expert, however, saw that domestic managers are still in the early stages in their ESG efforts. He urged them to follow the example of BlackRock that has made public commitments and shared what it is doing regarding investments.

“I think that will be a very big step going forward,” he said. “That will also force companies to become more transparent about their ESG activities.”

Lee emphasized that although Korea’s labor practice issues may not be a concern of global institutional investors in domestic PEFs, the governance, environmental and supply chain issues could be important for firms to attract investments from foreign limited partners, most of which are public pension funds from Canada, the U.S., Singapore and Norway.

Some PEFs in Korea are in conflict with unionized workers of their portfolio companies, who are threatening to demand foreign limited partners stop investing in their employers. Lee interpreted such actions as irrelevant to ESG, saying it does not necessarily mean that union members’ employment will be guaranteed.

According to the McKinsey senior partner, however, global limited partners may think differently about other issues raised by the union, environmental activists and other stakeholders.

“It depends on what they are raising. If they are raising governance issues with some of their minority shareholders, or some of their shareholders, that’s fair,” he said. “The key question is protecting the rights of minority shareholders. When you talk about governance, it’s all about making sure that shareholders are all treated in a relatively equal and fair manner.”

Regarding supply chain issues, he cited examples of Nike and Apple, both of which experienced negative press some time ago, as the former’s supplier had used child labor and the latter’s had failed to prevent several worker suicides.

“They took very proactive measures, and both Nike and Apple have disclosed their supply chains every year. They hired independent auditors to audit their suppliers,” he said, calling for Korean companies do something similar.

Considering that some local PEFs own companies that outsource their manufacturing, Lee’s advice can be applied to them as well.

He recommended companies to follow the World Economic Forum’s ESG disclosure framework developed by four major global accounting firms, if they want to disclose the supply chains of their suppliers.

“That could be a good starting point for companies to adopt ESG voluntarily,” he said. “Global companies wanted to use international standards, when I did due diligence for Korean PEFs and companies.”

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When you talk about governance, it’s all about making sure that shareholders are all treated in a relatively equal and fair manner. ”