Korean firms with high ESG scores show great P/E ratios

South Korean corporates’ price-earnings ratios are affected by their environmental, social and governance (ESG) management, experts said at an ESG conference held by Korea Capital Market Institute in Seoul last week. Among the ESG criteria, environmental factors were found the most influential to the firms’ P/E ratio.     

A research team from Korea University conducted a study on 683 Korean non-financial firms’ stock price trends during early 2020 and their ESG performance as assessed by Korea Corporate Governance Service (KGCS). In early 2020, Korean stocks nosedived and bounced back amid a widespread outbreak of COVID-19.

The firms which achieved grade B or above in ESG evaluation achieved an average P/E ratio that was 10.41% higher than the other firms', the research team found. Environmental factors especially made a positive impact on the P/E ratios, and corporates with strong ESG management showed better downside protection, said Korea University’s Business School professor Na Hyun-seung who led the research.

Firms’ carbon footprint will heavily impact their expected rate of return, said Kim Woo-chan, professor at Korea University’s Business School, in the forum. Corporates with heavy emissions have risks concerning the carbon tax and related regulations, and are thus expected to see 5-7% of losses from their stock prices, Kim added.  

Kim said ESG engagement, which is to execute active ownership in the investee companies for ESG improvement, will lead to excess returns as well as enhance ESG performance. Firms could strengthen their ESG engagement and shareholder activities by introducing non-binding voting systems for shareholder proposals, he explained.    
 
The National Pension Service (NPS) of Korea is seeing some positive impact on ESG investment, Korea Capital Market Institute researcher Nam Chae-woo said. The world’s third-largest pension fund achieved a 9.6% excess return from its responsible investment fund in 2020, compared with the benchmark Kospi index in the same year, Nam added.

Write to Sang-Hoon Sung at uphoon@hankyung.com
Jihyun Kim edited this article.