South Korea is preparing sweeping changes to its stewardship code that will allow public pension funds and other institutional investors to penalize companies linked to major industrial accidents.
The move is expected to reshape corporate governance and raise new questions about the balance between safety, finance and industrial competitiveness, analysts said.
According to industry sources on Wednesday, Korea’s top financial regulator, the Financial Services Commission (FSC), is working on revisions that would expand the remit of the stewardship code, a set of principles guiding institutional investors’ engagement with companies, beyond governance to include environmental and social risks.
For the first time, workplace safety, specifically the occurrence of serious industrial accidents, will be written into the framework, people familiar with the matter said.
The plan is anticipated to enable powerful shareholders such as the state-run National Pension Service (NPS), Korea’s largest institutional investor, to press companies for management reform if they are deemed vulnerable to major accidents.
Reinforced bars at a construction site in South Korea POSSIBLE WITHDRAWAL OF FUNDS; EXCLUSION FROM PUBLIC PROCUREMENT
If corporate responses are judged inadequate, investors could exercise voting rights more aggressively or withdraw funding altogether, sources said.
Firms that repeatedly suffer accidents could also face exclusion from public procurement, under a parallel initiative by the Ministry of Economy and Finance.
“Strengthening the stewardship code will encourage investors to take an active role in improving companies’ risk management,” said an industry source. “This is about protecting shareholder value as well as addressing social responsibility.”
Currently, 239 institutions, including the NPS and leading asset managers, have signed up to the country’s stewardship code since its introduction in 2016.
The proposed revision marks its first overhaul in nine years.
Regulators are also considering annual assessments of whether signatories are meaningfully implementing the code, with penalties for those falling short.
A construction site in Seoul PRESSURE TO EMBED ESG INTO INVESTMENT PRACTICE
The move reflects growing pressure in Korea to embed environmental, social and governance (ESG) criteria into investment practice.
Officials said ratings agencies, such as the Korea Institute of Corporate Governance and Sustainability (KCGS), may incorporate industrial accident risks into ESG scores, which would in turn affect capital flows.
Some asset managers are already moving to exit positions when companies fail to meet ESG thresholds.
“If accidents are repeated, that can mean a withdrawal of funds,” said an industry executive.
ACCIDENT-PRONE FIRMS REMAIN WARY
But business groups warn that those measures could tighten financing across industries with inherently higher accident risks, including construction, steel and petrochemicals, and push accident-prone firms onto what critics are calling an “investment blacklist.”
The NPS is a major shareholder in construction companies such as Samsung C&T Corp., in which the pension fund holds a 7.61% stake, Hyundai Engineering & Construction Co. with a 11.72% stake, GS Engineering & Construction Corp. with 8.6%, DL E&C Co. with 12.57% and HDC Hyundai Development Co. with 13.63%.
The National Pension Service is Korea's largest institutional investor Analysts said the new government measures are raising prospects of more activist intervention.
Industry executives also worry that swift market punishment following accident disclosures could increase volatility and deter long-term investment.
“This action risks cutting off capital even for companies making genuine efforts to improve safety,” said a senior construction industry official.
‘PENSION SOCIALISM’
The planned strengthening of the stewardship code is also reviving fears of “pension socialism,” the idea that the NPS and other public funds could exert outsized influence over private-sector management under the banner of social responsibility.
“If internal rules force a reduction in exposure to accident-prone companies, large-scale sell-offs may be unavoidable,” one person familiar with the NPS said.
While the FSC said such reforms will be coordinated with industry to avoid excessive disruption, critics said that the combination of investor pressure, tighter lending criteria and procurement bans would weigh heavily on sectors that already face global competitiveness challenges.
Write to Hyung-gyo Seo, Yeon-Su Shin and Gyeong-Jin Min at seogyo@hankyung.com In-Soo Nam edited this article.
