Redefining corporate value in the net-zero era: an interview with Kang Chang-mo

As investors, regulators, and businesses gradually recognize climate risk as a driver of corporate performance, sustainable finance has emerged as a central force in the transition to a net-zero economy. In this interview, Kang Chang-mo, an Associate Professor of Finance at the Hanyang University School of Business, shared how climate risk influences corporate value, why financial markets play a critical role in driving sustainability, and what policies are needed to encourage long-term investment in decarbonization.

What courses are you currently teaching?

Hanyang University offers a specialized graduate program in business administration. Hanyang University is currently the first institution in Korea to have developed and is operating an MBA program specifically focused on ESG, and I served as the director of the ESG track within that MBA program for about two years, helping to manage the curriculum. Within that program, the course I teach is called “Sustainable Finance.” As you know, ESG essentially means that, in the interest of sustainability, companies must manage their businesses by considering not only their traditional financial performance but also their social and environmental impacts. The core of ESG is to ensure that a company’s environmental and social impacts are factored into a series of key decisions—such as investment and capital raising.

Consequently, what is crucial is ensuring that a company’s environmental and social impacts are evaluated within the financial markets and that these assessments are reflected in investors’ investment activities or in the financial markets’ overall approach to the company—that is the core of ESG. So, in that regard, within the ESG framework, the paradigm or framework of the financial market regarding sustainability is extremely important. In the course I teach, I’m covering topics such as the new paradigm in the financial market, how it affects companies, and what areas still need improvement.

As you mentioned, the climate crisis should no longer be viewed merely as an environmental issue but rather as a financial risk. In your opinion, how do you think climate risk or ESG is currently influencing corporate value and investment decisions?

Broadly speaking, I believe it ultimately comes down to two factors. If we consider how we evaluate corporate value within the financial markets—as we’ve just discussed—one key factor, viewed very schematically, is how it affects cash flow, or the profits a company generates. From an investor’s perspective, when investing in a company, the cash flow it generates isn’t always within a predictable range, so investors inevitably have to take on a certain amount of risk, and the magnitude of the risk associated with that company also influences its valuation.

As mentioned, risks related to the climate crisis or ESG and sustainability—or rather, their impacts—inevitably affect both the cash flows I mentioned earlier and the potential investment risks associated with the company. From that perspective, I believe we can generally consider this issue along two main lines. However, if we narrow the scope of our discussion to focus solely on climate change—specifically, issues related to global warming—as you know, one aspect involves the physical risks that arise as global warming continues to progress. In other words, as global warming continues, natural disasters will become more frequent, people will face greater hardships, and labor productivity will decline—this is one risk. And, of course, such risks can naturally affect cash flow as well.

Another aspect is the ongoing increase in the price of carbon to mitigate these effects. Whether through a carbon tax or higher prices for emission allowances, companies that cannot avoid emitting carbon will see their production costs rise accordingly, leading to a reduction in cash flow. There is also the risk perceived due to the possibility of rising carbon prices. We typically refer to this as “transition risk.” Since it’s the risk arising from the transition of the system, I believe that the aspects of the impact companies may currently face include both physical risks and transition risks. However, as you know, the core of the current climate disclosure requirements—which require companies to disclose information related to climate change—is essentially to ensure that companies disclose all information critical to investors, whether regarding physical risks or transition risks, so that investors can substantively evaluate this information and reflect it in their assessment of corporate value. These factors are now inevitably being factored into investment decisions and corporate valuations. 

For ESG to act as a positive factor, it seems like companies must shift their mindset to recognize that investing in carbon neutrality now will impact their long-term competitiveness rather than just being a short-term cost. In that regard, how might policies or broader institutional frameworks need to change to make that possible?

Yes, that’s a good point. When you mention “short-term costs,” I assume you’re referring to policies that focus on raising carbon prices so that companies internalize those costs and are thereby incentivized to reduce carbon emissions. However, regarding your question, I believe the crux of the matter is what kind of policy will encourage companies to approach this issue from a longer-term perspective and voluntarily invest in technology development or other initiatives aimed at achieving carbon neutrality or reducing carbon emissions. I understand that this is the focus of In fact, from an economic perspective, these two factors—encouraging companies to internalize costs or to internalize socially generated benefits as their own—are not fundamentally different.

In other words, the reason we argue that carbon emissions are excessive is that there are costs being borne by society, but since companies do not recognize these costs as their own, they do not reduce emissions sufficiently. Conversely, as we transition toward carbon reduction or neutrality—which is ultimately a matter of opportunity cost—social costs will decrease, and this reduction will manifest as a social benefit. However, because companies do not internalize this social benefit as their own profit, they end up not making those efforts, right? So, this is actually a very good question. From an economic and theoretical perspective, we can think of internalizing the costs of this policy and internalizing the benefits as two sides of the same coin—they both operate in the same direction.

However, I still think this is a very important question and a good point. Ultimately, from the companies’ perspective, the core of the question is how to encourage them to adopt a longer-term perspective. So, I personally believe the government now needs to demonstrate a more consistent policy stance and timeline. What I mean by this is—as I mentioned earlier—while “transition risk” in the sense of physical risk refers to what happens when we do nothing, from a corporate perspective, “transition risk” refers to the costs incurred as we change our systems to achieve carbon neutrality and the specific costs that individual companies must bear.

So, this is something we can simply prepare for as we go along. However, from a corporate perspective, the challenge lies in the fact that the transition—specifically, its pace, timing, and manner—is uncertain, which makes the challenge feel even greater. Therefore, in order for companies to prepare for this issue from a longer-term perspective and increase related investments, I believe it is crucial for the government to have a very clear plan, consistently achieve precise policy milestones, and demonstrate the reliability of these efforts to both companies and investors. Therefore, based on those milestones, companies and investors must be able to understand what plans they should have for the future and what investments they need to make to ensure the optimal response. Only then, I believe, will investments related to companies occur from a longer-term perspective.

You mentioned that it’s important to internalize the social costs associated with carbon. Do you think systems like the greenhouse gas emissions trading scheme are effective in creating financial markets that properly reflect these climate risks and the social costs of carbon?

In this regard, the government’s efforts are actually crucial. That’s a good point, but ultimately, from an economic perspective, we view the issues of global warming and carbon emissions as problems of externalities. As mentioned earlier, these are problems that arise because individual economic actors—namely, companies—do not internalize the costs incurred by society as a whole. Therefore, I believe there are essentially two ways to address these externalities.

One is simply to impose a tax. This involves making companies internalize the costs by taxing them an amount equal to the social costs. The second approach is this: the reason this problem arises is that, in a sense, all of us have the right to live in a clean environment with fresh air and a comfortable temperature, but this right is not legally protected as a property right. If this were a legally defined and protected right, it would likely be bought and sold on the market. Since that isn’t currently possible—unlike other forms of property—emission permits are essentially a way to clearly define this right legally so that it can be traded on financial markets. In other words, an emission permit is the right to emit; conversely, it means that you can only emit if you purchase that right. This effectively secures a right that should be socially protected or defined as a property right, enabling it to be traded. So, the system itself is, of course, extremely important and serves as an excellent mechanism for addressing the issue of externalities. 

However, the problem lies in the supply of these emission allowances. As you know, emission allowances can be viewed as a type of security—that is, a commodity—and the price of this commodity is ultimately determined by supply and demand. Ultimately, it is the government that determines the supply. The government decides how many of these emission allowances to release into the market at any given time. However, if the government releases a very large number of these allowances, the carbon price will naturally be low, resulting in minimal internalized costs. In that case, companies will naturally not make much effort to reduce emissions. The key point is this: if we have a clear, specific goal to achieve carbon neutrality by 2050, we must implement the annual carbon reductions required to meet that goal. This involves internalizing the necessary costs, and to do so, it is crucial for the government to manage the supply of carbon emission allowances more tightly—that is, to adjust the supply to the market more strictly and raise the carbon price to the level required.

As you mentioned, the amount of supply is crucial in K-ETS, but there are still issues such as too many free allowances. In any case, it seems that the current system is still largely designed to protect the economic viability of projects. How do you think we should strike a balance in this regard?

Actually, what’s crucial here is global cooperation. What I mean is, for example, South Korea is raising its carbon price significantly, but if the United States, for instance, pays little attention to carbon pricing and continues to allow carbon-emitting activities like the use of fossil fuels, it’s only natural that a gap in industrial competitiveness will emerge between U.S. companies and those based in South Korea. In reality, achieving carbon neutrality is an essential goal not just for Korea, but for the entire world. While the benefits will be enjoyed by everyone and will manifest over the very long term, if there are differences in the pace or extent to which carbon prices rise due to a lack of global coordination among nations, the countries that are moving forward more quickly will naturally bear a greater cost. Furthermore, as industrial competitiveness declines, the costs incurred will likely be even greater than that.

So, the key point here is that the carbon border adjustment mechanism—commonly referred to as the “carbon border tax” or, in Europe, “CBAM”—is ultimately crucial. Ultimately, if we do not coordinate efforts to achieve the carbon reductions and carbon price increases necessary to meet this global goal—with everyone moving in step—then, as I mentioned earlier, we will once again face a kind of free-riding problem. In other words, if I can avoid paying the costs as much as possible while other people and other countries bear those costs first and reduce their carbon emissions, then I—or rather, we—can actually increase our competitiveness and simultaneously enjoy the benefits of gradually mitigating global warming. However, if we face this so-called free-riding problem once again, we will inevitably end up in a state where, at the equilibrium point, no one is willing to make the effort.

The key point here is that this cannot be achieved through the efforts of a single country alone; in fact, coordinated global efforts are crucial. Therefore, if there are disparities in the pace of action, at least from an economic standpoint—that is, for countries that rely heavily on imports and exports—most of these export-dependent nations will inevitably have high carbon emissions. Therefore, if those countries do not raise their carbon taxes sufficiently, it is crucial to have a coordinated system where importing nations raise their carbon taxes sufficiently and, through measures such as a carbon border tax, ensure that exporting nations also internalize these costs. Ultimately, this creates a mechanism that forces countries to align their efforts. Thus, rather than saying these issues can be resolved by the efforts of a single nation, it seems fair to say that global policy coordination is necessary.