Verifying corporate sustainability claims: an interview with Cha Geun

Companies have every incentive to make themselves look greener than they actually are, and little incentive to expose less presentable facts. Such gap in ESG reporting is addressed by a third-party verification. In this interview, Cha Geun from Jungin Accounting Corporation discussed how accounting firms verify sustainability reports in Korea and why measuring indirect emissions across a company's entire supply chain remains a largely unsolved problem.

Companies are increasingly making their ESG reports and sustainability reports publicly available to the general public. Why is it important for accounting firms to verify this ESG information?

First, let me explain. Yes, accounting firms do verify the numbers, and while this is certainly an important question—and it is an important question—to get straight to the point: from a company’s perspective, the ESG framework can, in a way, be seen as an additional requirement—something they didn’t originally have to do—and they might view it somewhat like a regulation. So, naturally, if companies are told they have to do something they don’t have to do, they’ll naturally want to present things in the best possible light. For example, if a company emits a lot of pollutants, it naturally wants to appear as if it’s emitting less.

So that’s the motivation for companies, but society wants them to disclose accurate information about these matters—to be transparent. However, when there are differing perspectives, it becomes inevitable that a third party will need to verify the information. Yes, that’s why verification takes place, and that’s the concept behind “third-party assurance.” For example, As part of your job, accountants conduct actual audits of financial statements that show how much money a company has earned. Just like with those audits, ESG reports—from the company’s perspective—are designed to make it look like the company is doing well financially, and there’s a need to present it that way. But in reality, society needs to know exactly how much profit was actually made, so a third-party verification is necessary in the middle.

So verification is now taking place. As I mentioned earlier, “sustainable management reports”—which is the general term for ESG reports in Korea—are not actually mandatory for companies right now. They’re merely voluntary. According to official analysis by the Korea Exchange, a total of 225 listed companies disclosed reports in 2005. Compared to last year—specifically 2024—this represents an increase of about 10%. However, while globally many accounting firms are verifying these reports, in Korea, the proportion verified by accounting firms is still only about 6–7% —a very minimal level. That’s the situation in Korea, but globally, it’s understood that accounting firms verify about 58%—more than half—of these reports.

In any case, sustainability reports typically include many indicators related to greenhouse gas emissions and energy consumption. I’m curious about how you measure and verify those metrics, and whether you apply different standards depending on the type of company.

In South Korea, there’s a website called the “ESG Portal,” operated by the stock exchange. If you go to this site—called “ESG Inquiry”—you’ll see that companies are assigned ratings. So, for example, if you look at the sustainability reports, you can view them here. Reports from various companies are listed there—not just entertainment companies. As I mentioned earlier, this is a program that’s being carried out on a voluntary basis in South Korea. So, it’s just people who feel they should do this voluntarily who upload the information.

If you look here, Scope 1 refers to direct emissions—for example, let’s say I’m talking about a bakery. If the bakery uses gas to bake bread, they measure that gas usage. That’s actually pretty easy because it’s so direct. You’ll have utility bills and everything, so that’s the source of Scope 1 emissions. Next, Scope 2 refers to electricity used for lighting in the bakery—even though it’s not directly related to baking—to sell the bread. This is what’s referred to as Scope 2, and even Scope 2 isn’t that difficult, right? Because there will be electricity bills for that, too.

But things get a bit ambiguous with Scope 3. Scope 3 is a somewhat conceptual idea—it’s called the “supply chain”—and the concept is to measure the carbon emissions generated by the entire value chain. So, taking the bakery example from earlier—let’s say flour. While flour isn’t the only raw material used in the bakery, you have to measure everything, including the exhaust emissions from the truck that delivered the flour to the bakery. So, at this stage, Scope 3 is still a bit of an idealistic goal. 

The problem here is that to measure this, you’d have to install exhaust emission measurement devices on every single truck. It’s actually a pretty difficult problem. So, in fact, for Scope 1 and 2, most major Korean corporations are already measuring and disclosing their emissions, but how to measure and disclose Scope 3—or how to verify it—is actually still the subject of extensive discussion, both socially and globally.

Along with the challenges of reaching Scope 3, there’s also a growing trend of greenwashing controversies. In your opinion, what do you think companies should focus on most to reduce these controversies?

What companies need to be careful about to address greenwashing is—first of all, what is actually the biggest challenge companies face right now? This is a bit of a difficult topic, but conceptually, the biggest hurdles are the limitations of data collection and the lack of internal control systems. These are the two main issues: how much data to collect and to what extent, and what kind of systems we need to set up within our company to collect that data. These are actually major concerns for companies. So, we’ll need to build these capabilities up slowly and methodically, step by step.

As mandatory ESG disclosure requirements are gradually expanding, what do you think companies need to prepare for most urgently in response to this? Is it the expansion of the Scope 3?

From the perspective of ESG critics, some view it as just a “feel-good campaign,” but in any case, I think this trend is here to stay, and companies need to prepare extensively—and that preparation will take quite a bit of time. After all, this involves establishing new standards, right? Establishing those standards, determining how to measure them, and deciding who will verify them—all of that actually takes a lot of time.

Regarding that discussion, companies are currently taking voluntary action, and while they’re aware of the various requirements, the fact is that the ESG concept itself originated in Europe. So, European pension funds are now taking the stance that if ESG scores aren’t provided or certification reports aren’t issued, they won’t invest. They’re taking a stance along the lines of simply cutting such companies out of their supply chains entirely.

Is there anything else you’d like to share?

What I want to say is that ESG is a really appealing concept to talk about. It seems like a “feel-good” campaign, and everything about it sounds right, but there’s always opposition, so we actually need to think about whether it’s truly the right approach. So, for example, one of the things my uncle pointed out was: “Well, we already have such comprehensive laws in South Korea covering the environment, labor, and governance—so why regulate this again?” But in my opinion, laws are somewhat result-oriented, but ESGs are preventing harmful practices from happening in the first place.

Second, this isn’t just about domestic law—it’s not a movement that started in our country. We’re already part of the value chains of many countries—for example, leading global supply chains like BMW, Apple, or NVIDIA—so there’s no way around it. South Korea has no choice but to go along with it. Since we’re already at the core of these supply chains, we have to do this. 

So, in my opinion, from the perspective of someone studying this field, there will be plenty to learn over the next ten or more years. That’s because we’re still in the very early stages, and things haven’t fully taken root yet. Once they do, this kind of data will start to emerge. For example, data might show that a company with a low score actually turned out to be unprofitable upon closer inspection—regression analysis data like that could emerge. So, from a researcher’s perspective, that’s not a bad thing.