The Relationship between the Greenhouse Gas and Energy Target Management System and Foreign Ownership: Investor Sensitivity to the Implementation of the System
2.1. Greenhouse Gas and Energy Target Management System and Related Prior Studies
As the world grapples with increasingly severe abnormal weather conditions due to global warming, a myriad of initiatives are being proposed to combat climate change. The international discourse on climate change first gained prominence at the inaugural World Climate Conference in Switzerland in 1979. This pivotal event marked a transition in viewing climate change as a collaborative international endeavor rather than an isolated national issue. Consequently, nations globally have acknowledged the need for collective action and cooperation.
Central to the climate change discussion is global warming, predominantly attributed to excessive carbon dioxide emissions. It is widely recognized that minimizing greenhouse gas emissions should be a primary focus. A key strategy emerging in this context is the carbon emissions trading system, which functions autonomously through market mechanisms.
In South Korea, under the previous administration’s philosophy of low carbon, green growth, a target was set in November 2009 to reduce greenhouse gas emissions by 30% from the expected Business as Usual (BAU) levels by 2020. To achieve this effectively, various systems for reducing greenhouse gases were established. Prior to the implementation of the emissions trading system, the Korean government introduced the Greenhouse Gas and Energy Target Management System. This system mandates specific greenhouse gas and energy consumption targets for significant emitting industries and enforces compliance.
The Target Management System imposes standards and obligations on high-emitting companies to set, manage, and achieve reduction targets formulated in the preceding year. The government collaborates with these companies in setting these targets and offers incentives for compliance, while non-compliance may result in corrective directives and penalties. The applicability of this system is determined based on a company’s average greenhouse gas emissions and energy consumption over the past three years. As of 2012, 458 companies were designated under this system, accounting for about two-thirds of the national greenhouse gas emissions.
The sectors involved include 366 industrial entities like power generation and manufacturing, 45 in the building sector such as universities and hospitals, 21 in waste management like incineration and wastewater treatment, and 26 in agriculture and livestock. The Target Management System not only plays a crucial role in reducing emissions through set targets but also prepares domestic companies for the future emissions trading system by enhancing their greenhouse gas management capabilities. The greenhouse gas calculation, reporting, and verification system used in the Target Management System is expected to be instrumental in the emissions trading system, ensuring the reliability and accuracy of reported greenhouse gas emissions and reductions.
Recent research, both domestically and internationally, consistently indicates that green policies, environmental improvements, and the disclosure thereof positively influence corporate profitability. This body of work suggests a notable causal link between a firm’s carbon emissions, its disclosure of carbon reduction policies, and corporate valuation. This linkage stems not only from consumer preference for products from low-emission companies, which aligns with their carbon reduction awareness, but also from the positive reputational signal sent to investors by corporate executives through these environmental efforts [3].
Chapple et al. (2013) examined market reactions to carbon emissions among 58 Australian companies engaged in voluntary emissions disclosure and involved in public carbon trading. Their event study revealed a significant market response to ETS (Emission Trading System)-related events, particularly in high-emission companies, suggesting a robust positive correlation between carbon emissions levels and stock prices via valuation models [4]. Matsumura et al. (2014) expanded this inquiry to S&P 500 companies in the U.S., addressing potential biases in Chapple et al.’s sample. Their findings confirmed a significant inverse correlation between carbon emissions and corporate value, even after adjusting for self-selection bias. Notably, firms that voluntarily disclosed carbon emission information had higher market value than those that did not [5].
Jung et al. (2016) explored the causal relationship between carbon emissions risk exposure and debt costs in 78 Australian Stock Exchange-listed companies from 2009 to 2013. Their analysis indicated a positive correlation between debt costs and carbon emission risks in non-CDP-compliant companies, suggesting that carbon emissions can escalate potential corporate debt and diminish corporate value [6].
Clarkson et al. (2015) investigated the interplay between greenhouse gas emissions and corporate value in EU companies under the carbon emissions trading system. Their empirical analysis found no direct correlation between a company’s carbon emissions allowance and its value. However, a negative relationship with corporate value emerged when the carbon emission allowance was insufficient, particularly for companies with higher emissions within their industry or those in less competitive sectors [7].
Saka and Oshika (2014) reported differing outcomes for Japanese firms. Analyzing data from 89 companies that responded to CDP surveys, 16 non-respondents, and 989 non-participants from 2006 to 2008, they observed a significant negative correlation between carbon emissions levels and corporate value. However, voluntary disclosure of carbon emissions information positively impacted corporate value, especially for larger emitters [8].
In Korean studies, Jeong Yong-gi and Kim Seon-hwa (2008) emphasized environmental investments, including low-carbon policies, as crucial for corporate social responsibility (CSR). However, they noted a prevailing investor perception of such investments as mere additional costs, leading to hesitancy among managers to undertake environmental initiatives without clear financial gains. Their empirical analysis of companies in environmentally damaging industries revealed that environmental facility investments significantly reduced total manufacturing costs, particularly evident from the first to the third year post-investment [9].
Kim Myeong-seo et al. (2010) argued for the necessity of responding to growing demands for environmental information disclosure, influenced by global trends and stakeholder expectations. Their analysis demonstrated that environmental costs and investments significantly impacted corporate valuation in the capital market [10]. In a similar vein, they investigated how environmental investments and management costs are reflected in market valuations, focusing on companies designated as environmentally friendly by the Ministry of Environment. Their findings indicated that environmental costs and investments were statistically significant, suggesting these factors enhance corporate environmental performance, alter risk perceptions, and reduce capital costs, ultimately boosting corporate value.
2.2. Prior Research on Foreign Ownership
Foreign investors have increasingly exerted a significant influence in financial markets, particularly through their ability to discern and extract the intrinsic value of companies through sophisticated investment techniques, thereby setting a benchmark for the entire market, as identified by [11]. This phenomenon suggests that managers in companies with substantial foreign equity participation are presented with unique opportunities to align their strategies with the interests and preferences of these foreign investors.
Moon-tae Kim (2004) conducted an empirical analysis to explore the impact of foreign equity participation on earnings management within domestic companies [11]. This study compared companies with more than 15% foreign ownership (FC) to those exclusively owned by domestic investors (KC). The findings revealed that FCs had a significantly lower average in both the absolute and actual values of the accrual variable measuring earnings management compared to KCs. This indicates a discernible difference in earnings management practices between the two groups, with FCs engaging in less earnings management than KCs.
Additionally, the direction of earnings management, whether it involves an upward or downward adjustment of profits, has emerged as a critical area of research in the context of foreign investor influence. Moon-tae Kim (2004) analyzed the explanatory power of the accrual variable’s own figures in relation to this aspect [11]. The analysis showed a significantly negative correlation between the coefficients of the occurrence variable and the foreign ownership ratio, suggesting a potential dampening effect on managers’ intentions to adjust profits in either direction due to foreign investor influence.
Park Gyeong-hwan (2008) conducted a study focusing on foreign companies’ investment preferences and considerations in South Korea, examining 13 investment incentives and 9 environmental factors through interviews [12]. The investment considerations for foreign investors were categorized into market entry, investment type, establishment type, industry, size of investment, workforce size, and year of investment, analyzed using a t-test. The results indicated that foreign investors base their investment decisions on factors such as the market entered, type and establishment of investment, workforce size, and year of investment. These findings highlight the need for the Korean government to tailor investment incentives and create conducive environmental factors to attract high-quality foreign investors.
Baek Jeong-han and Kwak Young-min (2018) investigated whether foreign investors show a preference for Korean companies that offer information highly comparable to foreign companies and whether the qualitative attributes of accounting information serve as an incentive for foreign investment [13]. Analyzing a sample of 1817 companies listed on the Korean stock market from 2011 to 2015, it was found that foreign investors tend to prefer Korean companies with higher comparability to foreign firms. Furthermore, the relationship between comparability and foreign ownership strengthened post-IFRS introduction, indicating that the adoption of IFRS, which brought about international accounting consistency, has had a positive impact on attracting foreign investors by addressing undervaluation in the international capital market.
Since the liberalization of investment regulations in July 1998, allowing foreign investment in all types of securities in the country, foreign investors, as of December 2020, hold assets valued at KRW 760 trillion. This figure represents 31.4% of the market capitalization of companies listed on the stock market and KOSDAQ. Examining previous research, it is observed that foreign investors in Korea display a marked preference for companies with reduced information asymmetry [14]. They tend to invest in firms characterized by transparent corporate disclosures and a stable financial and management environment [15]. Although concerns persist in some circles about the potential negative impact of foreign investors on the domestic capital market and corporations, such as short-term profit realization and corporate capital recovery via high dividends and capital reduction, the majority of studies suggest otherwise. Research predominantly indicates that foreign investors contribute positively, such as by stabilizing management with long-term capital and transferring advanced management techniques [16,17].
Furthermore, in companies with strategic investors holding more than 5% of the shares, the proportion of foreign investors appears to have no significant influence on short-term dividend increases [16,18]. Particularly noteworthy is the trend of foreign investors often participating as major shareholders or blockholders in institutional forms, rather than as individual or minority shareholders. As such, their investment approach is characterized by promoting stable values in the invested companies and a strong motivation for participation in corporate management, indicating a focus on long-term gains rather than short-term profits [19]. Additionally, with the growing trend of socially responsible investment (SRI), which seeks to balance profit maximization with stability in the global capital market, global management firms are increasingly motivated to invest in companies that demonstrate sustainable growth and handle environmental information conscientiously [20].
2.3. Hypothesis Development
Investigating the influence of foreign investors in corporate environmental initiatives, particularly in low-carbon and energy reduction efforts, uncovers a multifaceted relationship. Foreign investors, as advanced institutional investors, are increasingly recognized for their role in extracting intrinsic company value through sophisticated investment techniques and disseminating this information to the wider market. This dynamic not only sets market benchmarks but also provides domestic investors with novel investment paradigms, as noted by Moon-tae Kim (2004) [11].
Their propensity to influence market trends is significant, especially considering the tendency of general investors in domestic markets to exhibit herding behavior that often aligns with foreign investment patterns. Consequently, management in companies with substantial foreign equity participation cannot remain indifferent to the preferences and influences of these international investors.
The preference of foreign investors for companies engaged in low-carbon policies becomes a compelling area of study. Previous research in developed countries, particularly those with strong commitments to climate agreements, has shown mixed results regarding the relationship between environmental performance and corporate value. Porter and van der Linder (1995) highlighted that proactive environmental performance could enhance corporate value by eliminating environmental waste and inefficiencies [21]. On the other hand, Heal (2005) posited that good environmental performance, as an aspect of corporate social responsibility (CSR), plays a crucial role in bridging the gap between the country and the market, mitigating risks from social conflicts, reducing pollution, and enhancing brand value, thereby potentially improving long-term financial performance [22].
In the Japanese context, where the mandatory disclosure of greenhouse gases has been legislated since 1998, Saka and Oshika (2014) investigated the relationship between corporate value and environmental performance. Their analysis of responses to the Carbon Disclosure Project (CDP) survey from 2006 to 2008 showed a significant inverse relationship between carbon emissions and corporate value [8]. Conversely, Vance (1975) cautioned that striving for excellent environmental performance might negatively impact corporate value due to internal resource allocation [23]. Similarly, Barnea and Rubin (2010) questioned whether CSR spending, as opposed to direct profit-generating activities, could lead to opportunity costs and the potential misuse of corporate resources at the managerial level for personal reputation [24].
Despite these varied perspectives, the growing global emphasis on environmental factors due to climate change has spurred studies using carbon emission levels as a proxy for environmental performance. These studies generally indicate that better environmental performance (i.e., lower carbon emissions) correlates with higher corporate value [4,5,8,25,26,27,28,29].
In light of this evidence, it becomes increasingly clear that foreign investors may indeed have a growing preference for investing in companies actively engaged in environmental issues, particularly those implementing low-carbon and energy-efficient strategies. This trend reflects a broader shift in investment priorities, where environmental stewardship is becoming an integral component of corporate valuation and investor decision-making processes.
While previous studies have established that disclosure or investment in carbon information positively impacts corporate value, a new dimension emerges when considering companies under government-mandated Greenhouse Gas and Energy Target Management Systems. Firms designated as target-managed by government agencies are systematically overseen, with specific goals for carbon emission reduction, allocated quotas, and subsequent facility investments or carbon credit purchases. These elements provide these companies with strong incentives to implement carbon-neutral policies as part of achieving their reduction targets.
This scenario presents an intriguing investment landscape. Companies engaged in government target management programs potentially possess a higher investment appeal compared to their non-participating counterparts. The systematic approach to carbon management under these programs—spanning from setting reduction targets to enforcing compliance through investment or carbon trading—signals a proactive stance on environmental responsibility. Foreign investors, increasingly attuned to the long-term risks and opportunities associated with climate change and sustainability, may find these companies more attractive. This attractiveness stems not only from their alignment with evolving regulatory landscapes but also from their potential to lead in efficiency, innovation, and sustainable practices.
Moreover, the government’s role in Target Management System suggests a level of oversight and commitment to environmental goals that can translate into a competitive advantage for these companies. Through structured frameworks for emission reduction and encouraged investment in sustainable technologies, these firms are often at the forefront of adopting practices that not only comply with but exceed environmental standards. Such leadership can translate into enhanced corporate reputation, operational efficiencies, and ultimately, an increase in corporate value.
In summary, the intersection of government Target Management System and corporate environmental strategy opens up new avenues for understanding corporate value in the context of environmental sustainability. Firms under a Target Management System, with their structured approach to meeting carbon-neutral goals, present a compelling incentive for enhanced investment appeal in an increasingly environmentally conscious market. Based on the aforementioned arguments, the first hypothesis is as follows.
Hypothesis 1.
Foreign investors are more likely to favor investment in companies that are actively engaged and regulated under Greenhouse Gas and Energy Target Management Systems, in contrast to those companies that are not bound by such regulatory frameworks.
In the framework outlined by the National Greenhouse Gas Comprehensive Management System, the process for promoting the Target Management System involves sector-specific management agencies designating companies, subject to confirmation by the Ministry of Environment—the overseeing body. These designated companies are tasked with annually monitoring their greenhouse gas emissions and the status of emission facilities and subsequently submitting detailed reports to the respective sector’s managing agency. Following a review of these submissions, the management agency sets and communicates the greenhouse gas reduction targets and objectives for the ensuing year to each company. In response, these companies are required to formulate and submit a plan by December, detailing how they intend to achieve these set goals.
In alignment with the approved plans, each company undertakes initiatives to meet its greenhouse gas reduction and energy conservation targets. The data pertaining to greenhouse gases, calculated during this process, are reported to the Greenhouse Gas Comprehensive Information Center, supervised by the Ministry of Environment. Should a sector’s management agency identify any shortfall in a company’s performance against the targets or find deficiencies in the reporting, it issues an order for improvement. Such orders can negatively impact the company’s reputation capital. Given that the evaluators and the goal-executing entities are distinct, and the implementation process of the system involves multiple stages, the effective execution of the Target Management System is contingent upon efficient communication across these stages and the quality and quantity of information generated by the companies.
Previous research indicates that foreign investors typically favor companies with lower levels of information asymmetry, seeking to minimize transaction costs and uncertainties associated with information gaps [30,31]. This preference is particularly pronounced when investing in foreign companies, where information asymmetry concerning non-financial data is exacerbated by the institutional diversity of the target company’s country and market. From this viewpoint, this study hypothesizes that the intricate reporting system of companies under the Target Management System might be perceived as a form of institutional heterogeneity by foreign investors. This perception could contribute to information asymmetry, regardless of the system’s faithful execution, thus influencing foreign investors’ sensitivity to investment in these companies. Consequently, the following hypothesis is proposed.
Hypothesis 2a.
The degree of foreign investors’ ownership in companies governed by the Target Management System is likely to fluctuate based on the extent of information asymmetry present.
Hypothesis 2b posits that the stage of a company’s life cycle—whether it is in a growth or maturity stage—significantly impacts investor sensitivity to the implementation of the Target Management System. This study posits that the life cycle of a company significantly influences its proficiency in managing greenhouse gas emissions under the Target Management System. Specifically, the comparison is drawn between companies in the growth phase and those in the maturity stage, with a particular emphasis on their capabilities in greenhouse gas emission management, as well as their efficiency in operating systems for greenhouse gas monitoring, reporting, and verification.
Companies in the maturity stage are hypothesized to exhibit superior management capabilities and know-how in controlling greenhouse gas emissions. This proficiency is attributed to their extensive experience and established processes in dealing with the intricacies of the Target Management System, including the robust estimation, reporting, and verification of greenhouse gas emissions. These mature companies, having navigated the system for a longer duration, are likely to demonstrate exceptional efficiency and effectiveness in this regard.
In contrast, companies in the growth stage are presumed to have relatively less efficiency in managing greenhouse gas emissions within the Target Management System. This is not due to a lack of commitment but rather reflects their nascent stage in engaging with the system’s requirements and processes. These growing companies are still in the process of developing their capabilities and understanding of the system, which might result in less efficiency compared to their mature counterparts.
Consequently, this study suggests that the life cycle stage of a company is a crucial determinant in assessing its effectiveness and efficiency within the Target Management System for greenhouse gas emissions. This distinction, in turn, could influence the investment preferences of foreign investors, who may view the institutional effectiveness of mature companies as a more attractive and stable investment compared to the evolving capabilities of growing firms. This leads to the final hypothesis, as follows.
Hypothesis 2b.
The correlation between foreign investors’ ownership in companies under the Target Management System and their respective investment decisions will be influenced significantly by the stage of the company’s life cycle.
