Impact of an institutional investor as common ownership on the corporate environmental performance in Korea

Globally, institutional investors, such as large asset management firms and pension funds, represent an increasing proportion of investments. Bas et al. (2023) stated that, since the 2008 financial crisis, stocks have been overwhelmingly owned by institutions rather than by individual investors. It defined the situation as “common ownership.” Common ownership is defined as simultaneously owning shares of competing firms in the same sector (OECD, 2017).

Common ownership is observed in various investment approaches by different entities, including pension funds and asset management of institutional investors, sovereign wealth funds operated by governments, cross-shareholdings among corporations and investments by some influential family and individual capital owners. In practice, however, large institutional investors have emerged as the primary actors of common ownership (Bas et al., 2023). Common owners are characterized by holding equity stakes across the entire economy and prioritizing long-term returns (Wang and Zhou, 2022), largely because these investment characteristics are typical of large institutional investors (Edmans et al., 2019).

The USA has the largest stock market in the world, and the three largest asset management firms, BlackRock, Vanguard and State Street, have accounted for 80% of the S&P 500 ETF market since 2020 (Baines and Hager, 2023). These large asset management companies also exhibit the characteristics of common ownership, as they hold equity stakes across the entire economy.

Large pension funds, as institutional investors, not only hold equity stakes across the entire economy but also operate from a long-term perspective, prioritizing long-term returns. In this regard, they serve as a representative example of a common owner. A pension fund is a managed asset that pays an annuity each year as the investor ages and no longer has a regular income. Pension funds play an important role in market stabilization, functioning as a mechanism to mitigate the rise and fall in corporate asset prices by purchasing undervalued assets in pursuit of long-term investment returns (Fong et al., 2022).

Unlike hedge funds that seek short-term returns, pension funds aim to gain profits through long-term investments and play a role in the market that is distinct from that of short-term investors. Long-term institutional investors are more likely to monitor firms with the goal of driving policies that increase the firm’s long-term value, and better monitoring tends to alleviate managerial shortsightedness. Short-term institutional investors, on the other hand, have little incentive to monitor executives, and therefore do not engage in long-term monitoring.

In the UK, the second largest global asset management market after the USA, institutional investors accounted for 79% of all AUM as of 2021, with pension funds having the largest share (43%), followed by insurance firms (12%) (FSS, 2021). This finding confirmed that long-term institutional investors are primary investors.

Public pension funds are institutional investors representing common owners as they not only pursue long-term investments but also manage large assets. The National Pension Service (NPS), the largest public pension fund in Korea, is among the world’s top three pension funds in terms of AUM, with nearly $779bn in accumulated funds as of September 2024 (NPS, 2024).

These large forms of capital demand environmental responsibility from the investee firms, including disclosure of environmental, social and governance (ESG) information. The United Nations introduced the six Principles of Responsible Investment in 2006, which have become the largest initiative to promote responsible investment and integrate ESG into capital markets. Stewardship codes guide institutional investors to actively engage in investee firms’ decision-making, promote long-term growth and increase returns (Shim et al., 2023). In December 2016, the Korea Stewardship Code Council published its Principles on Institutional Investors’ Fiduciary Duties, recommending that domestic institutional investors actively engage in the environmental performance of their investee firms.

The 2015 G20 Finance Ministers and Central Bank Governors Meeting requested the Financial Stability Board to review climate-related financial risks, leading to the establishment of the Task Force on Climate-related Financial Disclosures (TCFD). Although not mandatory, large asset managers like BlackRock encouraged their investee firms to follow the TCFD framework (Baines and Hager, 2023).

The international community has recognized the importance of ESG management for firms. Therefore, many countries have reflected ESG requirements in their stewardship codes. In its 2020 revised stewardship code, Japan stated that institutional investors should consider sustainability issues, including ESG, in investment management strategies.

In 2016, Korea’s NPS launched a globally responsible investment policy that considered ESG and firms’ financial performance. By incorporating sustainability into its fund management, NPS established a foundation for responsible investment (Kim et al., 2022). As NPS considers environmental factors in its decisions, higher NPS shareholdings may indicate greater environmental responsibility by the firm.

The market share of large institutional investors is increasing in the international community and firms’ environmental responsibilities must be managed. This study empirically examined how a large institutional investor affects the environmental performance of investee firms. It is the first study to use greenhouse gas (GHG) emissions as an indicator of corporate environmental performance in the Korean market. This study targeted NPS, the largest institutional investor in Korea with the largest assets. All NPS’s top five domestic and foreign investees were blue chip firms (NPS, 2023). Considering that a common owner holds economy-wide stakes and prioritizes long-term returns, this study analyzed NPS as a representative example of a common owner, because it aims for long-term investment as a pension fund and holds stocks in the overall domestic and overseas economy.

In Korea, a revised Commercial Act to strengthen shareholder rights passed the National Assembly plenary in March 2024. The amendment aimed to expand directors’ Duty of Loyalty from “the company” to include “both the company and its shareholders” (Moon, 2025). However, in April 2025, the amendment was not enacted due to executive opposition. Still, such revision attempts indicate increasing scrutiny and pressure from stakeholders on firm management regarding ESG practices. When legal frameworks are weak and managers may prioritize their own interests over stakeholders’, large institutional investors like NPS can effectively monitor and promote stronger environmental performance in investees. This study empirically showed that, despite institutional constraints, institutional investors significantly enhance investee firms’ environmental performance.

Previous studies used ESG scores as a proxy for corporate environmental performance (Chen et al., 2023; Minutolo et al., 2019). While ESG scores provide a comprehensive assessment, they have the disadvantage of varying standards among rating agencies and reliance on firms’ self-reported or forward-looking data.

Considering these limitations of ESG scores, this study analyzed the environmental performance of investee firms in terms of their GHG emissions. Research on the relationship between large institutional investors and the environmental performance of investee firms remains limited. This study examined how large institutional investors, representing common owners in the Korean market, affect investee firms’ GHG emissions.

Institutional investors engage in firm management by monitoring the financial performance and governance of firms to improve the return on their investments, in line with institutional objectives. The monitoring activities of institutional investors help to resolve agency problems. According to the agency theory, in a firm where ownership and management are separated, the executives (agents) have more information than the shareholders (principals) and have incentives to use the firm’s resources in a way that is beneficial to the executives. This can lead to agency problems such as information asymmetry, concentration of short-term profits by managers and inefficient investment (Panda and Leepsa, 2017). Institutional investors’ monitoring is based on their expertise and social ties, which help ordinary shareholders access insider information. This alleviates the information asymmetry between external stakeholders and firms (Freiburg and Grichnik, 2012).

Direct social ties refer to the direct connections between institutional investors and corporate executives through personal relationships, whereas indirect connections imply that third parties provide nonpublic information between them. Social ties involve the transmission of information, either directly or through intermediaries, which reduces information asymmetry. By using active voting and other measures to monitor corporate executives over the long term, institutional investors reduce the agency problem, in which executives do not consider long-term risks and make decisions focused on short-term profits regardless of the shareholders’ intentions, thus preventing damage to corporate reputations (Lo et al., 2017).

Whether institutional investors monitor actively or passively is influenced by their pressure sensitivity. Pressure-resistant institutions, such as public pensions and funds that have no direct business ties with investee firms, actively monitor for sustainable performance despite potential conflicts of interest with management (Brickley et al., 1988). Meanwhile, pressure-sensitive investors, such as insurance companies or banks, which have commercial relationships with firms, prefer passive monitoring through share sales rather than direct opposition (Oh et al., 2023).

Importantly, institutional investors can influence investee firms’ environmental action through either direct intervention or divestment. Because reducing carbon emissions can enhance a firm’s image and protect investors’ long-term financial interests (Safiullah et al., 2022).

Active monitoring influences firm management through direct interventions such as board composition and opposition to mergers. Although it involves high management costs, it can contribute to improving long-term financial performance through firm growth. For example, the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the USA, challenged a lawsuit filed by investors who submitted shareholder proposals urging ExxonMobil to set climate change response targets. Instead of shareholder proposals, CalPERS sanctioned ExxonMobil’s anti-environmental actions through private conversations and shareholder coalitions (Winegarden, 2024).

Passive monitoring affects management by threatening to sell shares or withdraw investment rather than by direct intervention (Appel et al., 2016). This approach is often preferred by pressure-sensitive institutional investors, such as banks and insurance firms with business ties to investees, who use divestment strategies instead of direct engagement to maintain favorable relationships and minimize monitoring costs (Francis et al., 2021). In 2020, BlackRock, the largest asset manager in the USA, announced it would divest from coal firms according to its ESG principles, aiming to promote investees’ environmental performance through portfolio restructuring (Strampelli, 2020). This showed that passive monitoring can also have a significant impact.

Most institutional investors in Korea are pressure-sensitive and engage in passive monitoring, influenced by strong financial ties among financial institutions, government-related investors and family-owned firms (Oh et al., 2023). Korean conglomerates are typically family-controlled resulting in concentrated ownership and significant information asymmetry, which institutional investors monitor passively.

There is discussion on whether NPS acts as a passive monitoring institution, with some viewing its stewardship activities as excessive intervention (Park, 2020). Others argued that NPS is pressure-sensitive, citing its politically motivated support for the Samsung C&T–Cheil Industries merger and historically limited shareholder activism (Oh et al., 2023). While the classification remains controversial, NPS is considered to passively monitor investee firms’ environmental performance through ESG investment principles.

Common ownership is characterized by a small number of investors or institutional investors who simultaneously own stakes in competing firms in the same sector (OECD, 2017). Large institutional investors, as representative common owners, manage portfolios of competing firms and focus on maximizing overall portfolio value rather than returns from individual firms.

These common owners are likely to promote environmental protection. First, large institutional investors are sensitive to structural changes in the market because they prioritize long-term market returns. This makes them responsive to stakeholder and policy feedback, which leads them to adopt green investment strategies and responsible investment principles (Baines and Hager, 2023). Second, because they have a stake in the global economy, they seek to internalize environmental externalities and manage climate risks across all firms. As information about one firm’s environmental pollution can impact others in the portfolio, institutional investors monitor the environmental performance of all investee firms to protect total portfolio value (Lu et al., 2024).

Edmans et al. (2019) provide a theoretical model in which common ownership can strengthen corporate governance not only within individual firms but across an investor’s entire portfolio. When large institutional investors such as NPS hold diversified, cross-sectoral stakes, they have incentives to internalize negative environmental externalities generated by one firm that may affect the broader portfolio. For example, excessive GHG emissions in the energy sector may lead to regulatory responses or reputational risks that also affect automotive or financial firms within the same portfolio.

Under this framework, common owners have both the incentive and the ability to influence firms’ long-term risk management behavior. This can take the form of active monitoring (voice) or divestment threats (exit), leading to improved environmental performance across multiple firms. However, the effectiveness of this mechanism depends on the owner’s engagement intensity and transparency.

NPS is the largest pension fund in Korea by AUM. Under Article 147 of the Korean Capital Market Act, anyone holding more than 5% of a listed firm’s shares must report to the Financial Supervisory Service (FSS) and Korea Exchange. Based on these disclosure standards, NPS holds the largest shareholding among domestic institutional investors. As a long-term investor and large institutional investor, NPS’s investment decisions significantly influence the management of its investee firms.

In the 2015 merger between Cheil Industries Inc. and Samsung C&T, allegations were raised that the merger ratio favored the Samsung founding family and suspicions of deliberate stock price suppression, leading to public controversy over transparency. NPS, holding about 11% of Samsung C&T shares and acting as the casting vote, supported the merger despite opposition from external advisors. This case is widely regarded as an example of how large institutional investors like NPS can significantly influence corporate governance (Ryu, 2020).

Consequently, NPS faced public criticism for supporting the merger, which effectively aided Samsung family’s succession plan despite its public role in managing retirement savings of citizens. This raised concerns about whether NPS prioritized particular chaebol interests over those of citizens and highlighted issues about its accountability and public responsibility as an institutional investor.

The controversy over NPS’s exercise of shareholder rights raised awareness of responsible investment and prompted institutional reforms. In 2016, NPS introduced responsible investment provisions, adopted its Responsible Investment and Governance Principles (Stewardship Code) in 2018, and established a Special Committee on Responsible Investment and Governance to enhance ESG practices.

In 2019, NPS, as the second-largest shareholder of Korean Air, exercised its shareholder rights by casting a decisive vote against the reappointment of Hanjin Group’s chairman. This marked the first time in Korea that the head of a major conglomerate stepped down due to shareholder opposition, illustrating the substantial impact of NPS’s stewardship activities on corporate governance (Lee, 2019).

Based on stakeholder theory, firms enhance long-term value by addressing various stakeholders’ expectations, not just shareholders (Freeman and Phillips, 2002). As a public pension fund representing society, NPS demands better environmental performance and corporate governance, encouraging firms to manage environmental risks and establish transparent governance to meet ESG standards (Son and Kim, 2022). Prior studies showed a positive link between NPS ownership and firms’ ESG scores, reflecting NPS’s long-term investment philosophy focused on value creation and sustainability (Kim et al., 2022). This study examined H1 by analyzing GHG emissions, an insufficiently addressed aspect of Korean firms’ environmental performance:

Large institutional investors such as NPS emphasize and monitor firms’ ESG management, which motivates investee firms to improve their environmental performance. This is also supported by the resource-based view (RBV) theory. According to RBV, firms can achieve sustainable competitive advantage when their internal resources, whether human, physical or organizational, are valuable, rare, inimitable and nonsubstitutable (Barney, 1991).

Stakeholder monitoring can prompt firms to adopt environmentally friendly strategies, but firms also aim to enhance their environmental performance by viewing practices such as carbon reduction as unique internal resources for competitiveness (Issa, 2024). Green capital, such as carbon mitigation, green human capital trained in environmental practices and green innovations like energy-efficient products, are all considered key internal resources (Yusliza et al., 2017).

Firms perceive environmental performance as an internal resource for two key reasons. First, eco-friendly practices enable market expansion and product differentiation. In 2022, Korea’s Act to Promote the Purchase of Environmentally-Friendly Products requires public institutions to procure green-certified goods, granting compliant firms access to the public sector and allowing them to position themselves as green brands in consumer markets.

Second, environmental performance mitigates risks and reduces costs. Firms that do not act environmentally face regulatory penalties, lawsuits and reputational damage. In 2022, Korean automakers were fined US$4.7bn by India for exceeding emissions standards, underscoring how lower emissions help avoid such risks (Lankoski, 2006).

While RBV links environmental management to financial returns, slack resources theory suggests that financially stronger firms exhibit higher environmental performance. Slack resources that excess assets beyond operational needs (Nohria and Gulati, 1996) enable firms to invest in environmental innovations like green capital, human resources and technological improvements (Leyva-de la Hiz et al., 2019). Under RBV, such firms’ leverage slack to enter new markets and manage long-term risks, enhancing environmental performance.

Although many firms adopt ESG strategies to meet stakeholder expectations, this is especially true for those with strong financial performance as they can respond to stakeholder pressure (Xiao et al., 2018). Even when returns are uncertain, firms with greater financial slack increasingly view environmental innovation as a long-term strategic opportunity under stakeholder theory and RBV (Ma et al., 2023).

Prior studies linked financial and environmental performance. Analyses of U.S. S&P 500 firms showed that higher total assets and ROA correlated with better ESG performance, while highly leveraged firms used ESG scores to build stakeholder trust (Alareeni and Hamdan, 2020). Studies in the UK (Benlemlih et al., 2023) and China (Lu et al., 2024) also found ROA positively associated with emissions reductions or green investments. However, Alda (2019), using carbon emissions instead of ESG scores, found firms with larger total assets tended to emit more.

In Korea, ESG disclosure regulations are also based on firms’ asset size. The Financial Services Commission (FSC) is gradually expanding the scope of Corporate Governance Disclosure among Korea Stock Price Index (KOSPI) listed companies to encourage ESG management (FSC, 2018). Since its introduction in 2019, the system applied only to firms with total assets over KRW 2tn (about US$1.4bn as of April 2025). Although ESG disclosure will eventually be mandatory for all firms, larger firms currently face greater pressure to adopt ESG practices (Lee and Lee, 2021).

The Corporate Governance Disclosure system mainly focused on governance, but in 2019 the FSC announced it would require firms to disclose ESG information with greater emphasis on environmental aspects. The Korea Exchange introduced ESG Disclosure Standards in 2021 based on TCFD recommendations, and many listed firms have begun voluntarily disclosing ESG data. By 2022, major Korean conglomerates with family ownership, such as SK and Samsung groups, dominated the top 20 firms in ESG rankings (Yang and Chun, 2023).

While prior studies on Korean firms used ESG scores as proxies for environmental performance, this study examined H2 to determine how financial performance affects the emissions of Korean firms, which has not been examined in existing research:

A firm’s governance characteristics, alongside financial performance, influence its environmental performance. Effective governance, though variably defined, often involves boards with diverse stakeholders and independence from management (Nguyen and Thanh, 2022). Independent boards that monitor management decisions reduce agency issues (Goud, 2022). Furthermore, when such boards represent stakeholder interests, they help firms pursue long-term value, including environmental performance, as suggested by stakeholder theory (Jizi, 2017).

Previous studies identified board independence (proportion of outside directors) and CEO duality (CEO also serving as board chair) as key governance features. Outside directors play a crucial role in monitoring management, protecting minority shareholders and ensuring legal compliance (Naciti, 2019). Some research found that more outside directors improve environmental and social performance and disclosure (Hussain et al., 2018), while others found no significant effect (Allegrini and Greco, 2013). Goud (2022) reported that CEO duality in Indian firms led to higher carbon emissions.

Board diversity can be measured by board size and gender diversity. Larger boards combine diverse expertise and perspectives, enhancing monitoring and advice that improve firms’ environmental performance (Jizi, 2017). Gender diversity also significantly influences environmental disclosure (Liao et al., 2015), and studies on Korean firms showed female directors positively affected ESG environmental scores (Jeyhunov et al., 2025). Since most Korean boards are male-dominated (Yoon et al., 2022), analyzing gender diversity’s impact on Korean firms’ environmental performance is important.

This study empirically analyzed the impact of various board characteristics on GHG emissions in Korean firms, an area that had been underexplored in prior research. This study tested the following hypothesis (H3) to compare how unique features of Korean corporate governance, such as gender diversity, differed in their influence on environmental performance relative to conventional governance variables, which had been validated in previous studies as affecting firm environmental performance:

This study targeted NPS, an institutional investor representing a common owner. Only NPS disclosed full shareholdings among institutional investors in Korea, so this study focused on NPS due to data availability. Investee firms are listed on the KOSPI and Korea Securities Dealers Automated Quotation, the two major Korean stock indices. This study covers 2018–2023, when data on NPS’s stewardship code adoption following the release of the Korean stewardship code by the FSS in December 2016 and shareholding data were available.

This study used the Domestic Equity data from Portfolio Breakdown, the annual fund disclosure information of NPS, as NPS’s shareholding rate. From NPS disclosure data, we collected annual shareholding data for 1,645 firms over 2018–2023 (6,275 cases). Among these, 467 firms (2,802 cases) had all six years of shareholdings. In cases where both preferred and common shares existed for a single firm, only NPS shareholding rate of common shares with voting rights was included in the analysis to avoid double-counting for the same firm.

GHG emissions were collected from Korea’s National Greenhouse Gas Management System (Ministry of Environment, 2025). As of March 2022, a firm is subject to management if its annual emissions exceed 50,000 tCO₂eq per firm and 15,000 tCO₂eq per business site. To verify H1−H3, this study used the six-year GHG emissions data (936 cases) from 156 firms that disclosed their GHG emissions among 1,645 firms with NPS shareholdings. Due to limited data, many firms were excluded.

The various financial structures of the investee firms were obtained from the annual business report in the Data Analysis, Retrieval and Transfer System, the electronic disclosure system of the FSS. Ultimately, 147 firms (882 cases) with both financial information and market capitalization over 2018–2023 were included.

This study used NPS’s shareholding in the investee firm as an independent variable and variable was designed to account for the time lag between NPS investments and their impact on the GHG intensity of investee firms. To prevent excessive sample size reduction, time lags up to t–3 were examined. Pearson correlation analysis was conducted between GHG intensity and each time-lagged NPS shareholding rate variable (lag1, lag2, lag3). The two-period lag exhibited the highest correlation coefficient and significance (p < 0.001), justifying its selection in the regression analysis. The dependent variable, environmental performance, was measured as the ratio of firms’ GHG emissions to its sales (GHG intensity).

This study includes several financial characteristics as control variables, based on prior research analyzing green actions of firms backed by large asset managers and pension funds. The variables are total assets, ROA, leverage, asset turnover, Tobin’s Q and fixed asset ratio (Lu et al., 2024; Benlemlih et al., 2023; Safiullah et al., 2022; Alda, 2019). Total assets, ROA, and leverage showed significant effects on firms’ ESG scores (Alareeni and Hamdan, 2020; Minutolo et al., 2019) and GHG emissions (Benlemlih et al., 2023), so they were included as controls. Tobin’s Q was controlled for its positive association with ESG scores (Dyck et al., 2019) and CSR in Korea (Kim and An, 2018). Although asset turnover and fixed asset ratio lack clear prior explanations, they were included as controls since some studies (Lu et al., 2024; Minutolo et al., 2019) applied them in analyzing corporate environmental performance.

Previous studies (Lu et al., 2024; Benlemlih et al., 2023) analyzing firms invested in by large asset managers and pension funds included corporate governance variables (board size, proportion of independent directors, CEO duality and gender diversity) as controls. Larger boards may enhance ESG activities by bringing diverse expertise, supported by research showing board size improves ESG implementation (Jeyhunov et al., 2025). Yoon et al. (2022) found independent directors in Korean firms help monitor management and promote environmental investments. CEO duality was criticized for reducing board independence and decision diversity (Goud, 2022). Female director proportion (GDIV) was linked to better ESG disclosure quality and higher ESG ratings (Jeyhunov et al., 2025; Yoon et al., 2022). Accordingly, this study controlled for board size, independence, CEO duality and gender diversity as in prior research. Table 1 lists all variables used.

This study examined the impact of NPS, the largest pension fund institutional investor in Korea, representing a common owner, on the GHG intensity of investee firms. To test H1−H3, a fixed-effects panel model including firm and industry fixed-effects was estimated as shown in equation (1). GHG intensity and the financial and governance characteristics of firms exhibit heterogeneity across firms and industries. By including firm and industry fixed effects in the panel model, unobserved individual factors influencing GHG intensity compared to firm’s sales at the firm and industry levels were controlled. Firm fixed effects were introduced into the model using the within transformation, which subtracts the entity-specific mean from each variable before regression analysis. Industry fixed effects were controlled by including dummy variables to control sector-specific heterogeneity (see  Appendix):

where i and t denoted firm and year, respectively. $GIit$⁠, the dependent variable, measured the GHG intensity (GHG emissions/sales) of firm. $NPi,t-2$⁠, the independent variable, represented the two-period lagged NPS shareholding rate. $Xit$ was a set of firm-level financial and governance control variables, including ln(TA), ROA, LEV, ATR, Tobin’s Q, FAR, MEM, INDEP, DUAL, GDIV. $γi$ and $δk$ denoted firm and industry fixed effects, respectively.

The general characteristics of the data analyzed in this study are shown in Table 2. For the 127 firms, the dependent variable (GHG intensity) showed high variance. During standardization, absolute values appeared small because sales revenue exceeded GHG emissions. The maximum value (⁠$9.7×10-6$⁠) was approximately 480,000 times greater than the minimum (⁠$2.0×10-11$⁠), reflecting heterogeneity across firms. The primary independent variable, NP_lag2 (two-period lagged NPS shareholding rate), also varied widely with the maximum 286 times larger than the minimum reflecting significant differences in NPS ownership.

Among financial control variables, LEV (leverage), ATR (asset turnover ratio) and Tobin’s Q displayed over 30-fold differences between minimum and maximum values, suggesting high variability. In contrast, ln(TA) (log of total assets), ROA (return on assets) and FAR (fixed asset ratio) differed five times or less, indicating a narrow range and similar values among firms.

Among the governance-related control variables, MEM (number of board members) had the highest standard deviation (2.20), indicating substantial variation in board size. The mean value of GDIV (gender diversity) was very low (0.07), and the median was 0, suggesting that over half of the firms had no female executives. This indicated that gender diversity in governance was extremely low among Korean firms. Meanwhile DUAL (CEO duality) showed that in 72.8% of firms, the CEO also board chair. This suggested that board independence was low and decision-making authority likely concentrated among internal directors.

The results of H1−H3 on NPS shareholding and GHG intensity are shown in Table 3. The null hypothesis was that the lagged two-period NPS shareholding ratio had no significant effect on GHG intensity. This was tested using a F-test, which showed statistical significance at p < 0.000, so the null hypothesis was rejected. According to the analysis, the adjusted coefficient of determination of the model was 0.953, explaining 95.3% of the dependent variable, i.e. the firm’s GHG intensity (tCO₂eq/KRW). Total asset (ln(TA)) and asset turnover (ATR) were significant, except for the lagged two-period NPS shareholding ratio, ROA, leverage, Tobin’s Q, fixed asset ratio, number of board directors, board independence, CEO duality and gender diversity.

In the fixed-effects model incorporating firm- and industry-level, this variable lost significance. This suggests the result may stem from unobserved heterogeneity at the firm or industry level. The fixed-effects model controlled for such heterogeneity, demonstrating that firm and industry likely account for the initial correlation.

The main findings of this study are as follows. First, the full model identified the determinants of firms’ GHG intensity, and the main explanatory variable, NPS shareholding, was not statistically significant. Although NPS introduced responsible investment principles and considered firms’ environmental performance in its investment decision-making, it has not worked. In the case of NPS, despite holding significant shares in major carbon-intensive industries (e.g. steel, automotive, energy), our empirical findings showed no significant reduction in investee firms’ GHG intensity. This may suggest that, while NPS has the structural potential to work as a coordinating monitor of systemic environmental risks, such spillover effects remain underutilized in practice due to limitations in its current stewardship execution.

In 2021, NPS announced a coal divestment policy, pledging to gradually phase out investments in the coal industry (Kim et al., 2023). However, by 2024, it had not approved of any investment strategy. Though NPS passed an “Investment Strategy for Energy Transition of Coal-Related Companies” in 2024, it continues investing in coal-related firms and remains the largest shareholder in firms ranking first and second in GHG emissions in Korea’s corporate sector, prompting criticism that NPS needs to strengthen accountability in fund management (Hwangbo and Bak, 2025).

In 2023, NPS revised its stewardship code to include “climate change risk management.” Under this framework, NPS selects firms for a “confidential dialogue list” based on historical carbon emissions and GHG intensity (emissions/sales), then engages them to verify improvements. If improvements are insufficient, firms move to “confidential focus lists” for monitoring. If confidential dialogues fail, NPS designates the firm as a “public focus list” and monitors progress until the end of the selection year. If improvements remain inadequate, NPS proceeds with “active ownership” including shareholder proposals (Ministry of Health and Welfare, 2024). As of March 2025, only three firms received letters regarding climate risk management, while dialogues with 29 firms concluded confidentially, making it unclear which were targeted. No firms have received shareholder proposals.

Norway’s Government Pension Fund Global (GPFG) managed by Norges Bank Investment Management (NBIM), ranks with NPS among the world’s top three pension funds by AUM. NBIM discloses company dialogues on its website. As of 2024, NBIM held dialogues with governance and sustainability issues with firms representing 60% of its portfolio and designated 267 firms as climate risk focus firms. This includes domestic and international investee. Unlike NPS, NBIM discloses firms on its climate risk focus list and reports the number of climate risk-related meetings or letters exchanged (NBIM, 2025). This represents the GPFG’s proactive climate risk management in its investee. In contrast, despite holding shares across the Korean economy, NPS has selected only 29 firms for confidential dialogues, the first stage of climate risk management. This indicated poor monitoring performance by NPS compared to GPFG. Despite increasing overseas investments, NPS has never designated a foreign firm as a focus list and has conducted only one climate risk management dialogue with a foreign firm (Hwangbo and Bak, 2025).

Second, the main control variables, total assets and turnover, had a significant negative effect on firms’ GHG intensity, suggesting larger firms face greater pressure to comply with ESG disclosure and emission reduction mandates. Since ESG disclosure regulations from 2019 applied only to firms with total assets over KRW 2tn (about US$1.4bn as of April 2025), larger firms currently bear more responsibility for ESG compliance (Lee and Lee, 2021). Firms with higher asset turnover generate more revenue per unit, reducing fixed costs and creating financial slack. Although returns on environmental investments are uncertain, firms with slack increasingly view environmental innovation as a long-term strategic opportunity consistent with stakeholder theory and RBV (Ma et al., 2023). Under Korea’s ESG disclosure policy, environmental disclosure is first required for firms with larger total assets. Thus, large firms are likely to view emission reduction as part of internal resource management, reflecting government support and regulatory pressure.

Finally, governance variables had no significant effect on firms’ GHG intensity in Korea. This suggests that board independence (Hussain et al., 2018), CEO duality (Goud, 2022) and board diversity (Jeyhunov et al., 2025) do not directly influence GHG reduction in Korean firms despite generally positive findings elsewhere. This aligns with prior Korean studies finding no significant effect of larger boards or more independent directors on CSR activities or Tobin’s Q (Chang et al., 2017).

The study noted that Korean boards have low gender diversity, which also showed no significant effect on GHG emissions. In 2022, the Korean Capital Market Act was revised to require listed firms with assets over KRW 2tn to appoint at least one female director. Despite this, the law lacked penalties for noncompliance and was still in its early stages. Therefore, it was too early to observe tangible effects, and some firms still failed to appoint female directors, raising concerns about enforceability.

This study analyzed the impact of a large institutional investor as a common owner on the environmental performance of investee firms. It demonstrates that common ownership can influence firms’ environmental performance even when institutional investors, such as NPS, do not engage in active monitoring (Bas et al., 2023). Korea has emerging market characteristics, where a few large shareholders, like chaebols, dominate firm control and investor scrutiny is limited. However, it also shows developed market characteristics, including well-established disclosure and supervision systems. This study is significant as it tested common ownership theory in the Korean market. It examined the effect of NPS shareholdings, the largest pension fund institutional investor in Korea, on GHG intensity of 147 investee firms from 2018 to 2023 using fixed-effect model. The main findings are as follows.

First, as a large institutional investor with broad holdings across the economy and a focus on long-term performance, NPS is positioned to influence corporate environmental performance. However, the results suggested that despite adopting responsible investment principles, NPS has not effectively induced investee to reduce GHG emissions. Additionally, in Korea, where large firms have concentrated family ownership, institutional investors including NPS likely adopt a passive monitoring approach due to restricted ability to influence governance (Chung et al., 2018). This structural environment reinforces the tendency toward passive engagement.

Second, total assets and asset turnover negatively affected firms’ GHG intensity, suggesting larger firms under ESG disclosure and emissions regulations tend to achieve better GHG reduction. Firms with high asset turnover generate more revenue per unit, providing financial slack for environmental investments. This finding aligns with prior studies that link total assets to ESG management. However, this study distinguished itself by analyzing total assets’ effect purely on environmental performance measured by GHG intensity.

Finally, the study found that firm governance variables had no significant impact on GHG intensity. This implied that board independence and diversity, though previously linked to positive outcomes, did not improve GHG reduction among Korean firms. Gender diversity, which drew attention after Korea’s 2022 female director quota, also did not have a significant effect. These results indicated a gap between recent institutional changes aimed at governance reform and firms’ actual environmental performance in Korea.

This study offers several policy recommendations. First, although NPS is a major shareholder in domestic and foreign firms through large-scale, long-term investments, it lacks substantive responsible investment actions addressing climate risk. Even after the Stewardship Code revision, NPS remains passive, rarely taking public actions or submitting shareholder proposals targeting firms with high climate risks (Hwangbo and Bak, 2025). This indicates NPS does not actively monitor to reduce information asymmetry and conflicts of interest between investors and firms. Moreover, as pension funds’ investment behavior affects public welfare, responsible decisions considering long-term stakeholder interests are essential. However, NPS does not systematically manage or reflect the environmental performance of its investee firms.

NPS needs to strengthen its accountability as a large public pension fund by expanding private and public dialogue, disclosing firms with poor environmental performance, and taking practical measures such as shareholder proposals. NPS declared its support for the TCFD but has not incorporated the four thematic core elements of the TCFD’s disclosure framework (governance, strategy, risk management and metrics and targets) into its responsible investment principles (National Strategy information Portal, 2024). Following the TCFD’s recommendations, Norway’s GPFG assesses the climate risks of firms in its portfolio, including their GHG emissions and net-zero targets, as well as the fund’s own governance (NBIM, 2025). Likewise, NPS needs to integrate the TCFD’s disclosure guidelines into its responsible investment principles and include specific environmental criteria, such as investees’ GHG emissions and their reduction targets, in its investment decisions and voting guidelines.

Second, mandatory ESG disclosure currently applies only to firms with assets over KRW 2tn. With government enforcement postponed beyond 2026 and no clear roadmap, small and medium-sized enterprises (SME) face less institutional pressure to improve environmental performance. This suggests carbon neutrality policies may operate unevenly, causing long-term polarization in environmental outcomes. Although our results show environmental and financial performance can be complementary rather than trade-offs, this is likely stronger among financially robust firms. Policy support, such as expanding the SME Carbon Neutral Equipment Investment Support Scheme, is needed to reduce transition costs for SMEs and low-efficiency firms.

Finally, traditional board governance reforms in Korea have been insufficient for substantial environmental outcomes. Therefore, institutional measures to enhance board diversity and independence must be combined with stronger enforcement and oversight to ensure effective implementation. The fact that some firms still fail to appoint mandatory female directors underscores the need for enforcement and follow-up to improve system effectiveness (Jang, 2024). For governance reforms to translate into tangible environmental results, institutional investors should actively monitor firms. Large institutional investors with long-term outlooks can play a key role in overseeing firms’ environmental responsibility and governance. Such reforms are more effective when supported by external monitoring from institutional investors.

Given the growing influence of large institutional investors with long-term investment horizons worldwide, our findings may apply to other countries or institutional investor contexts with similar ownership structures to NPS.

This research was supported by the Carbon Neutrality, a specialized program of the Graduate School through the Korea Environmental Industry and Technology Institute (KEITI) funded by Ministry of Environment (MOE, Korea).

Panel data and fixed-effects model: Panel data observes the same firms over multiple years, allowing us to control for inherent differences between firms. We use a fixed-effects panel regression model (a model that controls each firm’s unique, time-invariant characteristics) to analyze the data. A fixed-effects model captures variations within each firm over time. This is implemented through the within transformation, analyzing deviations from a firm’s long-term average. To account for industry differences, we include industry fixed effects using dummy variables (binary indicators for each industry) in the regression, which control for sector-specific factors affecting a firm’s GHG intensity.

Two-year lag of NPS ownership and lag selection: Our key independent variable is the NPS shareholding percentage in each firm, lagged by two years. For example, when predicting a firm’s 2020 GHG intensity, we use NPS ownership from 2018. Using a lag allows time for changes in NPS ownership to potentially influence the firm’s environmental performance. We determined that a two-year lag was appropriate by testing one-year, two-year and three-year lags and examining their correlation with GHG intensity.