1) Industry definition
The defense, security, sensor, and electro-optical industries are highly regulated industries directly linked to national security and public safety . Therefore , ESG is not considered "image management," but rather a financial risk management system where export controls, sanctions, human rights, corruption, cyber, and product safety directly lead to risks related to order acquisition, contract maintenance, insurance, and sanctions . In particular, given the nature of dual-use technologies, end-user (EUM), diversion prevention, and re-export controls function as key ESG issues. (U.S. investor practices view the defense industry as an industry where "failure to comply with ethics and regulations undermines cash flow.") https://www.ecfr.gov/current/title-22/chapter-I/subchapter-M (ITAR) https://www.bis.doc.gov/index.php/regulations/export-administration-regulations-ear (EAR)
2) Korea's global position
Korean defense and electro-optical companies have expanded their global export performance in areas such as guided weapons, system integration, vehicles, sensors, and EO/IR. Major listed companies are disclosing compliance, anti-corruption, information security, and supply chains as key items in their sustainability reports. However, from the perspective of overseas investors , the focus of evaluation is not
whether a report has been published, but whether export control, EUM, accident, and sanctions risks are managed as KPIs .
https://www.sipri.org/databases/armstransfers
https://www.ifrs.org/issued-standards/issb-standards/
3) ESG sensitive points (critical issues) due to the nature of the industry
- Export Controls and Sanctions (ITAR/EAR/OFAC) : Violations may result in contract invalidation and loss of market access.
- Weapons Ethics and Human Rights : End-User and Conflict-Linked Risks
- Anti-corruption and lobbying : High risk due to the nature of the contract-based industry.
- Cybersecurity : Military and Government Customers Demand High (NIST)
- Product Safety and Reliability : Defects and accidents immediately pose risks to contracts and reputation.
- Supply Chain and Forced Labor : Human Rights Audits of Rare Materials and Subcontractors
Purpose of provision
This report is a global ESG standard document for the industry
to ① compare and present the ESG position of the Korean defense and security industry based on the U.S. defense investor baseline , and ③ encourage Korean listed companies to immediately transition to ‘U.S. level’ ESG documents .
Environment (E)
- Energy and emissions centered on manufacturing facilities (Scope 1 and 2)
- Some companies are expanding their supply chains (Scope 3).
Society (S)
- Weapons Ethics and Human Rights (including EUM)
- Product Safety/On-Site Accidents
- Cybersecurity and Information Protection
Governance Structure (G)
- Export Control and Sanctions Compliance System
- Anti-corruption and internal control
- Effectiveness of Board of Directors Oversight
The ISSB references the SASB framework when identifying industry-based critical issues, including defense.
https://www.ifrs.org/groups/international-sustainability-standards-board/
1) Industry-based standards (ISSB/SASB)
U.S. investors don't view defense ESG as climate-focused .
The key question is:
- “How does this company manage export control, sanctions, human rights, and corruption risks ?”
- “What is the financial impact of an accident or violation ?”
(SASB Aerospace & Defense topic structures this as a KPI)
https://sasb.ifrs.org/standards/materiality-finder/
2) Evaluation centered on regulations and sanctions
- ITAR/EAR : Applies to technology, parts, and software
- OFAC Sanctions : Trading Partner and Country Risk
- EUM (End User Management) : Ethics and Human Rights Core → Requires KPIs for Operations, Training, Audit, and Violation Response,
Not Policy Statements https://www.treasury.gov/resource-center/sanctions
3) Cyber/Product Security = Contract Maintenance Conditions
- U.S. defense and government customers are effectively demanding NIST-based security systems.
- Product defects and accidents pose immediate contractual risks
https://www.nist.gov/cyberframework
division | US baseline | A common condition in Korean industry | Gap basis |
| Export Controls and Sanctions | ITAR/EAR Operational KPIs and Violation Response | Focused on principles and declarations | Lack of policy-to-operation KPI conversion |
| Weapons Ethics·EUM | End-user/exclusive prevention management | Limited mention | Weak explanation of human rights and conflict linkages |
| anti-corruption | Lobbying and Brokerage Risk KPIs | Ethics Charter Centered | Lack of connection between incident and action |
| Cybersecurity | NIST-based response and training | Authentication and policy-focused | Lack of response and recovery KPIs |
| Product Safety | Defects, accidents, and financial impact | Quality policy-oriented | Lack of accident/cost connection |
(Based on official documents from ITAR/EAR, SASB, NIST, and ISSB)
1. Stage before mandatory disclosure
→ Companies are more likely to choose “later response”
https://www.ifrs.org/projects/work-plan/
2. Discrepancies between domestic disclosures and overseas audit questions
→ Overseas customers request “incidents, violations, actions, and KPIs.”
3. The defense industry's unique sensitivity
→ a tendency to be reluctant to disclose → resulting in a decline in ESG credibility.
1) Hanwha Aerospace
- Strengths : Global export experience, sustainability report highlights compliance, supply chain, and ethics structure
- Supplement : ITAR/EAR·EUM Operational KPIs, Quantifying Sanctions Risk Management
https://www.hanwhaaerospace.com/kor/esg/sustain-business.do
2) LIG Nex1
- Strengths : Defense-specific ethics and compliance system, clear ESG page
- Supplement : Linking Ethics and Human Rights (EUM) KPIs to Accidents and Financial Impact
https://www.lignex1.com/esg/sustainability.do
3) Hyundai Rotem
- Strengths : Establishing a safety and quality system through parallel defense and railway operations.
- Supplement : Separate disclosure of defense industry export control and sanctions management is necessary.
https://www.hyundai-rotem.co.kr/ko/sustainability/vision/report/list.do
4) Firstec
- Strength : Disclosure of the basic structure of ethics and compliance
- Supplement : Product safety, cybersecurity, and export control KPIs are needed.
https://www.firsteccom.co.kr/ethical/ethical_02.php
- Defense Industry: ESG = Order Risk Management
- Passing due diligence standards is required to enter the U.S. and NATO markets.
- ISSB/SASB are converging on a global common language.
- The report level will soon function as part of the company's credit.
Fixed section for defense industry (recommended)
- Export Control & Sanctions Ledger
- Weapons Ethics & End-User Management
- Anti-Corruption KPI Sheet
- Cybersecurity (NIST) Fact Pack
- Product Safety & Incident Ledger
- Climate Baseline (ISSB Minimum Requirements)
This is how foreign investors interpret defense ESG.
- "Failure to Ethics = Termination of Contract"
- Export Control Violations = Loss of Market Access
- Cyber incidents = a breakdown in trust.
Therefore, when the ESG of Korean defense companies is structured as
policy → event → KPI → financial impact,
it is recognized as “investable” by US standards.
This document is a reference document that structured industry-level ESG information based on publicly available corporate disclosures, website data, and credible disclosure standards (e.g., ISSB/CSRD).
It is not intended for investment decisions, buy/sell recommendations, or valuations of specific companies. The final decision and responsibility for any use of this material lies with the user.
- (A) 2-page Sector Scorecard for Foreign Investors
- (B) Writing Kit for Listed Company Practitioners (Including KPI Template)
- (C) Evidence Pack (Regulations, Standards, and Evidence Links)
