Key Strategies


Background

With growing concerns about the impact of climate change on individual companies, economies and the financial system as a whole, governments around the world have become more actively engaged in projects and policies that are geared toward sustainable development and making societies and economies greener. It requires industry-wide structural changes across different sectors and making a transition from the traditional carbon-intensive developmental model to one that relies on eco-friendly and renewable energies. To make this happen, businesses need to make changes to how they operate. The financial industry is no exception to this, and in effect, the role of finance is paramount in making a successful transition to a greener economy.

Green finance, in this regard, attempts to shift investments away from carbon-heavy industries towards eco-friendly businesses, sustainable projects and green industries. It requires concerted efforts from the public and private sectors as well as a joint framework of goals. The Korean government’s pursuit of green finance dates back to 2009 when it announced plans to promote investment in green growth related industries. As the Moon Jae-in administration introduced the Korean New Deal initiative in July 2020 and made the Green New Deal a crucial part of the broader post-pandemic developmental strategy, the policy framework on green finance has taken a more concrete shape in terms of its goals and strategies. While participating in the U.S.-hosted Leaders Summit on Climate in April 2021, President Moon Jae-in outlined Korea’s plan to bolster its carbon emission reduction goal to achieve net-zero emissions by 2050 and to put an end to public financing of new overseas coal power plants. On the sidelines of the P4G Seoul Summit held in May 2021, the FSC held a special session on green finance. In his opening remarks, FSC Chairman Eun Sung-soo touched upon the progress of green finance and introduced some of the meaningful steps taken by the Korean government as part of its green finance strategies.

Taking Steps toward 2050 Net-zero Carbon Goals

ESG DISCLOSURE
Environmental, Social, Governance

In Korea, financial institutions have stepped up their efforts for green finance. Major financial holding companies, including KB, Shinhan, Hana and Woori financial groups, have all made pledges to cut investments in fossil fuels and make their investment portfolios carbon neutral by 2050. Insurance industry groups also pledged their commitment to environmental, social and governance (ESG) issues and individual firms are also drawing up ESG strategies and gearing up plans for ESG investment projects. In order to facilitate their efforts, the FSC introduced a plan for improving corporate disclosure rules to strengthen disclosure of corporate management on ESG factors.

The plan entails making ESG disclosure mandatory for all KOSPI-listed companies gradually in three stages. In the first phase, businesses will voluntarily file ESG disclosure reports until 2025. Then, from 2026 to 2029, companies that have total assets of KRW2 trillion or more will be required to report their ESG management status. And ultimately, from 2030 on, ESG disclosure will become mandatory for all KOSPI-listed firms.

Recognizing the urgency of action on climate change and with an aim to boost international cooperation on climate response, the FSC and thirteen other relevant institutions officially announced the declaration of support for the Task Force on Climate-related Financial Disclosure (TCFD) and its recommendations on May 24, 2021 and adopted a four-point action agenda to follow through with the TCFD recommendations as follows.


  • i) We will work to actively disclose details regarding the management and supervision of the board and the role of management on climate-related risks and opportunities.
  • ii) We will actively disclose short, medium, and long-term climate change-related risks and opportunities, effects of climate-related risks and opportunities on business, strategy and financial planning, as well as many different scenarios on climate change including the one that takes into account a 2-degree Celsius increase in global average temperature.
  • iii) We will actively disclose the identification, assessment and management procedure of climate change-related risks as well as the method of integrating them into the risk management system.
  • iv) We will actively disclose the types of indicators used to evaluate climate change-related risks and opportunities, greenhouse gas emissions data and related risks, and targets used to manage climate-related risks and opportunities as well as attainment of goals.
K-TAXONOMY

With financial institutions introducing more ESG-related financial products and as more and more consumers are investing in green assets, it is important to establish clear standards on what counts as green and what does not. A comprehensive classification system that identifies environmentally sustainable economic activities and investments can help businesses and consumers make proper distinctions about what is truly green and what is merely greenwashing—the process of making false claims or providing misleading information about company’s products and services as being eco-friendly or environmentally responsible.

The government is currently in the process of developing a K-taxonomy that will serve as a crucial reference point for businesses wishing to make a transition to a green sector, investors looking for investment opportunities in green projects and financial institutions granting loans to green companies. The government announced that it plans to introduce K-taxonomy in June 2021 to be piloted in the financial sector in the second half of the year. When it becomes available, K-taxonomy will help prevent unchecked practices of greenwashing.

At the announcement of the declaration of support for the TCFD and its recommendations, the FSC and state-backed financial institutions launched a joint consultative body on green finance in order to provide sufficient funds to green industries and create synergetic effects towards the goal of promoting green finance. When the K-taxonomy becomes available, state-backed financial institutions will double their investment in green sectors from the previous level of about 6.5 percent to 13 percent of their total investment. The authorities are also considering introducing a new green finance lending program when K-taxonomy becomes ready to be used. In order to help mitigate the risk of sudden devaluations of carbon-intensive industries, the FSC will introduce best practice guidelines on green finance as well as a guideline on climate risk management and oversight plan for financial institutions in the third quarter of 2021.


GLOBAL COOPERATION ON GREEN FINANCE

On May 17, 2021, the FSC and FSS applied for the membership to the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). The NGFS was launched in December 2017 with aims to contribute to the management of climate and environment-related financial risks and support implementation of sustainable economic development. The NGFS discusses and deals with a variety of green finance-related issues, such as the supervisory measures on climate and environment-related financial risks, the impact of climate change on the macroeconomy and financial sectors and building relevant database on climate and environmental risks. By joining the Network, the FSC and FSS plan to actively participate in and contribute to global discussions on green finance and work to strengthen policy alignment of Korea’s green finance strategies with global standards.


P4G SEOUL SUMMIT: GREEN FINANCE SPECIAL SESSION

At the 2021 P4G Seoul Summit, the FSC and Korea Development Bank co-hosted a special session on green finance (click here to watch), inviting reputable speakers and panelists from international organizations, multilateral development banks and government agencies to have vibrant discussions on the role of finance in fostering green recovery in the post-pandemic era. While calling for strong global cooperation and partnerships, FSC Chairman Eun sung-soo pointed out “three major gaps” existing in the world that are hampering the progress of green finance.


  • i) Funding gap: Gap between the amount of funds necessary to make a green transition and the amount of funds actually being invested
  • ii) Data gap: Lack of sufficient and accurate data on individual company’s environmental impact and climate response measures
  • iii) Capability gap: Gap between developed and developing countries in their ability to effectively respond to climate change

The green finance special session featured vibrant panel discussions on a number of topics, such as “climate-related disclosure and green investment” and “the role of public financial institutions in promoting green finance.” In a keynote address, Makhtar Diop, managing director of the International Finance Corporation talked about the World Bank Group’s target of allocating 35 percent of its total financing for climate co-benefits over the next five years. Mr. Diop also introduced the upstream investment and blended finance strategies sought by the IFC as a way of facilitating commercially viable investment projects.

On the topic of challenges and opportunities of green investment, Yannick Glemarec, executive director of the Green Climate Fund explained the necessity of market fixing and market shaping mechanisms to overcome high risks and financing costs associated with promoting green investment, such as carbon pricing and establishing minimum performance standards. Mary Schapiro, head of the TCFD Secretariat stated that the TCFD recommendations have gained a positive momentum recently in the process of countries making a recovery from the pandemic and that the recommendations are moving from a voluntary to a mandatory phase which is a positive development. In this regard, Ms. Schapiro welcomed the declaration of support from the FSC and FSS and other relevant government agencies and institutions. Martina Cheung, president of S&P Global Market Intelligence noted the need to have flexibility in assessing individual company’s carbon reduction efforts and disclosure standards as it is necessary to take into account divergent levels of climate risks across businesses, industries and regions. However, Ms. Cheung also said that the private sector should actively engage in discussion with the international standard setting institutions and relevant government agencies in order to prevent the possibility of market confusion resulting from an array of different standards for ESG disclosure.

Ensuring Seamless Implementation

The government launched a public-private joint taskforce on green finance chaired by the FSC in August, 2020. Since its launch, the taskforce has held meetings on a number of different occasions to discuss measures for promoting green finance in both the public and private sectors and to improve the current regulatory framework. In these meetings, the taskforce decided to create green finance units within the state-backed financial institutions to help improve their work consistency and strengthen cooperation and coordination between different institutions. In this regard, the green finance consultative body launched on May 24, 2021 aims to formulate an integrated and coordinated framework for Korea’s green finance strategies while promoting information sharing among relevant authorities. In order to promote information sharing, networking and fund matching between relevant stakeholders, such as green enterprises, financial institutions and investors, the authorities also plan to establish an online green finance platform.

Last updated: Jun. 7, 2021