[Financial Stability Status] "Concerns Over Risk to Specific Financial Institutions When Differences Arise in Climate Change Response"

Bank of Korea to Announce 'Financial Stability Status' on 25th
Banks and Insurance Companies Account for 82% of Exposure... Other Institutions Only About 18%

[Asia Economy Reporter Jang Sehee] As policies for transitioning to a low-carbon economy are being strengthened, concerns have been raised that differences in climate change risk responses among financial institutions may lead to the concentration of risk in certain financial institutions.

According to the Bank of Korea's "Financial Stability Report (March 2021)" released on the 25th, as of the end of December 2020, domestic financial institutions' exposure to high-carbon industries amounted to 411 trillion KRW, which is about 17.4% of the total exposure to the corporate sector (2,358 trillion KRW).

Currently, using a transition vulnerability index that considers direct and indirect carbon emissions by industry, 9 industries including primary metals and coal power generation are classified as high-carbon industries out of a total of 77 industries. These industries account for approximately 10% of the overall real economy.

By institution, banks and insurance companies accounted for 82% of the exposure, with 251 trillion KRW and 88 trillion KRW respectively. Meanwhile, other institutions (pension funds 18 trillion KRW, other non-bank institutions 55 trillion KRW) accounted for only about 18%.

Since the exposure ratio of certain financial institutions such as banks is high, future policies for transitioning to a low-carbon economy could further increase the risk burden on specific institutions.

By industry, exposure increased in coal power generation (33 trillion KRW) and chemical substances and chemical products manufacturing (28 trillion KRW), while exposure decreased by 36 trillion KRW in other transportation equipment manufacturing.

The report stated, "The financial sector's response to climate change transition risks is insufficient," and added, "If significant differences arise in climate change risk responses among financial institutions, there is a possibility that risks will concentrate in certain financial institutions that are vulnerable to risk management."

It also emphasized, "As domestic greenhouse gas emission regulations are being strengthened in earnest, the financial sector must also enhance risk management."

This content was produced with the assistance of AI translation services.