Preventing 'Greenwashing'... Financial Supervisory Service Establishes ESG Bond Evaluation Guidelines

'ESG Bond Certification Evaluation Guidelines' to be Implemented Next Month
Post-Funding Execution Verification and Evaluation Methodology Disclosure
"Expectations for Enhanced Transparency and Reliability in the Evaluation Process"

[Asia Economy Reporter Lee Seon-ae] In the future, companies that raise funds by issuing ESG (Environmental, Social, and Governance) bonds will be required to have credit rating agencies verify whether the funds were actually used for ESG-related projects. It is expected that the controversy over 'greenwashing' surrounding ESG bonds will be resolved. Greenwashing is a term combining "Green" and "White washing." It refers to "false environmentalism," where entities pretend to be eco-friendly or deceive others to gain benefits without actually being environmentally friendly.

On the 15th, the Financial Supervisory Service announced that it will establish and implement the "ESG Bond Certification Evaluation Guidelines" starting next month. This is to prevent superficial ESG "greenwashing" (classified as green bonds despite funds being used in projects without environmental improvement effects) and to enhance the credibility of certification evaluations by credit rating agencies. The guidelines serve as a model code from the Korea Financial Investment Association and are of a recommendatory nature. The guidelines will apply to ESG bond certification evaluations with an evaluation reference date on or after February 1.

Although bonds claiming to be ESG have rapidly increased, there has been no credible standard to evaluate whether they truly meet ESG criteria. Credit rating agencies have conducted certification evaluations on ESG bonds, but without legal grounds, these were carried out in an ad hoc manner. Currently, all ESG bond certification evaluation grades are rated as Grade 1, making the ESG bond ratings effectively meaningless.

A Financial Supervisory Service official emphasized, "There was no legal regulation related to ESG certification evaluations, raising concerns about the effectiveness of certification evaluation grades." They added, "With the introduction of the guidelines, transparency in the evaluation process and the credibility of certification evaluations are expected to improve."

The guidelines stipulate procedures that credit rating agencies must follow during the evaluation process, including documenting the grading procedures, strengthening evaluator independence and conflict of interest prevention, and disclosing evaluation methodologies. Additionally, the guidelines require that contracts for ESG bond certification evaluation work include verification of fund usage. Currently, there is no expert verification obligation regarding the use of funds after ESG bond issuance, making it difficult for investors to confirm where the issuing company used the funds. Furthermore, the proportion of funds used for green projects and whether the credit rating agency has verified this will be recorded in the evaluation report, which is expected to enhance comparability of ESG bond certification evaluation grades among credit rating agencies.

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