"Domestic Banks Still Far from Achieving Carbon Neutrality Goals"

The Bank of Korea's 'Recent Status of Domestic Banks' Financial Emission Management and Policy Implications'
Domestic Banks Face Difficulty Achieving 2030 Interim Targets Without Active Reduction Efforts

[Image source=Yonhap News]

As global financial institutions demonstrate strong commitment to carbon neutrality, domestic banks have also declared carbon neutrality and voluntarily disclosed reduction strategies. However, evaluations suggest that without active reduction efforts from banks, it will be difficult to achieve the interim targets set by banks around 2030.

According to the 'BOK Issue Note: Recent Status of Financial Emissions Management by Domestic Banks and Policy Implications' published by the Bank of Korea on the 17th, the financial emissions (corporate credit) of domestic banks were estimated to have turned to a decreasing trend since 2022, reaching 157 million tons by the end of 2023.

Financial emissions refer to a key indicator that measures and evaluates the carbon emission reduction efforts of financial institutions. It represents the indirect contribution to greenhouse gas emissions through credit supply such as loans, stock, and bond purchases by financial institutions.

Looking at the financial emissions of domestic banks by bank type, special banks accounted for 80 million tons, representing 50.8% of the total financial emissions of domestic banks; commercial banks accounted for 66.5 million tons, or 42.2%; and regional banks accounted for 10.9 million tons, or 6.9%. By industry, manufacturing accounted for 48.4% (76.2 million tons) and services accounted for 32.7% (51.6 million tons).

The decrease in financial emissions of domestic banks is analyzed to be due to the government's energy transition policy rather than the banks' direct reduction efforts. Regarding the contribution to changes in financial emissions, power generation (24.4%) and food service industry (21.5%) accounted for 45.9% of the total. In contrast, the impact of high greenhouse gas emitting industries such as cement (2%) and chemicals (0.5%) was minimal.

Park Sang-hoon, head of the Sustainability Growth Research Team at the Bank of Korea's Sustainability Growth Office, who authored the report, explained, "Domestic banks are building infrastructure to reduce financial emissions, but this applies only to large corporations. Since small and medium-sized enterprises (SMEs) cannot generate visible profits immediately, they have little incentive to reduce greenhouse gases, so the effect of emission reduction was significantly reflected in the government's energy policy focused on the power generation sector."

Analysis suggests that additional reduction efforts are necessary for banks to achieve the emission reduction targets set for 2030. In 2021, the government announced an expansion of the Nationally Determined Contributions (NDC) target to reduce greenhouse gas emissions by 40% by 2030 compared to 2018, up from 26.3%, and is proceeding with reductions accordingly. Reflecting the government's NDC reduction effect, the financial emissions of domestic banks in 2030 are projected to decrease by 26.7?26.9% (121.9 million to 122.3 million tons) compared to 2019. This falls short of the originally set reduction target by banks (an average 35% reduction).

Park said, "To achieve the interim targets set by banks, additional reduction efforts by the banks themselves must accompany the government's NDC achievement efforts."

However, factors limiting emission reductions include ▶ Korea's industrial structure with a high proportion of manufacturing ▶ credit structure centered on SMEs ▶ lack of green finance infrastructure. The value-added share of manufacturing in Korea was 25.6% in 2022, higher than the OECD average (13.4%), the United States (10.7%), and Japan (19.2%). Also, a significant portion of domestic banks' financial emissions is linked to SMEs, but since SMEs are not subject to mandatory carbon emission reductions, they have little incentive to reduce emissions and lack human resources and investment funds for developing eco-friendly technologies. Only 35% of banks have established and operate internal procedures for green finance, making it difficult for financial emission reduction strategies to be fully implemented.

Park explained, "In the future, for banks to achieve interim targets for reducing financial emissions, efforts are needed to diversify management indicators for financial emissions, enhance green investment incentives for medium-sized and small enterprises, and standardize climate disclosure and green finance."

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