[News Terms] WGBI, AI, Electric Vehicles... The Green Bond Boom

South Korea's government bonds are confirmed to be included in the World Government Bond Index (WGBI) next November. As a result, the demand for Korean won from foreigners is expected to increase, and the bond market is likely to expand, which in turn raises expectations for the expansion of green bond issuance, a type of eco-friendly bond.

'Green Bonds' refer to bonds issued to raise funds for environmentally friendly projects. These are special bonds used exclusively for green projects such as electric vehicle production, renewable energy and energy efficiency projects, and greenhouse gas reduction initiatives. Along with green bonds, social bonds, sustainability bonds, and sustainability-linked bonds are collectively referred to as ESG bonds.

Four Core Elements of Green Bonds, Six Major Environmental Goals
[Photo by Environmental Responsibility Investment Comprehensive Platform]

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According to Standard & Poor's (S&P) Global, the global issuance of green bonds last year reached $575 billion (807 trillion KRW), a 10% increase compared to 2022. The first issuance of green bonds was in 2007. At that time, the European Investment Bank (EIB) issued green bonds worth 600 million euros (880 billion KRW) for the first time. In 2008, the World Bank followed by issuing green bonds to support environmentally friendly projects, and the scale of green bonds has grown annually since then. In July, Morgan Stanley, a major U.S. investment bank, also analyzed that the global artificial intelligence (AI) boom is driving the sales of U.S. green bonds.

In South Korea, the Korea Export-Import Bank issued the country's first green bond in 2013. It entered the green bond market by issuing $500 million worth of green sovereign bonds to global investors for renewable energy development. According to the Korea Environmental Industry & Technology Institute, as of the end of October this year, the cumulative number of issuing institutions is 114, and the cumulative issuance amount is 36.2503 trillion KRW.

To issue green bonds, issuers must comply with the 'Green Bond Principles (GBP),' a regulatory framework proposed by the International Capital Market Association (ICMA) in 2014. It consists of four core elements: ▲use of proceeds ▲project evaluation and selection process ▲management of proceeds ▲reporting. Governments worldwide are specifying national green bond guidelines based on these principles, and green bond issuers have established green bond management systems that comply with these principles.

The 'Korean Green Bond Guidelines' were announced in December 2020. The revised version was released in December 2022 to coincide with the full implementation of the 'Korean Green Taxonomy' announced in 2021, starting January 2023. This established an institutional foundation to apply the green taxonomy to green bonds and included measures to enhance the credibility of green bond issuance amid the rapid growth of domestic and international green bond markets.

Comparison of Issuance Procedures for General Bonds and Green Bonds
[Photo by Ministry of Environment]

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According to the guidelines, green bonds must meet all four core elements for the use of funds. Additionally, the funds must be used for green economic activities that contribute to at least one of the six environmental objectives defined by the Korean Green Taxonomy. The six environmental objectives are ▲greenhouse gas reduction ▲climate change adaptation ▲sustainable water conservation ▲transition to a circular economy ▲pollution prevention and control ▲biodiversity conservation. These measures aim to prevent greenwashing and improve the quality of external review reports, thereby strengthening the objectivity and transparency of green bonds.

Green bonds emphasize transparency regarding the use of funds and environmental improvement effects. This is why they require stricter pre- and post-reporting and external verification procedures compared to general bonds. However, stringent regulations also act as a major constraint on the activation of the green bond market. To address these side effects, the Bank of Korea has stated the need to consider the potential use of tokenized securities as a measure to promote green finance. Issuing green bonds as blockchain-based tokenized securities is expected to simplify issuance procedures and expand opportunities for eco-friendly financing to small and medium-sized enterprises as well as mid-sized companies.

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