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ESG Investment

BOK tells institutions to cut exposure in high carbon sectors

Mar 25, 2021 (Gmt+09:00)

The Bank of Korea Governor Lee Ju-yeol
The Bank of Korea Governor Lee Ju-yeol

The Bank of Korea has asked the country’s financial institutions to reduce exposure in economic sectors that generate high levels of carbon emissions.

The central bank said that South Korean financial institutions are taking inadequate action toward carbon neutrality, in its regular Financial Stability Report released on Mar. 25.

“While the country is moving fast forward with carbon neutral policies, driving the prevalence of ESG measures throughout the society, financial companies are taking inadequate action in the area,” said the report.

The report estimated that the amount of exposure of the financial industry – banks, insurers, securities firms, asset management firms, pension funds and other financial institutions – in nine high carbon sectors totaled 411 trillion won ($362 billion) as of 2020 year-end.

The amount of financial exposure is calculated by adding up loans as well as stock and bond investments.

The 2020 figure has increased by 9.6% or 36 trillion won ($31.7 billion) compared to 2014 exposure at 375 trillion won ($331 billion).

The high carbon sector accounted for 17.4% of the total exposure of domestic financial institutions as of 2020 year-end at 2,358 trillion won ($2.1 trillion).

The nine high carbon sectors categorized by the central bank are: primary metal; coal power; non-metallic minerals (such as cement); chemical; coke and oil refining; transportation manufacturing (such as shipbuilding); textiles; and metal processing.

By sector, financial institutions' biggest exposure was in the chemical sector with 102 trillion won ($90.0 billion), followed by coal power with 91 trillion won ($80.2 billion), primary metal with 59 trillion won ($52.0 billion), transportation manufacturing with 46 trillion won ($40.6 billion) and metal processing with 42 trillion won ($37.0 billion).

By financial institution type, banks were exposed with 251 trillion won ($221 billion), insurers with 88 trillion won ($77.6 billion), pension funds with 18 trillion won ($15.9 billion) and other types of financial companies such as savings banks, securities firms and asset management firms with 54 trillion won ($47.6 billion).

Compared to 2014, the banks’ exposure in high carbon sectors decreased by 21 trillion won ($18.5 billion), whereas that of the non-bank financial institutions increased by 58 trillion won ($51.1 billion).

By financial product, loans accounted for the highest amount of the exposure with 247 trillion won ($218 billion), followed by 87 trillion won ($76.7 billion) worth of stocks and 77 trillion won ($67.9 billion) worth of bonds.        

PRESSURE ON FINANCIAL INDUSTRY TO FURTHER ESG ACTION

The Bank of Korea evaluated that the domestic financial companies are not keeping up with the growing global trend of ESG investing.

Global financial institutions are leading the ongoing investment paradigm shift towards ESG, with Norway’s sovereign wealth fund and Goldman Sachs having already begun making investments based on ESG data.

Blackrock last year fully excluded from its portfolio the companies that generate more than 25% of their revenue from thermal coal production.

The central bank projects that the domestic financial institutions may face risk from difficulties in drawing funds within and outside Korea, if they do not cut exposure in high carbon sectors.

The Bank of Korea’s financial stability report also expressed concerns regarding the rapid growth of household and corporate debt.

The ratio of household and corporate debt to the country’s GDP in 2020 was 215.5%, up 18.4% from 2019 and the highest since the central bank started recording the statistics in 1975.

Write to Ik-Hwan Kim at lovepen@hankyung.com

Daniel Cho edited this article.

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