BOK ‘climate finance’ drive underpins need for growth
In-depth analysis, research to improve risk exposure assessments
Green financing and
green bond issuances will also be on the list of our research priorities.
The Bank of Korea (BOK) is fortifying research and analysis of climate risks, a major sustainability consideration for Korea’s export-reliant economy that is extremely vulnerable to global economic conditions.
The initiative spearheaded by BOK Governor Rhee Chang-yong seeks to lead the global discussion on green, sustainable growth, buoyed by the elevated standing of the country in financial policymaking. The new directive reflects criticism of Korea’s central bank lacking efforts to address environmental issues in the context of financial investments, loan conditions and the follow-on effect on industries.
At greater play are growing calls for practicality-oriented measures to stave off climate-induced disruptions to the country’s decades-long heavy dependence on global value chains. Electronics and car manufacturers — Korea’s key growth driver industries — remain wildly concerned about unexpected falls in exports due to softening overseas demand, whereas local consumers are wary mostly about rising overall prices of goods due to higher costs of imports.
The slew of challenges can be mitigated, the BOK says, in part by central bank directives of bolstering energy-efficient investments, financial institutions’ transparent disclosure of climate risk exposures followed by stress tests and cheaper financing for firms with carbon-neutral strategies.
Organizational restructuring
The central bank established the Office of Sustainable Growth under the Planning & Coordination Department in January.
The office will undertake a range of projects including “planning related to sustainable growth, conducting research on and studying sustainable growth, planning of internal climate risk response strategy, promoting cooperation in
domestic and foreign sustainable growth-related matters.”
The stated goals were previously separate responsibilities of the Financial Stability Department, and a team under the Planning and Coordination department.
But Rhee saw fit to merge the two for an integrated climate-themed analysis and dataset accumulation, as underpinned by deep expertise building of central bank employees.
Leading the office is Nah Seungho, an expert in domestic and global economic issues analysis with a deep understanding of developing and operating macroeconomic models, tools designed to identify problems of an economy. Two doctoral-level candidates are scheduled to join the office to work closely with BOK researchers.
Double whammy?
“It is a simple double whammy,” Nah said.
If the import prices of raw materials rise due to climate events, so would the price of intermediate goods imported to Korea, he said.
This would in turn push up the prices of final goods made in Korea, undermining the cost advantages of Korea-made exports.
Another grim scenario, he added, is a climate event shaving off the gross domestic product (GDP) of Korea’s trading partners.
The subsequent flagging demand in that country for Korean exports will significantly weaken Korea’s GDP.
“Those two are likely scenarios which the BOK will work on among many other projects to help accurately assess risks and provide solutions. Green financing and green bond issuances will also be on the list of our research priorities.”
Global value chain
There is much talk about the global value chain. But what is it really? And how important is it?
The global value chain is the entirety of a process encompassing product design, parts and raw material procurements, production, distribution and sales.
The value chain is divided into two parts: forward participation and backward participation.
The former refers to the export of domestically produced goods — oftentimes intermediate goods.
The latter refers to the import of raw materials and intermediate goods needed to produce final products and services for export.
Korea’s backward participation rate was 28.3 percent in 2020, according to a financial stability report released in February, far higher than China’s 15.1 percent and Japan’s 14.1 percent.
“The country with little natural resources has long resorted to and thrived on the global separation of manufacturing,” the report said. “Climate events will bring serious disruptions to the global value chain, an unintended dent to the export-driven economy.”
Among the five industries expected to take a major dive in the event of a climate event are refiners and petrochemicals; pharmaceuticals; mining and energy sourcing; furniture manufacturing and equipment and machinery repair; and financial services and insurance.
BOK policy tool
The central bank can guide financial institutions to invest in eco-friendly projects including renewables, according to the BOK. The carbon footprint-reducing efforts can build resilience to climate-related risks.
The central bank can also mandate the disclosure of climate risks exposures with financial services providers. This can lead to informed decision-making by investors.
Also, among the policy tools are climate stress tests, a central bank-overseen process that can identify vulnerabilities.
Low-interest loans and other methods of financing can be provided to spur investment in carbon-neutral sectors.
Central banks around the world can develop uniform standards and frameworks to jointly tackle climate risks, ensured by consistent application across borders.