Green Finance: Future of Korean Economy
By Kim Jae-kyoung
This is the first in a six-part series of articles on the nation's vision to become a green economic power in the global community and the recent developments of ``green finance'' in Korea to support the vision. ― Ed.
The global economic crisis triggered by the U.S. subprime mortgage meltdown is steering the global economy in a new direction, forcing many countries around the world to follow a new growth paradigm, ``green growth.''
For sustainable growth, governments in major countries have come up with green initiatives to get the upper hand in the new area, which they believe will determine the future of their economies.
In line with the global trend, South Korea has also unveiled its ambitious vision to become a green economic power by shifting its growth paradigm to an environment-friendly and energy efficient one.
President Lee Myung-bak said the government will promote ``low carbon and green growth'' as the nation's new vision, abandoning its 60-year long manufacturing-based and export-oriented approach.
``Green growth is a new national development paradigm that nurtures new engines and creates jobs with green technology and clean energy,'' he added.
In July, the Presidential Council on Green Growth introduced a five-year plan in its briefing to President Lee at Cheong Wa Dae.
According to the council, the country should invest 107 trillion won ($87 billion) over the next five years to foster green technologies, in order to make Korea one of the world's top seven ``green economic powers'' by 2020.
It said the investment is forecast to create some 1.8 million jobs and help related industries emerge as future growth engines for the economy. It estimated that the economic effects from this will range from 182 trillion won to 206 trillion won.
``Low carbon, green growth'' is not a matter of choice, but a matter of destiny. The issue is how fast the country can transform into a green economy. To that end, the first thing to do is to channel more money into green businesses.
In that regard, the country should first foster ``green finance'' ― financial activities that support green growth and mitigate environmental degradation. Its role is particularly important in the initial stages as it can not only drive growth, but also prevent bubbles by weeding out disqualified companies.
In a global economic forum on green finance held in June in Seoul, Takejiro Sueyoshi, special advisor to UNEP in the Asia Pacific region, stressed its importance. ``If financing does not change, the economy won't change. To change the economy, we need to change finance,'' he said.
``We face a variety of global issues, such as climate change, ecosystem degradation and water scarcity. To end such destructive investment and promote environment-friendly investment, we need to change the flow of money,'' he added.
Green Finance in Korea
Although the Lee administration has placed a top priority on green growth, the country is taking just baby steps in green finance compared with other advanced countries. Its plan to promote green finance took shape only early this year.
In April, local financial companies ― banks, insurers and securities firms ― and the government jointly formed the Green Finance Council to develop a key finance agenda and establish a network linking businesses and finance.
The council is a regular dialogue channel consisting of 50 key people both from the government and private sector.
In June, the Financial Services Commission (FSC) also announced its plan to build up a database featuring how companies work for the initiative of an eco-friendly world as well as making firms proactively announce environment-related information.
In line with the government's ``low carbon, green growth initiative,'' local banks and insurers have introduced a wide variety of green finance products
Kookmin Bank, the nation's largest lender, established the Renewable Energy Private Equity Fund worth 330 billion won with the government and allocated 750 billion won to invest in low-carbon, green growth industries.
Shinhan Bank also started to give prime interest rates to environment-friendly companies from April this year. The State-run Korea Development Bank and Export-Import Bank of Korea (Eximbank) have planned to invest 1 trillion won and 840 billion won in the industry this year, respectively.
Woori, Hana, Korea Exchange Bank and Industrial Bank of Korea have also introduced various financial products and set up funds to nurture green industries.
``Financial firms can contribute to the eco-friendly world by lending money to companies seeking low-carbon businesses,'' KIF economist Lee Yoon-seok said.
``Such a trend could take root in the not-so-distant future, both at home and abroad. Our financial companies need to be prepared for the imminent change,'' he said.
Experts said that in order to promote green finance, Korea should tackle numerous challenges.
``Korea's green finance is faced with many challenges, such as poor regulatory system on the environment, insufficient human resources and underdeveloped products,'' Korea Capital Market Institute (KCMI) senior research fellow Noh Hee-jin said.
``For example, Korea is lacking in fiduciary and lender's liability on environment, corporate environmental disclosure rules and green certification programs. Also, the country is in need of experts who can integrate environmental issues with finance,'' he added.
World Moving Toward Green Finance
In the global scene, green finance has been rapidly growing. Advanced countries, such as the U.S. and Europe, have driven growth of carbon market through emission trading, carbon funds and other mechanisms after the Kyoto Protocol.
According to World Bank and KCMI, global emission trading markets are expected to grow to $150 billion in 2010 from approximately $64 billion in 2007.
Advanced countries have developed diverse financial services for the emission trading market, such as carbon funds, carbon asset management, emission trading insurance and carbon banks. Currently, there are over 30 carbon funds around the world with assets under management of $2.5 billion.
Financial firms in those countries are offering a wider spectrum of green finance products ― mortgages and car loans in retail finance; fiscal and eco funds in asset management, project finance and venture capital in investment finance and auto insurance and carbon insurance in the insurance industry.
By country, in the U.S., socially responsible investing (SRI) reached $2.71 trillion at the end of last year, up from $639 billion at the end of 1995. In European Union (EU), the SRI rose by eight-fold to $2.66 trillion in 2007 from 2002.
SRI, also known as sustainable investing, socially-conscious or ethical investing, describes an investment strategy which seeks to maximize both financial return and social good.
In Canada, the government provides tax benefits for those purchasing hybrid cars or low carbon-emission cars. In Australia, banks introduced green mortgages ― those buying houses run by renewable energy can get these loans at favorable rates.
In the Netherlands, the government introduced Green Fund Plan in 1995 and successfully changed its economic structure by nurturing green finance. For example, the government offers a 1.2 percent capital gains tax exemption for banks providing money for green industries.
Market experts said that green finance can be a great alternative for Korea to turn the current turmoil into opportunities and become an economic leader in the global community.
At a recent international conference in Seoul, World Bank Senior Vice President Justin Lin said that Asia's fourth-largest economy needs to invest more in low-carbon and green growth sectors to achieve a sustainable growth.
``South Korea should turn the current global slump into a golden opportunity to become one of the world's leading economies by promoting renewable energy, and other environmentally friendly and high growth industries,'' he said
``In the early 1990s, both Japan and China introduced massive stimulus measures. But Japan has fallen into deeper recession, while China has become the world's fastest growing economy. If Korea takes advantage of the current crisis, it will emerge as a more advanced country when the global economy returns to normal,'' he added.
In order to achieve a fast transition, concerted efforts from the government and financial sector are essential.
``Banks should make more efforts to develop more products and improve infrastructure by establishing system for analyzing and assessing businesses,'' Korea Institute of Finance economist Ku Jeong-han said.
``The government should also provide more tax benefits for banks offering green finance products to channel more money into the business,'' he added. ``At the same time, the country should make more efforts to catch up with other countries in the rapidly-growing global carbon market.''