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| The cover image of "The green swan: Central banking and financial stability in the age of climate change" that the Bank of International Settlements (BIS) published in January. / Courtesy of BIS |
Financial sector takes measures against climate-related risks
By Park Jae-hyuk
The nation's financial authorities and companies have begun to make a series of efforts to fight climate change amid growing concerns in the international community over a potential threat from a "green swan."
Inspired by the concept of the "black swan," which Lebanese-American scholar Nassim Nicholas Taleb developed in 2007 to refer to an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences, the "green swan" has been used widely since the Bank of International Settlements (BIS) mentioned the concept in its report published in January.
According to the international financial institution, a "green swan" event is a climate-related systematic financial crisis outside the normal range of expected events.
"Climate change poses new challenges to central banks, regulators and supervisors," the BIS said. "Integrating climate-related risk analysis into financial stability monitoring is particularly challenging because of the radical uncertainty associated with a physical, social and economic phenomenon that is constantly changing and involves complex dynamics and chain reactions."
The report reads that central banks have a role to play in avoiding such risks, including by seeking to improve their understanding of climate-related risks through the development of forward-looking scenario-based analysis.
Adding that central banks alone cannot mitigate climate change, however, the BIS called for coordinating actions among many players including governments, the private sector, civil society and the international community.
The International Monetary Fund (IMF) has been also focusing on the financial sector's roles as it opened a panel discussion under the theme, "Can central banks fight climate change?" at its annual meeting in October 2019, according to the Korea Institute of Finance (KIF).
"In the mid-to-long run, sustainable finance will be considered important in terms of establishing a sustainable growth model. The IMF also mentioned climate-related risks as one of factors in making a downward revision on its outlook for the global economic growth rates," the KIF said in its report. "Central banks and commercial banks will need to make preemptive efforts to cope with their exposure to various risks that can be caused by climate change."
In response, the Bank of Korea (BOK) started looking for a doctoral researcher who will study the impact of climate change on the macro-economy and financial stability.
"The researcher will be in charge of measuring the financial system's exposure to climate-related risks and tracing the ripple effect of climate-related shocks," the BOK wrote on the job posting. "The position's duties also include studying the impact of climate-related risks on financial institutions' assets, debts, soundness and resilience."
The BOK aims to hire a well-qualified researcher by July this year.
Preemptive steps in private sector
As financial authorities are expected to tighten their supervision on banks in the near future to find out whether they are well-prepared for risks from climate change, the nation's two largest financial holding firms have taken preemptive measures to avoid "green swan" risks.
In December 2019, Shinhan Financial Group became the first Korean financial company to declare principles to counteract climate change.
The country's biggest banking group said it came up with the principles to enhance countermeasures against the overall climate change and to comply with the Paris Agreement that the global community has signed to keep the increase in global average temperature to well below 2 degrees Celsius.
"Since climate change has had larger impact on the macro-economy and the financial system, it has been needed to control risks from climate change and to invest in sustainable infrastructure such as the renewal energy industry," a Shinhan official said.
The company aims to cut the emission of the greenhouse gas by 20 percent, through a 20 trillion won ($16 billion) investments in the eco-friendly industry until 2030. It also issued green and sustainability bonds worth $500 million in July 2019.
KB Financial Group carried out a large-scale reshuffle in December last year to reinforce the management regarding environmental, social and governance (ESG) factors.
"Through the ESG management, we will offer responsible financial services for the environment and society, while enhancing the sustainable management," a KB official said.
As part of the efforts, KB Kookmin Bank installed a recycling machine called Nephron at its main branch on Yeouido, Seoul, to give various financial benefits to customers who do recycling using the machine.
Dilemma over 'coal finance'
Despite these efforts, the nation's financial industry is still facing a severe criticism from environmental activists here over their investments in the coal industry.
In March, Green Korea and two other environmental civic groups held a press conference in front of the NH Investment & Securities headquarters in Seoul to protest the brokerage and four others ― Shinhan Investment, KB Securities, Korea Investment & Securities and Kiwoom Securities.
The civic organizations alleged the companies had collectively invested 50 billion won in a POSCO subsidiary of Samcheok Blue Power's construction of a coal-fired power plant in Samcheok, Gangwon Province.
"KB Financial advertised a few days ago about setting up an ESG committee in its board, saying it has a practical and strong will to pursue the ESG management," the environmental activists said at the press conference. "KB's ESG committee should reconsider whether the latest decision to acquire Samcheok Blue Power's corporate bonds is in accordance with its ESG management policy."
