1. Green finance in Korea has evolved primarily around green lending and guarantees provided by banks and policy financial institutions, along with green bond issuance in the bond market. In contrast, the stock market has played only a limited role. This is primarily attributable to the fact that, unlike the bond and loan markets where green finance systems and infrastructure are relatively well established, the stock market lacks adequate climate disclosure and performance assessment frameworks, resulting in an unfavorable environment for promoting green finance.
2. In contrast, the European Union introduced the EU Climate Benchmarks* framework in 2019 to provide investors with standardized criteria for evaluating the climate performance of green investments. Against this backdrop, this paper reviews the EU Climate Benchmark system and assesses its applicability to the Korean market as part of efforts to promote green finance through the stock market.
* A climate benchmark indicates reference, such as an index or rating, that is used to compare and evaluate climate-related investment performance. The EU has stipulated quantitative indicators and standardized index composition requirements to enhance transparency and comparability.
3. The EU has established minimum requirements for two categories of climate benchmarks—EU PAB and EU CTB*—which aim for emission reductions consistent with the Paris Agreement. Only indexes that meet these criteria may be labelled as an EU PAB or EU CTB. Previously, various privately developed climate indexes were used to evaluate the climate performance** of investment portfolios. However, many of these were marketed as “climate” indexes despite the lack of standardized criteria and discrepancies in their performance objectives and indicators, causing confusion among investors. To address this, the EU standardized detailed requirements for benchmark composition, including (1) decarbonization, (2) exclusion criteria, and (3) sector composition.
* PAB: Paris-Aligned Benchmark, CTB: Climate Transition Benchmark
** Key indicators include carbon reduction rates, decarbonization pathways, the share of high-emission companies, investment-excluded companies, and the share of renewable energy firms.
4. PAB and CTB indexes can serve as effective tools to enhance the reliability and transparency of financial products, enable investors to invest responsibly, strengthen corporate incentives for voluntary carbon reduction, and provide policymakers with instruments to advance carbon neutrality. As a result, in Europe, financial products referencing PABs and CTBs benefit from reduced disclosure requirements under the Sustainable Finance Disclosure Regulation (SFDR) and are recognized as eligible instruments for transition finance.
5. Since the implementation of the system, the market for PAB and CTB index products has rapidly emerged. Major global index providers such as MSCI and S&P, along with leading asset managers including BlackRock and Amundi, have successively launched indexes incorporating the EU benchmark requirements alongside funds that track them. In the global financial market, the total assets of funds tracking PAB and CTB indexes have grown substantially since 2021, reaching USD 155.9 billion as of the end of June 2025 (EPFR).
6. To evaluate the applicability of the EU Climate Benchmarks to Korea, this study simulated indexes for Korea (hereafter referred to as K-PAB and K-CTB) that reflect the EU requirements. The results show that both indexes closely tracked* the performance of the parent index (KOSPI) while maintaining substantially lower carbon intensity**. In addition, compared to the parent index, the share of investment (or the constituent weight) allocated to low-carbon companies has expanded, indicating a shift of capital from high-carbon to low-carbon firms. By industry, carbon intensity improved notably in manufacturing and the science and technology sector, which demonstrates a significant mitigation of transition risk.
* Excess cumulative return relative to KOSPI (%p, Oct. 2015–May 2025): K-PAB 5.6, K-CTB 4.6
** Weighted average carbon intensity by index (tons/KRW billion, 2024): KOSPI 217.0, K-PAB 92.4, K-CTB 129.4
7. The introduction and utilization of the K-PAB and K-CTB indexes is currently constrained by the limited availability of domestic climate data and weak demand for low-carbon investments. While it is necessary to develop indexes that comply with EU requirements, Korea faces a shortage of granular climate-related data, such as corporate greenhouse gas emissions (Scopes 1, 2, and 3) and fossil-fuel-derived revenue. Moreover, despite the launch of several low-carbon funds, demand from both institutional and retail investors remains subdued, suggesting that the applicability of these indexes and the growth of related markets may be limited at this stage.
8. Nevertheless, the K-PAB and K-CTB indexes are expected to enhance the quality and transparency of domestic climate finance and strengthen Korea’s global competitiveness by presenting quantitative low-carbon investment standards consistent with the Paris Agreement and adopting internationally recognized benchmarks. In particular, greenhouse gas reduction efforts and the disclosure of credible climate information are likely to attract global capital inflows and positively impact corporate value across the stock market. As demonstrated in the European case, such indexes can also serve as practical tools for designing and implementing diverse green finance frameworks and infrastructures in the stock market.
9. As such, the K-PAB and K-CTB indexes can be further refined and the related markets can be developed smoothly when supported by the following conditions: the expansion of reliable climate data to improve index transparency and credibility; the implementation of effective government climate policies; and the strengthening of demand through increased low-carbon investment by institutional investors. In particular, the introduction of a domestic climate disclosure framework will be a prerequisite for enhancing index usability. Furthermore, realistic carbon pricing, policy funding-based support for climate finance, and the establishment of decarbonization plans by long-term institutional investors such as pension funds and the expansion of low-carbon investment are likely to serve as key catalysts for stimulating private-sector participation.
10. Lastly, relevant domestic institutions should be encouraged to cooperate in developing and operating climate benchmarks tailored to Korea’s circumstances. While referencing EU requirements, it is also necessary to establish standards that adequately reflect Korea’s industrial structure, characterized by a high concentration of high-carbon companies, as well as transition conditions in Korea. Europe has recently proposed the introduction of a new type of benchmark—Investing for Transition Benchmarks (ITBs)—which aims to encourage corporate transition efforts. This will would benefit from a phased approach, beginning with pilot indexes based on available data that are refined through the improvements and limitations identified during the process.