In response to the worsening climate crisis, the transition to a low-carbon economy is becoming crucial.
A low-carbon economy refers to an economy based on energy sources and technologies that emit fewer greenhouse gas.
Financial institutions play a key role in this transition by allocating financial resources through portfolio adjustments and discriminatory interest rates.
Thus, global financial institutions are setting targets for reducing financed emissions and strengthening their efforts to measure and manage these emissions.
In this context, 'financed emissions' refer to the indirect impact that financial institutions contribute to the greenhouse gas emissions of various economic entities through provision of credit.
Domestic banks in Korea have declared carbon neutrality and have been committed to measure and reduce their financed emissions.
We analyzed domestic banks’ targets and strategies for reducing their financed emissions, and estimated the volume of financed emissions projected for 2030 in order to evaluate the feasibility of achieving the intermediate carbon neutrality goal.
Additionally, we found that there are several constraints on reaching the carbon neutrality objective. Thus we explored the main constraints and potential measures to address these limitations.
Currently, a significant number of domestic banks have declared their goals to achieve Net-Zero financed emissions by 2050 and are voluntarily disclosing strategies to mitigate these emissions.
To reach their goals, domestic banks are implementing strategies to support borrowers in reducing greenhouse gases, adjusting their asset portfolios, or enhancing their systems for measuring and managing financed emissions.
Financed emissions of domestic banks were estimated at 157 million tons in 2023, going into decline since 2022.
However, even if national greenhouse gases are reduced by 40% compared to 2018 levels by 2030, as per the nationally determined contribution (NDC) target, banks are not likely to meet their interim targets.
Therefore, in addition they should actively strive to reduce their financed emmisions, besides the government’s efforts to achieve NDCs.
Under these circumstances, the high proportion of loans to the manufacturing sector, the loan structure where loans are centered on small and medium-sized enterprises (SMEs), and the lack of green finance infrastructure are major constraints hindering domestic banks from reducing their financed emissions.
First, as the manufacturing sector, where reducing greenhouse gas emissions is relatively challenging, constitutes a large part of the Korean economy, banks have limited capacity to significantly reduce their financed emissions in the short term.
Second, although financed emissions of domestic banks are considerably linked to SMEs, most SMEs are not subject to regulations for concerning carbon emissions, which results in there being a lack of incentives for them to actively reduce their greenhouse gases.
Moreover, SMEs are short of resources to devleop green technologies.
Finally, the lack of infrastructure to handle green finance, such as green finance standards and performance indicator systems, also restricts banks from fully implementing their reduction strategies.
Currently, only 35% of banks have established and operate internal procedures concerning green finance, and there is a lack of postoperative procedures.
Therefore, to ensure that domestic banks’ efforts to mitigate financed emissions contribute to the transition to a low-carbon economy, it will be necessary to diversify management indicators, such as emission intensity and carbon offsets, enhance incentives for corporate green investment, and standardize climate disclosures and green finance practices.