Positive Money, a UK-based advocacy group, and the Institute for Green Transformation, a South Korean think tank, have urged the Bank of Korea (BoK) to integrate climate finance into its monetary policy framework. This recommendation comes as South Korea faces rising inflation primarily driven by its reliance on fossil fuels.
As reported by Green Central Banking, the organizations have released a briefing note advocating for a shift away from traditional interest rate mechanisms. They propose that monetary policy should instead facilitate a transition from fossil fuel dependency.
Among the policy suggestions outlined in the report are the establishment of a dedicated green lending program, alterations to collateral haircuts based on carbon intensity, and the allocation of monetary stabilization bond proceeds to finance green initiatives.
This call for action coincides with a significant depreciation of the South Korean won, which has fallen to its lowest level since the 2008 global financial crisis. A key factor contributing to this decline is increased demand for the US dollar, exacerbated by disruptions in shipping through the Strait of Hormuz, a vital route for approximately 70% of South Korea’s crude oil supply amid the US-Israel conflict involving Iran. The new BoK governor has warned that rising import costs and currency weakness may intensify inflationary pressures.
The briefing highlights that central banks in other major Asian economies, including China and Japan, have already implemented dedicated green lending schemes to aid in decarbonization across various sectors, from renewable energy to energy efficiency. Although the BoK has initiated green finance initiatives for small and medium enterprises (SMEs) via its bank intermediation support program, the report indicates these efforts have been limited in scale.
Furthermore, the report advocates for the BoK to adjust haircuts on collateral from commercial banks according to the carbon intensity of the assets involved. The co-authors posit that assets with higher carbon footprints should experience steeper devaluation to reflect the associated physical and transition risks. Additionally, it suggests excluding assets connected to fossil fuel expansion from the central bank’s collateral framework. A proposal also exists to allocate a portion of the proceeds from the BoK’s monetary stabilization bonds towards financing green initiatives, signaling an opportunity for the BoK to position itself as a global leader, as currently, only the UAE’s central bank is exploring green short-term debt securities as a policy tool.
In response to the ongoing crisis, the South Korean government has introduced a supplementary budget targeting approximately 616.2 billion Korean won (around $420 million) toward energy transition projects. The authors of the report contend that this development creates greater potential for the BoK to formalize green finance as a long-term strategic focus.
Giwon Choi, head of the economic transformation team at the Institute for Green Transformation, remarked, “The ongoing crisis underscores that the BoK must move beyond immediate crisis management and traditional interest rate adjustments to fundamentally eliminate the nation’s high dependence on fossil fuels.”
Choi emphasized that the government’s recent budgetary allocation represents a rare and significant response, paving the way for the central bank to adopt a long-term policy approach toward green finance.
Joe Herbert, a senior researcher at Positive Money, stated, “Addressing climate and ecological challenges is often viewed as outside the central bank’s scope, yet it is intrinsically linked to price stability and financial mandates. This opens up the possibility of employing monetary tools like the collateral framework and lending facilities to channel funding toward key sectors crucial for the green economic transition.”