Inside the Bank of Korea’s new climate team

The world’s central banks have been pouring resources into green initiatives – but few of them are on such an ambitious push right now as the Bank of Korea (BoK), which has a new specialised team with its sights set on becoming a world leader on climate risk analysis.

Launched in January at the personal initiative of Governor Rhee Chang-yong, the Office of Sustainable Growth is envisaged as a centralised hub for the BoK’s research into the economic impact of climate change, as well as its exploration of possible policy responses.

Within Asia, the Hong Kong Monetary Authority (HKMA) and Monetary Authority of Singapore (MAS) are better known for their pioneering green finance initiatives. But Nah Seung-ho, the Office of Sustainable Growth’s director, is keen for the BoK to join their ranks.

“There has been an increasing social demand in Korea for the central bank to play an active role in ensuring the sustainable growth of the Korean economy,” Nah told Green Central Banking in an interview conducted via email.

What’s more, he added, there is a growing internal consensus within the BoK that the central bank needs “systematic response strategies in order to effectively achieve its primary mandates of price stability and financial stability”.

To illustrate the link, the BoK published an analysis last month showing the impact of climate change on domestic inflation. It noted that food prices for Korean consumers are already rising as a result of extreme weather events both at home, where higher temperatures have led to soaring fruit prices, and abroad. Many Korean food manufacturers are highly dependent on imported ingredients – forcing them to pass on, for example, sharp increases in sugar prices resulting from droughts in south-east Asia.

“Central banks should take measures to prevent climate change-induced fluctuations in agricultural prices from spilling over to other items, leading to generalised price instability,” the analysis says.

Beyond the food sector, South Korea’s strategically crucial electronics and car manufacturing industries also imply a heightened exposure to climate risks.

“Countries that are deeply involved in global supply chains, such as Korea, are exposed to the risk of production disruptions and fluctuations in raw material prices due to climate change in countries they trade with, and can be greatly affected by changes in climate policies in those countries,” said Nah.

“So we believe that comprehensive analysis and thorough preparation for domestic and international climate risks are necessary.”

Stress tests and a model upgrade

With a team of 11 that is set to be joined shortly by two more PhD-level staff, the Office of Sustainable Growth aims to strengthen the BoK’s climate work by consolidating tasks that previously fell to two separate departments.

Nah’s team is currently working on an upgrade of the BoK’s climate risk assessment model, as well as broader changes to how the impacts of climate risks are measured and assessed.

Along with South Korea’s Financial Supervisory Service, the BoK is also conducting joint stress tests this year with 15 banks and insurers. The operation is “progressing smoothly”, according to Nah.

“Currently, the Bank of Korea and the Financial Supervisory Service are in the process of developing climate scenarios that reflect the country’s carbon neutrality policy and climate change projections,” he said.

“Once the scenarios are finalised, financial companies will use them to measure the impact on their soundness. The Bank of Korea and the Financial Supervisory Service also plan to conduct separate stress tests and compare them with the results of financial companies’ tests to enhance the reliability of the results.”

With no direct financial regulatory authority other than over monetary and credit policy, the BoK would not have the authority to introduce tools that are being discussed by some other central banks, such as lower capital requirements for sustainable investments.

The bank is nevertheless considering the policy instruments that are at its disposal to respond to climate change, Nah said. And in its role as a “thinktank for the national economy”, the central bank is also “exploring various policy responses to promote the flow of funds to the green sector”.

These include a recent proposal to the Korean Financial Investment Association, the sector’s self-regulatory organisation, to “activate green finance by issuing securitised products backed by green loans”, Nah explained.

Working with Asian neighbours

His team is turning its attention to the BoK’s own portfolio too. The central bank has been gradually expanding its investments in green bonds, and has applied a negative screening strategy to exclude fossil fuel investments.

And as of this year, ESG is included as an explicit consideration factor in the planning of the foreign currency asset management. Going forward, “the Office of Sustainable Growth will work with the foreign currency asset management department to explore ways to incorporate ESG factors into the entire foreign currency asset management process, including asset allocation, risk and performance management,” Nah said.

The BoK has received criticism in the past for lagging behind some other central banks on their environmental efforts. But in a world where national economies are increasingly impacted by both their neighbours’ disclosure regulations and more global initiatives, Nah said the bank was keen to coordinate with other central banks and financial regulators.

“We are looking extensively at research and policy cases from organisations that are leading the way in addressing sustainable growth issues, such as MAS and HKMA, to see if they are applicable in Korea,” he said.

“We look forward to collaborating with other central banks in Asia in more various ways to address sustainable growth.”

Written by