As a heat wave grips South Korea, a recent study finds that the country's central bank is favouring fossil fuel companies. Photo by Falco Negenman on Unsplash
Key points
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A new study by the Institute for Green Transformation and Positive Money finds that more than half of the Bank of Korea’s collateral comes from fossil-fuel and high-emission sectors, while green and sustainability bonds account for less than 2%.
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The BoK’s collateral rules are “carbon-blind,” relying on security type, issuer rating and maturity rather than climate risk. State-owned KEPCO and KOGAS bonds alone represent nearly 20% of pledged collateral, despite their sectors contributing less than 3% of South Korea’s economic value.
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Between 2021 and 2025, high-emission collateral grew sixfold, while green and sustainability bonds grew at half that rate. Fossil-fuel bonds also received lower average haircuts than green bonds—7.2% versus 11.8%—which the report says acts as an implicit subsidy for carbon-intensive companies.
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The report calls on the BoK to create a dedicated green-collateral category, give forthcoming green government bonds equal status with other government bonds, apply climate-based eligibility and haircuts, issue green monetary stabilisation bonds, and improve environmental disclosures.
As a record heatwave grips South Korea, a new study finds its central bank’s collateral framework is biased towards fossil fuels – the single largest contributor to global warming.
Over half of the bonds pledged as collateral at the Bank of Korea (BoK) are from the fossil fuel and high-emission sectors, while green and sustainability bonds make up less than 2%, according to a new report by South Korean thinktank the Institute for Green Transformation (IGT) and UK-based Positive Money.
South Korean expanded its collateral pool to include more green assets since 2023, but high-emissions bonds continue to dominate.
“The BoK claims its measures now bring over 70% of green bonds into eligible collateral, but the green share pledged is stuck at around 0.4% and is markedly lower than the green share of total listed bonds,” the report states.
To date, the BoK has not implemented any measures to reflect climate change in its collateral framework, though it has considered the available tools, such as adding green bonds to eligible collateral for lending.
This contrasts with other major central banks in the world, such as the European Central Bank, which recently expanded its reductions to collateral value based on climate risk, and the People’s Bank of China, which began accepting green financial bonds in its medium-term lending facility in 2018.
IGT and Positive Money suggest that BoK sees no need to specify green bonds as eligible collateral, since its emergency lending measures have already brought many green bonds into the pool, which has arguably in turn mitigated climate risk.
But “this judgement is open to serious challenge,” argue both thinktanks. “It is true that broadening eligible collateral admitted many green bonds, but it is hard to argue that the pool’s environmental risk has been adequately addressed, or eligibility for environmentally beneficial assets sufficiently widened.”
Carbon bias in BoK’s collateral framework
Currently, the BoK’s collateral valuation and haircuts are determined by only three variables: security type, issuer rating and remaining maturity.
“The rules are ‘carbon-blind’: they neither explicitly penalise nor favour the carbon intensity of assets,” the report says.
However, given that South Korea’s largest industries – semiconductors, steel, petrochemicals – are carbon-intensive and its power sector has the lowest renewable energy share in OECD, carbon-intensive sectors dominate in the financial sector through creditworthiness and stability metrics, the authors write.
When comparing the composition of BoK’s collateral pool with the contribution of different sectors to South Korea’s economy, the study finds that the electricity-gas-water-waste sector had an eight-fold over-representation in the collateral pool.
In particular, corporate and public institution bonds issued by South Korea’s state-owned electricity and gas companies, Korea Electric Power Corporation (KEPCO) and Korea Gas Corporation (KOGAS), made up nearly 20% of all of the pledged collateral, despite generating under 3% of the economy’s value.
From 2021 to 2025, fossil fuel and high-emissions collateral pledged increased sixfold, while green and sustainability bonds rose at half that rate.
In the same period, the average estimated haircuts – reductions made to an assets value to mitigate potential risks – on fossil fuel bonds were 7.2%, compared to 11.8% for green and sustainability bonds, equating to a 4.5 percentage point advantage.
“The preferential treatment that high-carbon assets receive within the BoK’s collateral framework acts as an implicit subsidy to these sectors, by increasing the demand for their assets and allowing high-carbon firms to access lower cost finance,” said Joe Herbert, senior researcher at Positive Money.
“The blockade of the Strait of Hormuz has shown how urgently Korea needs to decarbonise, and shift to renewable energy. The BoK must support, not hinder those efforts.”
Fossil fuels, primarily coal and liquified natural gas (LNG), made up 63.4% of the power mix of KEPCO and its generation subsidiaries in 2024. KEPCO’s continued reliance on coal has led major global investors to shun its bonds, including “green” bonds issued for renewables and grid expansion.
Last year, a whistleblower complaint was filed against KEPCO for failing to disclose significant climate-related risks, including fluctuating LNG prices, in a bond issuance on the Singapore bourse.
“The BoK’s expansion of collateral eligibility over recent years… has not had the effect of increasing the share of green bonds in collateral pledged at the BOK,” the report’s authors say.
“Rather green bonds’ share has fallen, while institutions continue to prefer high-carbon assets, whose share in the pledged collateral pool has increased. It can therefore be said that the expansion of eligible collateral has served to reinforce carbon bias in the BOK’s framework.”
Calls for a green collateral framework
To counter the bias towards high-emitting assets, the report calls for BoK to incorporate green bonds as a standalone category in the collateral framework to send an explicit signal to financial institutions, which the existing eligibility expansion has failed to achieve.
At minimum, the authors said the forthcoming green government bonds – announced by the government in June 2026 – should be given equal status to other government bonds, similar to the Bank of Japan model.
IGT and Positive Money also reiterated their recommendations from an earlier briefing for the BoK to show international leadership by issuing green monetary stabilisation bonds, which would make it one of the world’s first central banks to utilise short-term debt securities as green instruments.
Additionally, the report urges adjustments of collateral eligibility and haircuts based on an assessment of environmental risks and impacts, as well as improved disclosures of environmental information on the central bank’s collateral pool, in line with leading international standards.
“The BoK’s collateral system is an overlooked channel that strengthens the financial position of fossil fuels. Now that empirical data shows the framework structurally favours fossil fuels over green assets, it is time to open a discussion on reforming it,” said Giwon Choi, head of the economic transition team at IGT.
This page was last updated August 10, 2026
Written by
Gabrielle See is an award-winning journalist based in Singapore who has written for Green Central Banking since 2025. She has covered the intersections of finance, geopolitics and energy transition in Asia over the past five years for regional and international publications, including CNBC, Eco-Business, Southeast Asia Globe and the Business Times.
