(2) Society bears the risk while the private sector reaps the rewards

Second, the financial structure of the National Growth Fund embodies a typical asymmetry of “socialized risks and privatized rewards.” This is particularly evident in the fund open to retail investors, where the government will provide KRW 120 billion in public funds alongside KRW 600 billion raised from retail investors. The fund is structured with a subordinated first-loss tranche, under which public capital absorbs initial losses of up to 20% of retail investors’ commitments in each underlying fund. 

This structure can help mobilize private capital by protecting investors against part of the downside risk. However, despite the substantial public support and loss buffers provided, there is no institutional mechanism to return to the public the excess returns generated by successful investments.

(3) Climate alignment Pushed to the Back of the Agenda

Third, a major weakness in the government’s approach is that it has developed its strategy for advanced industries first, while treating climate finance for the Green Transformation (K-GX) as a separate, subsequent agenda. This approach is out of step with the global economic order in an era of climate crisis. Productive finance must be designed so that advanced industries and climate sustainability operate in tandem.

If policy finance for AI data centers, which consume vast amounts of electricity and water, is not conditioned on renewable energy power purchase agreements (PPAs) or RE100 commitments, public funds could ultimately reinforce demand for new LNG power generation and the expansion of fossil fuel-based grids. Under the EU Carbon Border Adjustment Mechanism (CBAM) and increasingly stringent global supply-chain disclosure requirements, this could increase stranded-asset risks across the broader economy and make it more difficult for Korean companies to meet their international RE100 commitments.

Transition finance, a core pillar of productive finance, supports the green transformation of the real economy. It must go beyond simply supplying funds for the low-carbon transition. Robust safeguards are needed to ensure that financing supports the transition to low-carbon production processes aligned with a 1.5°C pathway, rather than extending the operating life of high-carbon assets.

(4) Just Transition and Social Risks Overlooked

Fourth, the productive finance agenda lacks clear safeguards to screen companies with significant social risks, such as repeated serious workplace accidents or unfair practices toward suppliers. The government has identified industrial safety as a major policy priority, announcing a comprehensive workplace safety plan in September 2025 and pursuing amendments to the Occupational Safety and Health Act. Productive finance should likewise incorporate workplace safety records and related due diligence into eligibility assessments.

The productive finance framework also lacks measures to support regions whose industrial base is disappearing due to the low-carbon transition. Under the government’s coal phase-out plan, power plants in South Chungcheong and South Gyeongsang provinces are being closed in stages. Boryeong, where Units 1 and 2 were shut down in 2020, has since seen its population fall below 100,000, and areas facing upcoming closures, such as Hadong, are concerned about declining tax revenues, population loss and employment disruption. Yet productive finance does not explicitly support alternative industries or the retraining and redeployment of workers from power plants and related suppliers. Without such measures, the costs of the transition risk being shifted onto workers and local communities.

03

Policy Recommendations for Sustainable Productive Finance

  Prinicple 1    Demonstrating Additionality at the transaction level

 ●  Requiring evidence of need for public support: Applicants must quantitatively demonstrate in advance that the project falls within areas difficult to finance with private capital alone, such as high-risk deep-tech ventures or large-scale technology demonstrations. In line with the intent of productive finance, priority for policy finance should go to advanced venture SMEs that struggle to issue public corporate bonds or refinance on their own credit, rather than to large corporations. 

 ●  Establishing a baseline:The government should first determine what investment would have occurred without public support, including its scale, timing, and R&D scope. Only the additional investment made possible by policy finance should be counted as a policy outcome..

  Prinicple 2    Institutionalize Upside Sharing in Return for Public Risk-Sharing

 ●  Rebalancing asymmetric financial contracts: Where public funds absorb the first 20% of losses, as in the National Growth Fund, a share of the upside from successful projects should also accrue to the public. Equity investments could include public warrants, while infrastructure and equipment loans could incorporate profit-linked pricing mechanisms that allow higher interest payments when projects generate excess returns.

 ●  Introducing penalty and clawback provisions: Loan agreements should mandatorily include clawback provisions that revoke preferential interest rates and immediately recover public funds if beneficiaries fail, without justifiable cause, to meet their committed targets for R&D commercialization, capital investment, employment or greenhouse gas reduction.

  Prinicple 3    Ensuring Climate Alignment in All investment

 ●  Applying ESG-Integrated Responsible Investment Across the Portfolio: Responsible investment principles incorporating ESG should be fully applied to all productive finance portfolios, including the KRW 200 trillion National Growth Fund. Negative screening should apply to new coal and LNG power plants, fossil fuel exploration and extraction infrastructure, and projects that merely extend the operating life of existing high-carbon assets.

●  Standardizing sustainability-linked loans (SLLs): When policy finance is provided for advanced manufacturing facilities and large-scale infrastructure, SLL structures should be mandatory, with interest rates linked to performance against Scope 1, 2, and 3 emissions reduction targets and renewable energy use, including RE100 and PPAs. For data centers, achieving a PUE of 1.3 or lower and securing carbon-free energy (CFE) procurement contracts should be mandatory prerequisites for loan approval.

  Prinicple 4    Assessing Social and Regional Performance Review in Just Transition

 ●  Link financing decisions to labor and employment protection: Eligibility assessments should screen companies for workplace accident records and unfair practices in their supply chains, with serious violators excluded from policy finance. Efforts to retrain and redeploy workers whose jobs are displaced or transformed by the low-carbon transition should also be recognized as preferential criteria. 

●  Assessing Regional Value Creation: Preferential treatment granted merely because a company’s registered headquarters or factory site is located outside the Seoul metropolitan area should be eliminated. Assessment should instead focus on the extent to which public financing contributes to local value creation, including procurement from regional SMEs, collaboration with local universities and research institutes, and the retention and skills development of young workers. 

04

Conclusion: What Kind of Economy and Society Do We Want to Build? 

Productive finance is not simply about shifting capital from real estate to industry . It is the design of a national system that mobilizes public and private capital to build sustainable and resilient productive capacity amid a polycrisis of climate change, industrial restructuring and deepening inequality.

If the government’s KRW 1,560 trillion financing plan over the next five years is used primarily to subsidize investment by established large corporations, prolong high-carbon fossil fuel systems, and leave taxpayers bearing the downside risk, the outcome would diverge from the original purpose of productive finance: strengthening the long-term foundations of the national economy.

What financial authorities and policy finance institutions need is not a race to meet financing targets early. Every single investment or loan must uphold the principles of “verified additionality, shared public risk and returns, climate alignment, and just transition.”

Only when investment screening criteria and ex-post evaluation systems are redesigned from a sustainability perspective can productive finance fulfill its purpose of creating new growth engines for the nation.