Press Releases

South Korea's ESG Finance Exceeds KRW 1,000 Trillion Threshold

— Most of Year-over-Year Increase Accounted for by National Pension Fund

— Urgent Need to Establish Standards and Systems to Prevent ESG Washing

South Korea's ESG finance market has surpassed the KRW 1,000 trillion mark. However, analysis reveals that most of the increase stems from outsourced assets of the National Pension Fund, which faced allegations of ESG washing during the recent parliamentary audit.

The Korea Sustainability Investing Forum (KoSIF) and the Office of National Assembly Member Yong Woo Lee published the '2022 Korea ESG Finance White Paper' (hereinafter "White Paper"), which analyzes and reports on the ESG (Environmental, Social, and Governance) finance status of domestic public and private financial institutions. The report marks the third edition following its initial release in December 2021, featuring a comprehensive survey and analysis of overall ESG finance across 82 public financial institutions and 89 private financial institutions.

According to the White Paper, domestic ESG finance stood at KRW 1,098 trillion as of year-end 2022, surpassing KRW 1,000 trillion this year. This represents a 39.7% (KRW 312 trillion) increase year-over-year. The growth in ESG investment (responsible investment) by the National Pension Fund reached KRW 254 trillion, accounting for 91% of the total domestic growth.

ESG finance held by domestic public financial institutions stood at KRW 701 trillion, representing 64.5% of total domestic ESG finance, nearly double the KRW 390 trillion in private ESG finance. Public ESG finance expanded by KRW 293 trillion compared to 2021, with National Pension Service (NPS) ESG investments driving 86.6% of this increase. The NPS ESG investment volume reached KRW 384 trillion as of year-end 2022, accounting for more than half of public sector ESG finance. Following the NPS, institutions with the largest ESG finance volumes were the Korea Housing Finance Corporation (KRW 122 trillion) and the Korea Development Bank (KRW 64 trillion).

The volume of NPS ESG investments grew rapidly from KRW 130 trillion in 2021 to KRW 384 trillion in 2022. This spike occurred because the NPS categorized all KRW 284 trillion of domestic and foreign equities and bonds outsourced to asset management firms as 'ESG investments'. Previously, outsourced responsible investments were counted as ESG investments only if they were managed under domestic equity responsible investment mandates, which amounted to just KRW 6 trillion as of year-end 2022. The NPS classified all assets outsourced to asset managers that adopted responsible investment frameworks or stewardship codes as ESG investments, regardless of whether ESG integration was actually applied. Consequently, suspicions of ESG washing surfaced.

Private financial institutions recorded KRW 390.2 trillion in ESG finance, up 5.1% compared to 2021. The banking sector held the largest share at 72%. Among financial groups, NH Financial Group held a larger ESG finance volume compared to Woori, KB, Shinhan, and Hana. NH Financial Group also recorded the highest proportion of ESG finance relative to total group assets at 17%, followed by Woori (13%), KB (8%), Shinhan (8%), and Hana (6%).

By type, ESG investments were identified at KRW 558 trillion, ESG loans at KRW 393 trillion, ESG bond issuances at KRW 76.3 trillion, and ESG financial products at KRW 70.6 trillion. ESG investments and loans grew 101% and 13% year-over-year, respectively, whereas ESG bond issuances saw a 13% decline in volume. ESG financial products remained on the same scale as the previous year. Over the past four years, ESG loans represented the largest category among the four types; however, due to the expansion of NPS responsible investments, ESG investments became the largest category in ESG finance as of year-end 2022. Within total ESG finance, ESG investments accounted for 50.8%, loans for 35.8%, bond issuances for 7%, and financial products for 6.4%.

While ESG finance continues to grow steadily, the White Paper pointed out that, as demonstrated by the NPS case, standards and regulatory frameworks to prevent ESG washing remain insufficient. To combat ESG washing, the report proposed early mandatory ESG disclosure, the application and strengthening of the Green Taxonomy, the early development and implementation of a Social Taxonomy, and the introduction of sustainable finance disclosures. Recently, the Financial Services Commission (FSC) postponed mandatory corporate ESG disclosure until after 2026. The Korean Green Taxonomy (K-Taxonomy) was announced at the end of 2021 and revised and finalized in December 2022; among the 171 institutions responding to the report's survey, 72 stated they are currently applying or plan to apply K-Taxonomy. Meanwhile, discussions regarding the development of a Social Taxonomy targeting the Social (S) domain, where a significant portion of domestic ESG finance is concentrated, remain sluggish. Regarding financial products, the Financial Supervisory Service (FSS) launched a task force in March 2023 to establish disclosure standards for ESG funds and published its framework in October.

National Assembly Member Yong Woo Lee emphasized, "As ESG finance expands, transparent disclosure is necessary. ESG disclosure will serve as the crucial first step toward diagnosing and solving problems."

Young-ho Kim, Chairman of KoSIF, stressed, "ESG washing in finance represents the greatest hidden threat to sustainability. Establishing standards and regulations to prevent ESG washing is essential for effectively channeling capital into a sustainable economy." (End)

Read more the White Paper →