Press Releases

FSS Lukewarm on Guarding Against the “Green Swan,”

a Climate-Driven Financial Crisis 

- The Financial Supervisory Service has yet to mandate climate stress testing or factor climate risk into asset-soundness assessments 

- Overseas regulators such as the European Central Bank have, in effect, made climate-risk management guidelines mandatory 

As international efforts intensify to head off the “Green Swan”, a financial crisis brought on by climate change, Korea’s Financial Supervisory Service (FSS) is taking a notably passive stance. 

* Green Swan: the prospect of catastrophic economic and financial disruption caused by climate change. The term gained wide currency through a 2020 report by the Bank for International Settlements (BIS), “The Green Swan: Central Banking and Financial Stability in the Age of Climate Change,” which warned that the climate crisis could trigger a severe financial crisis. 

According to materials submitted to the office of Rep. Kim Hyun-jung of the National Assembly’s National Policy Committee, the FSS responded to his proposal, to revise the current climate-risk management guidelines so as to mandate climate stress testing and add provisions on asset-soundness assessment, by stating that mandating such measures would be difficult, since gauging the effects of climate change over long horizons requires assumptions about a wide range of variables spanning climate, energy and finance. 

Climate change has a material impact on finance and the broader economy by driving changes in asset values, through physical risks such as natural disasters and through transition risks arising from shifts in policy, technology and markets. Climate scenario analysis and stress testing are core supervisory tools for assessing how these climate risks affect the asset soundness of financial institutions. 

Major Economies Tighten Climate-Risk Oversight-Moving Toward Mandates 

The FSS cites overseas precedents in arguing for self-regulation, but critics say this ignores an international trend that puts financial stability against climate risk first. The European Union and others are introducing what amount to mandatory measures to prevent climate change from spilling over into systemic risk. 

Since 2023, the EU has enforced compliance through real penalties, issuing legally binding supervisory decisions to banks with inadequate climate-risk management and notifying them that fines may follow for non-compliance. The UK’s Prudential Regulation Authority (PRA) has likewise set out clear supervisory expectations, requiring remediation plans from institutions that fall short and deploying additional measures to press for compliance. The Bank of England (BoE) has institutionalized climate stress testing as a standing supervisory exercise, running it on a biennial cycle. 

Notably, as a member of the Network for Greening the Financial System (NGFS), the international body dedicated to preventing green swans, the FSS has a responsibility to act on the international recommendation that climate risk be incorporated into financial-stability monitoring and supervision. Yet it is effectively setting that obligation aside. 

In truth, the FSS itself clearly recognizes the problem. In a climate stress-test analysis released this past March, the FSS warned that the longer the transition is delayed, the more abrupt the shock will be, and noted that under certain scenarios some banks could fail to meet their regulatory capital ratios. The agency acknowledges the need for active measures even as it remains lukewarm about making them mandatory. 

The Bank of Korea, which took part in the climate stress test alongside the FSS, warned in its report on the results of a top-down climate-change stress test for banks and insurers that climate risk will become a key threat to financial stability going forward. It recommended that the authorities promptly pursue improvements to the climate-risk management guidelines, stronger buffers against unexpected losses, and greater green and adaptation investment. On the guidelines specifically, it recommended making the currently voluntary climate scenario analysis and stress testing mandatory. 

The Korea Sustainability Investing Forum (KoSIF), an ESG-focused think tank, urged the supervisory authorities to act. In its report “Climate Finance Policies Proposed to the New Government in 2025,” it argued that, given the serious impact of climate risk on the asset soundness and stability of financial institutions, the case for mandating its inclusion is steadily growing stronger. 

Lee Jong-oh, CIO of KoSIF, criticized the FSS’s passive stance and called for decisive action by the financial supervisory authorities: “Climate risk is not some future uncertainty, it is a clear and present threat to the asset soundness of financial institutions today, and the longer the transition is delayed, the greater the climate shock. The FSS’s inaction could mean missing a critical window, threatening the nation’s overall financial stability and ultimately harming the public.” 

Inquiries: Myungeun Song Senior Researcher (mileysong@kosif.org), Dajeong Kim  Senior Researcher (kimdj@kosif.org)