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ESG Bonds: The Current State and Facilitating Policies / Jun. 15, 2021
With the rising attention to ESG investing and ESG management among firms and financial institutions, the issuance of ESG bonds went up dramatically. In Korea’s ESG market, ESG-certified social bonds represent a disproportionately dominant form of ESG bonds. Furthermore, the proceeds of ESG bonds are mainly used for existing projects instead of new ESG investing. This weakens ESG bonds’ function as a financing tool for new ESG projects. More recently, however, some private sector firms and financial institutions are increasing their ESG issuance for a diverse set of ESG projects, which is expected to increase new ESG investing via bond issuance.A brief look at ESG bonds reveals that those bonds, except for the ESG certification process, have very similar maturities and credit ratings than ordinary bonds do. Moreover, the two types of bonds are similar in terms of price discovery, implying that market conditions and demand—instead of ESG-specific factors—have a critical impact.Korea’s ESG market will be more sustainable only if more firms and financial institutions issue more bonds investing in new ESG projects. On top of that, the market also needs some plans to broaden the pool of ESG bond investors. Institutional investors are needed to set up socially responsible investing standards, while the market needs an investor incentive for enhanced investment performance. Also necessary are institutional tools such as a clear legal and institutional basis on ESG bonds, expanded information provision, and a stronger ESG bond certification system all of which will improve investor confidence in ESG bonds.
Facilitating Indirect Real Estate Investment via REITs / Jan. 05, 2021
Korea has so far employed REITs mainly for two purposes─a privately placed investment option for institutional investors, and a tool for housing policy such as public housing─instead of providing ordinary investors a greater range of indirect investment opportunities for holding real estate. However, Korea’s listed REITs market is recently gaining activity as more and more REITs are going public and drawing attention of ordinary investors. Nevertheless, Korea’s REITs market still lacks a market structure that can meet ordinary investors’ diverse demand for indirectly investing in real estate. Currently, most REITs take the form of private placement and the market for listed REITs is quite small with a very limited range of investment targets. Currently, REITs are subject to regulatory overlaps and a tough listing standard without sufficient regulatory support and incentives for listing. Even after being listed, REITs have difficulty in purchasing new shares for growing their size due to some regulatory constraints. For nurturing a well-functioning REITs market, the current market structure needs reshaping in a way placing listed REITs in the center. Long-term development of the market would be possible only if the market provides investors more indirect investment opportunities and proper returns that suit investor demand. This requires the market to list more REITs based on high return properties, which would widen investor choices. Also necessary is a plan to increase the size of the REITs already listed. The current “one REIT for one property” structure needs improving so that a listed REIT can include new assets. Another alternative is a regulatory improvement to permit a multi-tier FOF structure for listed REITs, which would enhance scalability. Along with that, it’s worth benchmarking overseas cases where an incentive is provided to facilitate the market for listed REITs.
Implications of Korea’s Recent Measures to Improve Asset-backed Securities Market / Jun. 23, 2020
Korea’s government recently unveiled its measures to build a more efficient asset securitization market that could regain investor confidence. The measures include a legislative reform on the Asset-backed Securitization Act. Key directions of the measures are to improve registered securitization for helping financial institutions to finance smoothly, to adopt a risk retention rule for addressing potential conflicts of interest inherent in ABS structure, and to bolster information provision for enhancing transparency in the securitization market. Such improvements are meaningful because they will facilitate the market, enhance market transparency, and bolster investor confidence in ABS, all of which will help address long-held problems in the market. For such improvements to produce intended policy effects going forward, three conditions are needed. First, a legislative reform should be made on the Asset-backed Securitization Act. Second, the market needs a flexible, sophisticated risk retention rule that bolsters soundness without contracting the market. Third, market participants should work together to build an efficient integrated system for better information provision. On top of those, market participants should exert all-out effort to improve market practices and structure.
Impacts of Covid-19 on Corporate Financing in Korea / Apr. 22, 2020
The Covid-19 pandemic is imposing a tremendous impact on the real economy and the financial markets. The global economy is slowing down with the financial markets fluctuating wildly. In Korea, concerns about a slowdown in the real economy and a crunch in the corporate financing market put the bond market and the money market into instability. In response, Korea’s government unveiled a series of broad-ranged measures that include almost all market stabilization measures available. Nevertheless, the lingering uncertainty from the epidemic could prolong the instability in the corporate financing market. Higher investor sensitivity to credit risk could make it harder for issuers to refinance their credit bonds. Also, many firms with decreasing corporate earnings are expected to see a downgrade in their credit ratings, which could lead to a crunch in the credit bond market. Another area of concern is the possibility where the crunch keeps lingering in the money market. In the long run, rising yields could put higher upward pressure on financing costs. All of those circumstances require supplementary policy actions based on a thorough monitoring on the risk factors in the corporate financing market.