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2023 Jan/12
Introduction of Sustainability-Linked Bonds into Korea: Expectations and Challenges
Issue Papers 23-03
PDF
- Research Topic Capital Markets
- Page 22
- Summary
- Recently, sustainable linked bonds (SLBs) have been newly adopted in Korea’s ESG bond market. The market has achieved highly quantitative growth but is faced with problems such as a leaning toward social bonds and a lack of private company engagement, which requires qualitative improvements. Under the circumstances, it is unfortunate that domestic companies rarely make full use of ESG bonds to meet environmental and social goals such as the net-zero transition that require enormous funds. Among various factors that contribute to underused ESG bonds, the most notable is that the use of funds from ESG bonds is limited to specific projects. On the other hand, SLBs are not constrained by the scope of fund use and thus, a growing number of companies are expected to tap into SLBs to improve environmental and social issues.
SLB issuers can use the funds raised from SLBs for achieving specific environmental or social goals to finance any corporate activities. For this reason, SLBs can provide an opportunity for companies, which are unable to find a huge green or social project or fall into the brown industry category, to have access to the ESG bond market. In addition, an SLB is an incentive-based borrowing instrument under which financial conditions such as interest rates are tied to whether the issuer achieves a commitment. This is beneficial for investors as the risk of greenwashing that comes with conventional ESG bonds can be mitigated. However, SLBs may give rise to other types of greenwashing, depending on goal setting or incentive structure, which requires both SLB issuers and investors to exercise caution.
The introduction of SLBs is expected to expand Korea’s ESG bond market base and boost the engagement of private companies. As any SLB has yet to be issued in Korea, however, Korea needs to make thorough preparation to ensure that SLBs take hold and thrive. First of all, a database across industries and sectors should be created based on corporate ESG disclosure to set a goal and evaluate whether an SLB accomplishes the goal. What is also needed is a sophisticated methodology to assess an SLB design structure, based on which Korean companies should establish ESG strategies. Most importantly, trust in the early SLB market should be built to ensure that they live up to the expectations of market participants.