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2010 Jul/01
Strategic approaches to develop green finance
Survey Papers 10-01
PDF
- Research Topic Corporate Finance
- Page 190
Noh, Hee-Jin
- Other Publications
- Summary
- Several developed countries including US and UK have announced plans for green growth and the reduction of greenhouse gas emissions. The measures include an emission trading scheme(ETS) which is a market mechanism that offers economic incentives. Green finance supports green growth by allocating capital to companies that develop green technology. Active green financing will boost the financial sector because the green industry has enormous potential. Hence, the Korean government has emphasized the need for policies and plans that will foster green finance. The purpose of this paper is to present strategies to develop green finance including designing an ETS in Korea. The paper first covers the main concepts of green finance, reviews the trends and policies related to green finance in other countries, and presents ideas to support the ETS and green finance as a whole. Conceptually, green finance refers to financial activities that enhance the financial industry, improve environmental conditions, and promote economic growth. It provides funding to relevant enterprises, creates special financial products, attracts investors, and also factors in environmental risks. Environmental protection is being promoted by multiple global initiatives such as the GRI, UNEP/FI, UN PRI, the UN Global Compact, and CDP. Financial institutions are paying more attention to environmental risks, especially those related to carbon emissions. The trading volume of emission rights has sharply increased globally since the ETS was introduced. Many developed nations emphasize financial institutions’ role in protecting the environment, and pursuing ESG-oriented financial management. Moreover, numerous products related to the environment have been released by commercial and investment banks, asset management firms, and insurance companies. The Netherlands government launched the Green Funds Scheme to encourage projects that have a positive effect on the environment. They offered incentives to make the “green projects” attractive with a tax advantage to green savers and investors. Banks can offer loans at lower interest rates for projects such as sustainable houses, wind farms, and organic agricultural businesses. Another important aspect of green finance is an efficient ETS which will enhance social efficiency by reducing emissions. More than 126 billion US dollars of carbon emission rights were traded globally in 2008 and trading has increased sharply since inception of ETS. Global emission trading can be categorized into three parts: the derivatives exchange which evolved from the power exchange; an independent carbon emission trading scheme; and one established with the securities exchange subsidiary. Diversified spot products including EUA, CER & CFI and derivatives(future and option based spot products) are traded. In addition, the financial authority has supervised the activity because derivatives trading accounts for the lion’s share in the carbon market. The Korean government enacted a new law titled, “Basic Act on Low Carbon Green Growth” to promote green finance. Based on article 28 (Promotion of Green Finance) of the proposed law, the government will secure funding for green growth and develop new financial products and expand financing for green management businesses. Additionally, based on article 46 (Introduction of Cap and Trade Emission Trading Scheme) of the law, the government will set up a carbon market to implement a cap and trade mechanism to reduce carbon emissions. However, the green financial industry in Korea is still in its early stage. Fund allocations have started but there is a long way to go. For example, Korea Development Bank and Korea Exim Bank announced plans to provide significant loans to the green industry, but actual lending has thus been below original expectations. Also, specific processing tools to provide money for green growth have not been fully established because the criteria for “environment-friendly” is unclear. The regulatory, technical, and human infrastructures are also underdeveloped. Recent green financial products in Korea are limited in quality and quantity and most of them are not used to provide funds to the high risk high return green industry. Moreover, based on the Kyoto Protocol, Korea belongs to the non -annex 1 group which means it is not required to reduce carbon emissions. Therefore, a national registry and ETS have not been introduced yet. In consideration of global trends, an ETS is necessary. There are some matters that need to be addressed such as legal disputes on the characteristics of emission rights, the characteristics of the ETS, supervision of trading, and the kind of products to be traded. To develop green finance in Korea, several challenges lie ahead but there are strategies to tackle those issues. First, the core issues have to be resolved. Government support must be strengthened, and a verification system for green technology and green companies must be enhanced. There also has to be public consensus about developing green finance, which must be recognized not as a matter of choice but a necessity. Second, we need to build a system that provides customized financial support to suit the needs of each green company according to its stage of development. Third, social infrastructure such as regulatory, technical, and human infrastructure must be established. The regulatory infrastructure needs to reflect environmental concerns in the statutes for investment, lending, credit rating, and accounting. Also, environmental information must be publicized and required for listing and disclosure. Technical infrastructure such as a “Green Enterprise Index”, “Green (Carbon) Risk Index”, or “Green Enterprising Rating Agency” will be necessary. Human resources should be educated and trained to be knowledgeable about green finance. Fourth, financial institutions can include environmental factors into some existing products and introduce integrated green financial products. For these to be attractive, the government could offer subsidies through tax benefits. Fifth, the carbon market should be launched as soon as possible so that Korea can establish a base for carbon trading and utilize the first mover’s advantage in Asia. That will help Korea cope with the compulsory carbon emission reduction. However, many challenges such as legal issues related to carbon emission rights, the membership, registry establishment, and products must be addressed first. At the same time, Korea can improve efficiency, stability, and transparency of the carbon market from the perspective of the financial markets. To implement these strategies, action plans must be prepared. Although the government can play a key role in the beginning, the end goal should be to set up a system that operates on market principles. Government agencies need to cooperate with each other. Financial companies must develop products and protect investors from bubbles. Moreover, it is necessary to educate and train human resources to produce green financial professionals. Lastly, the private sector should be fully prepared for government enforced carbon emission caps, while actively considering investing in green technologies.