BoK: "Green Bonds Account for Only 1.8% of Market Share... Investment Factors Must Be Strengthened"

Green Bond Issuance Grows, but Overall Market Share Remains Modest

Limited Financial Returns Concentrate Issuance Among Highly Rated Institutions

Systemic Improvements Needed, Including Practical and Economic Support

There has been a call to improve systems, including practical and economic support, to enhance green bond investment factors and expand the market base for attracting funds to invest in eco-friendly projects, such as efforts to mitigate climate change.

The Bank of Korea made this statement in its "BoK Issue Note: Review of Domestic Green Bond Issuance Conditions and Policy Implications (Kim Jaeyoung, Lee Suji, Lee Yeonju)", published on July 30.

Green bonds are issued to raise funds for eco-friendly projects. They must contribute to at least one of the six environmental objectives defined under the Korean green taxonomy, such as greenhouse gas reduction, climate change adaptation, sustainable water conservation, transition to a circular economy, pollution prevention and management, or biodiversity conservation. In addition, they must fulfill all four core requirements: use of proceeds, evaluation and selection processes, fund management, and reporting.

The global green bond issuance volume increased from 800 million dollars (about 1.16 trillion won) in 2007 to over 600 billion dollars (about 868 trillion won) last year. In Korea, the green bond issuance totaled 3 trillion won over the three years from 2018 to 2020, but since the establishment of the Korean taxonomy in 2021, it soared to 40.6 trillion won over the past five years, and the number of issuing organizations grew from 12 to 220 during the same period.

Initially, banks and other financial institutions were the main issuers, but based on the issuance amount between 2021 and 2025, the share diversified to 40.7% for general corporations, 29% for financial institutions, and 28% for public institutions.

However, considering their proportion within the entire bond market, the creditworthiness and diversity of issuers, and the use of proceeds, the Bank of Korea explained that the domestic green bond market is still considered small in terms of breadth. Last year, the share of green bonds among total bond issuances was 1.8%, including both won- and foreign-currency bonds, falling short of the major country average, which is 4.0%.

Issuances are also concentrated among highly rated institutions, with those rated AAA accounting for 53%, and the use of funds is focused in certain areas such as clean transportation (33.3%), renewable energy (20.8%), and energy efficiency (16.7%).

The main motivations for issuing green bonds are mostly non-financial, such as improving eco-friendly management and reputation (36.5%) and attracting new investors (18.3%), which outweigh the financial benefits (15.1%).

For green bonds, unlike general bonds, there are cost-saving effects due to government interest subsidies and the "greenium" (eco-friendly preference premium). However, when accounting for costs of external reviews, certification, and post-issuance reporting, there is little difference compared to ordinary bonds.

With limited financial benefits, the main constraints on issuance were cited as the burdens of financial certification and reporting requirements and staffing, difficulties in securing eligible projects, and complexity of issuance procedures.

Kim Jaeyoung, Director of the Bank of Korea’s Sustainable Growth Office, said, "Green bonds require a range of procedures and post-management that are not demanded for ordinary bonds, and this burden is much greater for organizations lacking internal systems and dedicated staff. In addition, issuing institutions must check in advance whether their green projects comply with the Korean taxonomy and have the documentation ready to prove it."

He further added, "Some financial institutions issue green bonds as a way to secure funds for green loans, and thus must comply with both the green bond guidelines and green credit management rules. This leads to duplicative review and reporting work, which is another challenge."

There are calls to ease practical and economic burdens through institutional improvements in order to expand and maintain green bond issuance demand. In terms of easing practical burdens, the report suggested that, within the boundaries of international standards, the processes, forms, and reporting requirements for issuers should be streamlined, and the formats and reporting items for the green bond guidelines and green credit management instructions should be unified.

The Bank of Korea believes that relieving the economic burden related to green bond issuance could involve providing preferential support for first-time green bond issuers, as well as referring to previous examples of tax incentives for green financial products to enhance investor participation. Director Kim emphasized, "Alleviating both the practical and economic burdens for issuing institutions, while also widening the pool of eligible green projects and investors, is the key to vitalizing the green bond market."

This content was produced with the assistance of AI translation services.