Positive Money, a UK-based advocacy group, and the Institute for Green Transformation, a South Korean thinktank, have jointly called on the Bank of Korea (BoK) to embed climate finance into its monetary policy framework as the country grapples with mounting inflationary pressure driven by fossil fuel dependency.
According to Green Central Banking, the two organisations have published a briefing note urging the BoK to move away from conventional interest rate tools and instead use monetary policy to accelerate a departure from fossil fuels.
The report puts forward several concrete policy recommendations, including the creation of a dedicated green lending scheme, adjustments to collateral haircuts based on carbon intensity, and ringfencing proceeds from monetary stabilisation bonds to fund green assets.
The call comes as the South Korean won has dropped to its lowest point since the 2008 global financial crisis, with surging demand for the US dollar placing further strain on the currency. A key driver is a near-total disruption to shipping through the Strait of Hormuz — the route through which almost 70% of South Korea’s crude oil supply travels — following the outbreak of the US-Israel war on Iran. The BoK’s incoming governor has cautioned that rising import costs combined with a weakening currency are set to hasten inflation.
The briefing notes that other major central banks in the region, including those in China and Japan, have already established dedicated green lending schemes to support decarbonisation across a range of activities, from renewable energy adoption to energy efficiency improvements. While the BoK has begun channelling green finance to small and medium enterprises (SMEs) through its bank intermediation support facility, the report concludes this has so far been rolled out on a notably limited scale within its existing regional SME support programme.
The report also recommends that the BoK revise haircuts applied to collateral pledged by commercial banks, calibrated according to the carbon intensity of those assets. The co-authors argue that more carbon-intensive assets should face steeper reductions in value to account for the physical and transition risks they carry. Furthermore, assets held by companies engaged in fossil fuel expansion should be removed from the central bank’s collateral framework entirely. A further proposal would see a share of proceeds from the BoK’s monetary stabilisation bonds — short-term instruments used to manage excess liquidity — directed towards green assets. The briefing notes that the UAE’s central bank is currently the only institution worldwide exploring green short-term debt securities as a policy tool, presenting an opening for the BoK to establish itself as a global leader in this space.
The South Korean government has meanwhile responded to the current crisis by drawing up a supplementary budget that directs approximately 616.2bn Korean won ($420m) towards energy transition initiatives, a step the report’s authors suggest widens the scope for the central bank to formalise green finance as a long-term policy direction.
Institute for Green Transformation head of economic transformation team Giwon Choi said, “The ongoing crisis underscores that … the BoK must move beyond immediate crisis management and traditional interest rate adjustments to fundamentally eliminate the nation’s high dependence on fossil fuels.”
Institute for Green Transformation head of economic transformation team Giwon Choi said, “In response to the current crisis, the government has formulated a supplementary budget, allocating approximately 616.2bn Korean won [US$420mn] toward energy transition projects – a type of response rarely seen in the past,” adding that this development expands the room for the central bank to adopt this as a long-term policy.
Positive Money senior researcher Joe Herbert said, “Taking action on climate and ecological crises is still often framed as being outside of central bank remits, yet it strikes right at the heart of price and financial stability mandates. This includes using monetary tools such as the collateral framework and lending facilities to guide finance towards sectors crucial to green economic transition.”
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