[Viewpoint] ESG Bond Issuance and New Business Models for Credit Finance Companies

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

Recently, the issuance of Environment, Social, and Governance (ESG) bonds has surged, especially in the financial sector. These bonds are issued to raise funds used for environmental improvement, social value creation, and corporate governance enhancement. ESG bonds are special-purpose bonds, and their use of funds is verified by evaluation agencies to ensure alignment with the issuance intent. Additionally, issuers must present annual post-issuance reports in the form of progress reports until the funds are fully utilized.

Banks generally have a broad scope for using funds in line with ESG purposes, such as supporting loans to small and medium-sized enterprises and investing in renewable energy projects. Moreover, banks need to expand capital to prepare for increased risk-weighted assets due to the surge in loan demand amid the recent COVID-19 pandemic. By issuing 5-year maturity ESG bonds in the form of innovative capital securities recognized as capital, banks can increase their capital and set lower issuance interest rates, thereby increasing bond issuance. Furthermore, banks consider it advantageous for enhancing credibility as they receive excellent ESG ratings from external evaluation agencies such as the Korea Corporate Governance Service.

However, recently, credit-specialized financial companies (hereinafter referred to as credit finance companies), such as card companies and capital companies, have also joined in issuing ESG bonds. These are mainly used for financial support purposes such as shortening payment cycles for small merchants like small business owners, lowering loan interest rates for financially vulnerable groups, and reducing late fees. Recently, large institutional investors such as the National Pension Service have actively invested in ESG bonds, which has become an incentive for bond issuance. In particular, credit finance companies, which faced difficulties issuing card bonds due to credit tightening this year, are actively issuing ESG bonds as they can raise funds at relatively low interest rates.

Compared to banks, which actively issue green bonds as ESG bonds aimed at investment and financial support for electric vehicle battery development companies, credit finance companies’ ESG bonds are mostly limited to issuing social bonds. Credit finance companies need to explore ways to achieve both public interest creation and business diversification by utilizing funds raised through ESG bond issuance. They should devise new business models that not only align with ESG but also enhance profitability. One approach is to use funds raised through green bond-type ESG bond issuance to expand the automobile subscription economy business. By offering subscription discounts to consumers using subscription services for electric vehicles, this can induce social demand for eco-friendly cars, contributing to environmental improvement by reducing emissions and supporting electric vehicle manufacturers, thus largely aligning with the purpose of green bond issuance.

Automobile finance has long been a core business for credit finance companies. However, not only the new car market but also the current used car installment finance market has become a fierce battleground among banks, card companies, and capital companies, necessitating the discovery of new automobile finance models. Therefore, considering a subscription service model for used electric vehicles fits both the ESG fund usage purpose of eco-friendly projects and the credit finance companies’ efforts to discover new businesses.

It is also necessary to expand financial support targets to include lease-expired vehicles. In the United States, subscription services for used electric vehicles are already expanding. Particularly, business models centered on third-party subscription services are promising. These services provide used and lease-expired vehicles through digital channels such as mobile platforms and are characterized by affordable subscription fees. Services offering subscription fee discounts for using electric or eco-friendly vehicles can be considered. The U.S. company Borrow is noteworthy for providing subscription services focused on popular Tesla used electric vehicle models, receiving favorable reviews from consumers.

In conclusion, it is a timely effort for credit finance companies to contribute to the public interest and pursue business diversification by utilizing funds secured through ESG bond issuance for eco-friendly vehicle subscription services.

[Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University]