'Carbon Neutrality Leads to 6 Trillion KRW Reduction in Financial Sector Losses'... FSC Encourages Establishment of Climate Risk Management System

FSS Conducts 'Climate Stress Test'
Finds Lower Long-Term Losses with Carbon Neutrality
Plans to Strengthen Climate Risk Management in Financial Sector

The Financial Supervisory Service (FSS) conducted a 'climate stress test' related to carbon reduction efforts and found that achieving carbon neutrality results in lower long-term losses from climate crises. Accordingly, it plans to promote the establishment of climate risk management systems within financial companies.

On the 18th, the FSS announced that it conducted the climate stress test to analyze the effects on economic growth and financial sector losses when actively responding to carbon reduction versus not responding.

The FSS, Bank of Korea, and Korea Meteorological Administration jointly developed climate scenarios up to the year 2100, consisting of economic variables (such as GDP) and meteorological variables (such as temperature), then assumed pathways for losses incurred by financial companies under different situations and established a model.

According to the climate stress test results, achieving carbon neutrality by 2100 would result in losses of 19.5 trillion KRW due to climate crises, which is smaller than the losses under the no-response scenario (25.1 trillion KRW).

Additionally, regions with concentrated manufacturing industries were vulnerable to climate risks. Approximately 70% of losses from climate crises were concentrated in high carbon-emission manufacturing sectors such as steel and in natural disaster-sensitive industries like wholesale and retail. In particular, the loss rate of financial companies located in provincial areas (2.0%) exceeded that of commercial banks (1.3%).

Furthermore, if there is no active response to the climate crisis (no-response scenario), increased losses could cause seven financial companies to fail to meet the minimum regulatory capital ratio.

In response, the FSS plans to establish a 'transition finance guideline' to activate investments that partially meet green standards. Green loans that fully meet the green standards under the 'Green Loan Management Guidelines' will be differentiated from transition finance through incentives to ensure smooth funding for carbon reduction. It also plans to strengthen low-carbon transition financial support in cooperation with provincial financial companies and local governments, which are highly exposed to climate risks due to manufacturing concentration.

Moreover, the FSS intends to promote the establishment of enterprise-wide climate risk management systems within financial companies. It will enhance communication with the financial sector to enable governance establishment, strategy formulation, risk assessment and management, and disclosure in accordance with the 'Climate Risk Management Manual.'