Lee Chang-yong: "Financial Institutions Must Act as Risk Managers and Acceptors of Climate Change"

Financial Institutions Must Become Both 'Risk Managers' and 'Risk Takers' in Response to Climate Change
Lee Chang-yong: "Accurate Measurement and Assessment of Climate Risks Is the Starting Point"

"Financial institutions must act as 'risk managers' for physical risks caused by climate change and as 'risk takers' providing funds for green transition in response to transition risks. The starting point is to accurately measure and assess the impact of climate risks on the real economy and the financial system."

Lee Chang-yong, Governor of the Bank of Korea, is delivering a welcome speech at the Climate Finance Conference jointly hosted by the Financial Supervisory Service and the Bank of Korea on the 18th at the Bank of Korea in Jung-gu, Seoul. Bank of Korea

Lee Chang-yong, Governor of the Bank of Korea, said this on the 18th at the climate finance conference jointly hosted by the Financial Supervisory Service and the Bank of Korea in Jung-gu, Seoul. He stated, "I hope the climate stress test jointly conducted by the Bank of Korea and the Financial Supervisory Service will be a meaningful first step for financial institutions to prepare for climate change response."

Governor Lee pointed out that the recent threats of climate change are also placing a considerable burden on the Bank of Korea’s price management. This is due to a surge in heat-related illnesses caused by heatwaves, flooding in downtown Seoul and industrial sites from sudden extreme heavy rains, and rapid price increases of related products caused by changes in agricultural cultivation areas and coastal fish species distribution due to rising temperatures.

The Ministry of Environment has established systems for companies and financial institutions to respond to the climate crisis. In December 2021, it established the Korean Green Taxonomy to lay the foundation for activating green finance, and through amendments to the Enforcement Decree of the Greenhouse Gas Emissions Trading Act, it is promoting the activation of the emissions trading market, a key tool for reducing carbon emissions. The Bank of Korea and financial authorities are also paying attention to what the 'tail risks' are?risks that the existing financial system has not sufficiently considered due to climate risks?and the potential scale of damage caused by them.

Governor Lee noted, "If appropriate responses to climate change are not made or are delayed, there is a risk of significant adverse effects on the soundness of financial institutions, as shown in the paper announced today." He added, "If appropriate climate response policies are implemented, financial institutions may initially incur losses due to the decline in asset values of high-carbon industries, but in the long term, it is expected to contribute to managing financial institutions’ losses within a certain level by promoting the development of eco-friendly technologies and mitigating climate risks."

This climate stress test was conducted for the first time in Korea by the Bank of Korea, the Financial Supervisory Service, and the Korea Meteorological Administration, developing a customized climate change scenario reflecting Korea’s economic structure and geographical characteristics. Fourteen major financial institutions provided various ideas for scenario improvement and basic data for evaluation. Governor Lee said, "This joint project experience will be an important foundation for establishing an early warning system for climate risks and strengthening the resilience of the financial system," adding, "It is a meaningful case demonstrating the synergy effect that can be created through cooperation among multiple institutions."

He emphasized, "Responding to climate change is an urgent national task that the government, companies, financial institutions, and households must solve together," and said, "I hope today’s discussions will not only remind the financial sector but all economic actors of the importance of responding to climate change and serve as an opportunity to promote a sustainable structural transition of our economy."