Despite government support policies, the actual cost savings from issuing green bonds in South Korea appear to be limited. Additional expenses arise from external certification and post-issuance reporting, which, combined with the government's secondary support and the phenomenon of 'greenium'—where green bonds are issued at lower interest rates than regular bonds—largely offset any potential savings, resulting in issuance costs that are not significantly different from those of regular bonds.
The Bank of Korea stated in its 'BOK Issue Note: Assessment of Domestic Green Bond Issuance Conditions and Policy Implications' released on July 30 that to activate the green bond market, it is essential to reduce the economic and practical burdens on issuing institutions and to expand the investor base.
The domestic green bond market has grown rapidly since 2021. The average annual issuance increased from 1 trillion won between 2018 and 2020 to between 6 trillion and 9 trillion won annually since 2021, with the number of issuing institutions rising from an average of four to 44. This growth has been supported by government policies, including carbon neutrality initiatives, the introduction of a Korean green classification system, secondary support, and fee exemptions.
However, despite this apparent growth, the market's foundation remains narrow. Last year, South Korea's green bond issuance totaled $13.1 billion, ranking 13th globally, while green bonds accounted for only 1.8% of total bond issuance, significantly below the average of 4.0% in major countries. Issuance has also been concentrated among a few high-credit institutions and specific eco-friendly projects.
The Bank of Korea analyzed that the financial incentives of green bonds are not as substantial as expected. When a large corporation issues a 100 billion won green bond with a five-year maturity, it is estimated that additional costs of 5 to 10 basis points (1 basis point = 0.01 percentage points) arise from external reviews, certifications, and post-issuance reporting compared to regular bonds. In contrast, the greenium effect provides about 2 basis points of savings, and government secondary support contributes to a reduction of 4 to 7 basis points, resulting in an overall offset of 6 to 9 basis points. Consequently, the total issuance cost of green bonds is analyzed to be similar to that of regular bonds. However, the Bank of Korea noted that when considering non-monetary burdens related to internal administration and management, the costs felt by companies could be higher.
Survey results echoed these findings, with 42.2% of responding institutions stating that the issuance costs of green bonds are similar to those of regular bonds, while 20.0% indicated that they are even higher. Additionally, 86.7% reported that the funding rates are not different from those of regular bonds, with only 13.3% stating that they are lower.
On the other hand, green bonds are seen to provide non-financial benefits, such as signaling a company's commitment to eco-friendly management and attracting ESG investors. Approximately 80% of issuing institutions reported improvements in their environmental ratings, and over 90% indicated reductions in carbon intensity, reflecting improvements in environmental indicators. However, the Bank of Korea clarified that these results demonstrate a correlation between green bond issuance and environmental performance, rather than a direct causal relationship.
The Bank of Korea recommended that to expand the foundation of the green bond market, policies should be implemented to reduce the burdens on issuing institutions while simultaneously increasing investor demand. It suggested maintaining secondary support while considering preferential measures for initial issuing institutions, as well as enhancing tax incentives for investors and expanding investment products related to green bonds to boost investment appeal.
* This article has been translated by AI.
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