South Korean industry is increasing its use of green bonds to raise funds for the energy transition, but the lack of binding force in the green taxonomy is increasing greenwashing risks, a report said. With international green finance standards tightening rapidly, it could also constrain South Korean companies’ ability to attract overseas capital.

According to a recent IEEFA report titled "ASEAN+3 Climate Finance Capacity Assessment", South Korea ranked second among ASEAN+3 economies in the Financial Development Index (FDI). It placed fourth in the Green Financial Development Index (GGFDI), behind China, Japan and Singapore. IEEFA rated South Korea as "the only advanced economy with the largest gap between financial capacity and climate finance performance".

The gap is also evident in the figures. From 2016 to 2024, cumulative green bond issuance totalled $779 billion in China and $314 billion in Japan, compared with $136 billion in South Korea. The report said Singapore, with a much smaller economy, also outpaced South Korea relative to GDP, with $33 billion in issuance.

A key factor behind the situation is the lack of binding force in South Korea’s green taxonomy, known as the K-Taxonomy. IEEFA said the K-Taxonomy remains a voluntary guideline, creating a structure in which projects dependent on fossil fuels could also be classified as "green". IEEFA said, "Strengthening the definition of green finance and enforcing it consistently is necessary to prevent greenwashing and direct capital toward genuine decarbonisation."

The weakness could pose a direct risk for South Korean industry pushing an energy transition. With EU taxonomy rules and International Sustainability Standards Board (ISSB) disclosure standards tightening quickly, overseas capital raising will inevitably face constraints if green bonds issued by South Korean companies come under suspicion of greenwashing in global markets.

South Korea’s K-Taxonomy revised twice, but binding force remains a task despite broader scope.

The government is also aware of the issue and is speeding up work to overhaul the classification system. The Ministry of Environment revised the K-Taxonomy in December 2024. It added 10 economic activities and amended and supplemented 21 across four environmental objectives - water, circular economy, pollution prevention and biodiversity - centred on the climate change adaptation sector.

A comprehensive revision took effect in January this year, expanding green economic activities to 100 from 84. The main points include more detailed categories by renewable power source, new next-generation low-carbon technologies such as heat pumps, sustainable aviation fuel and clean methanol, and additional economic activities aimed at encouraging emissions reduction efforts in semiconductor and display processes.

South Korea’s green bond market is also growing in headline terms. Green bond issuance in 2024 rose 11.5 percent from a year earlier to 82.56 trillion won. Listed outstanding amounts also increased 7.6 percent year on year to 273.31 trillion won.

The IEEFA report said that despite the two revisions, the system still remains a voluntary guideline. It said that while the list of economic activities expanded, there is no legal basis to compel financial institutions to apply it, leaving intact a structural loophole that allows fossil fuel-dependent projects to be classified as green. The report also flagged the lack of a system to track actual carbon reduction performance, saying the current framework stops at the bond issuance stage.

The Bank of Korea’s climate stress test results released in March last year also support that view. Even under an optimistic scenario, climate change could cut annual GDP growth by 0.30 percentage points, and delayed policy responses could threaten the stability of capital flows and asset values, it warned. IEEFA said the test results have not been sufficiently linked to financial policies to expand green investment.

IEEFA said elevating the K-Taxonomy from a voluntary guideline to a binding market standard to block greenwashing is the starting point. It said binding force is needed for policy banks to take on a de-risking role in green investment, enabling a virtuous cycle in which private capital flows in.

It also recommended that a framework to track actual carbon reduction performance, rather than bond issuance results, is needed to maintain trust in green finance. IEEFA said, "If policy signals are uncertain, financial institutions hesitate to commit large-scale capital," and added, "A clear regulatory direction and strong institutional leadership are needed."