Financial Services Commission’s Announcement of K-Transition Finance

On February 25, 2026, at the “4th Grand Transformation Meeting for Productive Finance,” the Financial Services Commission (the “FSC”) announced the “Plan for Activating Climate Finance” and presented the introduction of the Korean Transition Finance framework as a core initiative. Below is a summary of the key details on (i) the introduction of “Transition Finance,” which aims to support the low-carbon transition of high-emission industries, and (ii) its primary implementation mechanism, the “Transition Finance Guidelines.”

Introduction of Transition Finance

“Transition Finance” refers to financial support provided to high-carbon companies to enable their transition toward low-carbon and eco-friendly structures. It is distinguished from traditional “Green Finance”—which primarily focuses on supporting eco-friendly green activities—in that it encompasses support for carbon-reduction activities, such as facility efficiency upgrades and fuel switching, within high-emission manufacturing sectors, including steel, chemicals and cement.

Given the domestic industrial structure, which is characterized by a high proportion of manufacturing and a heavy reliance on fossil fuels, a consensus has emerged regarding the necessity of introducing Transition Finance to maintain industrial competitiveness while ensuring a flexible green transition. Accordingly, the government has reviewed overseas precedents and domestic implementation methodologies since 2024, and based on these discussions, has officially announced the introduction of the Korean Transition Finance framework.

Key Details of Transition Finance Guidelines

To ensure the flexible yet credible operation of Transition Finance and prevent “greenwashing,” the FSC, in coordination with relevant ministries—namely, the Ministry of Climate, Energy and Environment (the “MCEE”) and the Ministry of Trade, Industry and Resources (the “MOTIR”)—has established the Transition Finance Guidelines (the “Guidelines”). The Guidelines define Transition Finance by encompassing two distinct frameworks: (i) “Taxonomy-Based Transition Finance,” which benchmarks the European Union’s (the “EU”) conceptual framework (under the MCEE), and (ii) “Transition Strategy-Based Transition Finance,” which is similar to the Japanese framework (under the MOTIR).

Classification and Concepts of Transition Finance

Referencing the EU’s model (a taxonomy-based pioneering approach) and the Japanese model (which utilizes industry-specific carbon reduction roadmaps as benchmarks), the Guidelines present two categories: Taxonomy-Based Transition Finance and Transition Strategy-Based Transition Finance.

Classification

Taxonomy-Based

Transition Strategy-Based

Concept

Economic Activity-Focused: Activities that currently fall short of the standards but are capable of meeting the Green Taxonomy criteria within a specified period

Corporate-Focused: Corporations that establish and implement a transition strategy based on scientific evidence

Core Requirements

(1)	The purpose of the use of proceeds must meet the relevant eligibility criteria

(2)	Substantial Contribution (“SC”), Do No Significant Harm (“DNSH”), and Minimum Safeguards (“MS”) criteria must be achievable within five years (or by maturity)

(1)	The corporation adopts science-based reduction targets and pathways established by the government or relevant authorities; or

(2)	The corporation establishes its own transition plan containing quantitative targets

Available Capital

Primarily facility capital (working capital permitted on a limited basis for cases such as the manufacturing of innovative items)

Facility capital and working capital

B.	Role of Financial Institutions Financial institutions must move beyond acting as simple capital providers and assume the role of verifying and encouraging the corporate transition process.

Verification of Appropriateness: Financial institutions must verify whether the transition strategy presented by a corporation aligns with the government’s industry-specific roadmaps or scientific evidence. Third-party verification may be utilized to ensure credibility.
Post-Management and Remedial Measures: Financial institutions must regularly assess whether corporations are implementing their transition strategies and meeting all Green Taxonomy criteria, and may demand improvements if necessary. In the event of non-compliance or insufficient implementation, the financing may be converted to conventional finance, or the benefits may be reduced or revoked.
Management Framework: Financial institutions must establish governance and recognition systems specifically for handling Transition Finance, and manage it separately from conventional finance. Furthermore, at the end of each quarter, they must calculate the “Transition Finance Ratio,” defined as the ratio of the balance of Transition Finance relative to total assets as of the last day of the immediately preceding quarter.

Key Implications

The introduction of Transition Finance and the formulation of the Guidelines signify that the institutional framework for the low-carbon transition is entering full-scale implementation. Relevant corporations and financial institutions should track ongoing developments while keeping the following matters in mind:

Corporations Eligible for Transition Finance

For high-emission companies that were previously classified as “non-green” and faced difficulties raising green capital, Transition Finance presents a new financing opportunity. To leverage this, companies need to formulate comprehensive strategies that integrate the government’s Korean Green Transformation (“K-GX”) policy with climate disclosure requirements.

Financing Linked to Transition Finance: Companies can utilize Transition Finance to preemptively secure funds for carbon reduction, such as process optimization and investment in low-carbon facilities. To achieve this, establishing credible reduction targets and detailed implementation plans is essential.
Responding to Mandatory Climate Disclosures: Established transition plans and implementation performance are directly linked to the current regulatory trend toward mandatory climate disclosures. Therefore, Transition Finance strategies should be prepared in alignment with disclosure preparations.

Financial Institutions

To ensure the enforceability of Transition Finance, financial institutions must enhance their underwriting expertise and establish robust post-management processes. This will enable them to discover new business opportunities while upgrading their risk management frameworks.

Establishing Transition Finance Management Frameworks and Governance: Beyond existing green finance evaluation capabilities, financial institutions need to internalize specialized underwriting systems and post-management processes capable of verifying corporate reduction pathways and technical feasibility.
Designing Tailored Financial Products: Financial institutions should consider proactively identifying transition demands in high-emission industries to design products tailored to specific industry and corporate characteristics.
Systemic Integration Utilizing Green Finance Infrastructure: Rather than operating Transition Finance as a standalone system, it is more efficient to link it with existing green finance lending frameworks. This allows institutions to manage emissions and achieve net-zero targets from an integrated portfolio management perspective.

[Korean Version]

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