Amendment to K-Taxonomy and Establishment of Green Credit Management Guidelines

On December 12, 2024, the Financial Services Commission (“FSC”), the Ministry of Environment (“MOE”), and the Financial Supervisory Board (“FSB”) enacted the “Green Credit Management Guidelines” (“Guidelines”) in order to apply the Korean Green Taxonomy (“K-Taxonomy”) to credits offered by financial companies. In the same vein, the MOE amended the K-Taxonomy on December 23, 2024 to expand the green investment.

The purpose of enacting the Guidelines and amending K-Taxonomy is to expand investment in green companies by facilitating the application of the green standard in the financial sector. It further aims to promote green economic activities and accelerate the transition to a low-carbon economy. The key points of the Guidelines and the amended K-Taxonomy are as follows:

Key Points of the Green Credit Management Guidelines

The Guidelines stipulate a standard for determining whether credits managed by financial companies are “suitable for green economic activities.” Through these Guidelines, the government aims to create an environment that fosters the growth of green finance. Below, we provide the key aspects of the Guidelines.

(1)

Clear Standards on Green Credits

The Guidelines define the term “green credits” as credits that are allocated for purposes that align with the K-Taxonomy and that are managed in compliance with the internal control standards outlined in the Guidelines.
The FSC, MOE, and FSB anticipate this standard will address the uncertainties faced by financial companies arising from green washing concerns and establish a foundation for promoting green credits.

(2)

Internal Control Standards on the Management of Green Credits for Financial Companies

The Guidelines present the subject, procedures, and grounds for determining whether credits managed by a financial company are appropriate for the K-Taxonomy (“Conformity Assessment”) in detail.
The Guidelines enable financial companies to designate a “Green Credit Officer” who oversees all matters related to green credits.

(3)

Flexibility in the Subject of Conformity Assessment and Creation of an Environment for Public Disclosure

In principle, the debtor (i.e., fund-using entity, such as a corporation) should perform Conformity Assessment. However, recognizing that many debtors lack an understanding of the K-Taxonomy, the Guidelines allow financial companies to conduct Conformity Assessment so as to ease the burden on the debtors.
In addition, the Guidelines expand upon the benefits of green credits by allowing fund-using entities to disclose and promote green activities through obtaining the “Certificate of Green Credit” issued by financial companies.

(4)

Measures to Ease the Burden of Conformity Assessment

To pass the Conformity Assessment for the K-Taxonomy, the purpose of the fund must meet all of the following four criteria: (i) activity, (ii) recognition, (iii) exclusion, and (iv) protection.
The Guidelines alleviate the burden of Conformity Assessment by making it possible to fulfill the “exclusion^[1]” and “protection^[2]” criteria by the submission of a debtor’s written confirmation.

Key Points of the Amended K-Taxonomy

The MOE first established the K-Taxonomy in December 2021 based on the “Green Technology and Environmental Industry Support Act.” The K-Taxonomy sets forth the principles and standards for “green economic activities” that contribute to achieving six major environmental goals^[3]and applies to various financial means, including green bonds (December 2022 Guidelines) and green credits (December 2024 Management Guidelines).

The MOE’s amendment to the K-Taxonomy establishes ten new “green economic activities,” and revises and supplements 21 existing “green economic activities.”

(1)

Water

The amendment establishes new relevant economic activities to utilize ground water leaked from underground facility constructions, such as road washing, and proposes additional water-related product/facility certifications.

(2)

Circular Economy

In order to reduce the use of plastic packaging, the amendment introduces activities related to reusable container services and reorganizes such activities to promote technologies and industries related to chemical recycling of plastic waste and recovery of waste energy.

(3)

Pollution

The amendment newly establishes activities to manage and reduce soil pollution and indoor air pollution.
The amendment lays the foundation for the investment of green funds in reducing pollutants across various sectors by incorporating new pollution control activities in previously overlooked areas, such as prevention and management of air pollution on ships and management of the scattering of air pollutants.

(4)

Biodiversity

The amendment establishes new activities to maintain and manage forests in a sustainable manner and presents the Korea Forest Certification System and the International Forest Certification System as the criteria for the new activities on forests.
The amendment supplements existing economic activities on the protection, conservation, and restoration of (i) land and marine ecosystems and (ii) bio species. The amendment also broadly expands the scope of protection and restoration to actively preserve the ecosystem and biodiversity. Specifically, the scope of protection and restoration has been expanded from “endangered species” to “wildlife.”

Implications

As “green credits” are still in the early stages of adoption, the financial authorities will not make the Guidelines mandatory. Instead, they will allow financial companies to voluntarily refer to the Guidelines for their credit business. In addition, they plan to regularly compile the status of green credits to facilitate the supply of funds to the green sector, and actively monitor issues faced by the financial companies. Furthermore, the Guidelines reflect the amended K-Taxonomy prepared by the MOE.

The enactment of the Guidelines and the amendment to the K-Taxonomy have clarified the specific criteria for investment in the green sector. In this regard, both corporations and financial companies are expected to effectively manage legal risks associated with attracting and operating green investments, including the risk of greenwashing. Still, they will need to make efforts to enhance internal control systems, such as designating a “Green Credit Officer.”

Meanwhile, the government plans to inspect the status of green credits and continuously review policy, technology, and industry trends related to the K-Taxonomy. As such, it is important for companies to closely monitor policy and regulatory developments.

^[1] “Exclusion” criteria: Whether the economic activity at issue causes severe environmental damage.
^[2] “Protection” criteria: Whether it complies with applicable laws and regulations (e.g., human rights, labor, safety, anti-corruption, and destruction of cultural assets, etc.).
^[3] (i) Reduction of greenhouse gas emissions, (ii) adaptation to climate change, (iii) sustainable preservation of water, (iv) transition to circular economy, (v) prevention and management of pollution, and (vi) conservation of biodiversity.

[Korean Version]

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