Financial Services Commission Officially Announces Transition Finance Guidelines

On February 25, 2026, the Financial Services Commission (FSC) held a meeting on the Great Transition towards Productive Finance and officially announced the Measures to Promote Climate Finance to drive the Republic of Korea’s Green Transformation (K-GX). At the meeting, the government presented three core tasks to support the achievement of the 2035 Nationally Determined Contributions (NDC): (i) quantitative expansion of Climate Finance, (ii) introduction of Korea-specific Transition Finance, and (iii) advancement of the information infrastructure for Climate Finance.

This newsletter explores the key points and implications of the newly established Transition Finance Guidelines (the “Guidelines”), a primary implementation tool designed to expand the scope of Climate Finance and support the transition to a sustainable economy. We also provide an overview of the Japanese Transition Finance Framework, which serves as a key benchmark for government-led transition initiatives.

Background

As the global climate response evolves from declarations to implementation, the role of finance is shifting. While “Green Finance” targets already-green activities, “Transition Finance” supports high-carbon industries in their journey toward low-carbon operations. Given Korea’s heavy reliance on manufacturing and fossil fuels, industrial sectors have been among the primary advocates for the implementation of Transition Finance.

2.	Key Takeaways from the Transition Finance Guidelines

Definition and Classifications

The Guidelines define Transition Finance as “finance provided to economic activities and companies that comply with the requirements set forth in the Guidelines to achieve the 2050 Carbon Neutrality, meet the goals of the Paris Agreement, and support the transition toward a sustainable economy.”

Drawing on the precedents of the EU, which pioneered transition finance based on a taxonomy-based approach, and Japan, which utilizes industry-specific carbon reduction roadmaps as benchmarks, Korea adopts a dual approach:

Category

K-Taxonomy based approach

Transition Strategy based approach

Eligibility

Economic activities that currently do not meet the required standards, but can satisfy K-Taxonomy within a set period

Companies that establish and implement science-based transition strategies

Key Requirements

(1)	Use of funds meets the activity criteria; and

(2)	Satisfies Recognition, Exclusion and Safeguard criteria within 5 years (or by maturity)

(1)	Companies to adopt science-based targets/pathways established by the government; or

(2)	Companies to establish an internal transition plan that includes quantitative targets

Permissible Use

Primarily facility funds (Working capital allowed limitedly for manufacturing of innovative items)

Facility funds and working capital

2)	Key Roles of Financial Institutions Financial institutions are now expected to move beyond simple financing to actively validate and facilitate the transition efforts of companies.

Eligibility Validation: Financial institutions should verify that a company’s transition strategy aligns with government roadmaps or scientific evidence. To ensure credibility, third-party verification can be relied on.
Post-lending Management and Monitoring: Financial institutions should maintain ongoing oversight of a company’s transition and its compliance with the K-Taxonomy or transition strategy targets. If progress is insufficient, institutions may demand corrective actions. Failure to comply may lead to converting the loan to general finance or revoking preferential terms.
Management Framework: Institutions should establish governance and awareness systems specifically for Transition Finance and manage it separately from general finance. Furthermore, they must calculate the ratio of the outstanding Transition Finance balance to total assets as of the end of each quarter, relative to the last day of the preceding quarter.

Japanese Transition Finance Framework

Japan provides a valuable benchmark due to its similar industrial reliance on high-carbon sectors. Since its 2050 Carbon Neutrality declaration in 2020, the Japanese government has recognized decarbonization as one of its core national strategies and established the Basic Guidelines on Climate Transition Finance in 2021. These guidelines set forth the target industries for Transition Finance and the key elements of corporate transition plans. Notably, the Japanese government provides industry-specific technology roadmaps, specifically presenting the best currently available technologies and feasible future technology pathways for major high‑emission sectors, such as steel, chemicals, power, and gas. This gives financial institutions clear technical criteria to assess whether a company’s transition plan aligns with national targets and science‑based scenarios.

4.	Strategic Implications

1)	For Financial Institutions To ensure the effective implementation of Transition Finance, financial institutions should strengthen their assessment expertise, establish robust post‑finance monitoring, and upgrade their risk‑management systems.

Establish Specialized Governance and Management Systems: Beyond existing green finance assessment capabilities, financial institutions should internalize specialized frameworks and post-financing monitoring to verify companies’ emissions reduction strategies and their technical feasibility.
Design Tailored Financial Products: Financial institutions should proactively identify transition demand in high-emitting industries. By designing products that reflect specific industry characteristics, institutions may capture new market opportunities.
Integrate with Green Finance Infrastructure: Rather than treating Transition Finance as a separate system, financial institutions should synchronize it with existing Green Finance frameworks. This will allow for an integrated portfolio perspective in managing emissions and carbon neutrality goals.

For Non-financial Institutions

Transition Finance offers new financing opportunities for high‑emitting companies that were previously classified as “non‑green” and found it difficult to access ESG funding. To leverage these opportunities, it is essential to develop an integrated strategy that encompasses the government’s K-GX initiative and climate disclosure requirements.

Secure Funding via Transition Finance: By utilizing Transition Finance, companies can secure funds for carbon reduction, such as process efficiency improvements and investment in low-carbon equipment. This requires setting credible reduction targets and preparing detailed implementation plans.
Prepare for Mandatory Climate Disclosure: Transition strategies and their outcomes will align directly with future mandatory disclosure requirements (e.g., KSSB). Aligning Transition Finance Strategies with disclosure preparations will ensure long-term regulatory compliance.

[Korean Version]

Share

Professionals

Professionals