On December 30, 2021, the Ministry of Environment (the “MOE”) announced the K-Taxonomy Guideline (the “Guideline”) that sets forth principles and standards of green economic activities based on a review of international standards (e.g., the European Union (“EU”) and the International Organization for Standardization) and opinions from various stakeholders and experts in accordance with Article 10 Clause 4 of the Environmental Technology and Industry Support Act.
Based on a growing interest in green economic activities with environment-friendly goals (e.g., carbon neutrality and the Green New Deal), the Guideline was developed to help categorize green economic activities and support the inflow of private and public funds into green businesses and green technologies, while preventing the so-called “green washing.” By using the Guideline, the financial sector and other industries will be able to easily verify green businesses and participate in various green financial activities. The key points of the Guideline are as follows.
1. K-Taxonomy Concept and Principle
K-Taxonomy is a classification system of green economic activities that promotes six environmental objectives: (i) reduction of greenhouse gases, (ii) adaptation to climate change, (iii) sustainable conservation of water, (iv) resource circulation, (v) prevention and management of pollution, and (vi) conservation of biodiversity.
“Green economic activities” contribute to the improvement of the environment based on scientific evidence. Further, green economic activities must comply with the following three principles based on preventive environmental management and social consensus: (i) contribution to environmental objectives, (ii) absence of serious environment damages, and (iii) the minimum protection mechanism.
2. Categorization of Green Economic Activities Under K-Taxonomy
K-Taxonomy, which is comprised of 69 sub-economic activities, is largely divided into the “Green Category” and the “Transition Category.”
The “Green Category” contains truly green economic activities that are essential for carbon neutrality and environmental improvement. A total of 64 economic activities (e.g., renewable energy production and pollution-free vehicle manufacturing) fall under this category.
The “Transition Sector” contains transitional economic activities that are necessary to reach the ultimate goal of carbon neutrality. The following five economic activities fall under this category: (i) reduction of greenhouse gases at SMEs’ place of business, (ii) production of energy based on liquefied natural gas (“LNG”) and mixed gas, (iii) production of (blue) hydrogen from LNG, (iv) eco-friendly shipbuilding, and (v) eco-friendly ship transport.
Regarding the “Transition Sector,” it is important to note that the MOE did not include nuclear power under the green economic activities in consideration of various future scenarios (e.g., carbon neutrality). However, the MOE plans to re-visit this issue after continuously monitoring international trends, such as those of the EU, and further taking into account domestic situations. Considering that the EU Taxonomy recently included nuclear power under green economic activities and the President-elect pledged to implement carbon neutrality through renewable energy and nuclear energy, we will closely monitor the MOE’s further updates on this issue.
3. Procedure to Determine Green Economic Activities Under K-Taxonomy
An economic activity falls under the K-Taxonomy only if all four criteria below are satisfied:
- Activity Criteria: whether the economic activity falls under any of sub-green economic activities
- Technical Criteria: whether the economic activity satisfies the technical specifications to achieve at least one of the six environmental objectives above
- No Harm Criteria: whether the economic activity satisfies the Do No Significant Harm (DNSH) standards
- Compliance Criteria: whether the economic activity violates any related laws or regulations (e.g., human rights, labor, safety, anti-corruption, and destruction of cultural assets)
By defining green economic activities, the Guideline is expected to be utilized in various green financial activities (e.g., issuance of green bonds, green project financing, green credit, and green funds) as well as corporate and financial institution disclosures. The MOE will apply the Guideline to corporate level financial products (e.g., bonds and project financing) first, and then to the Guideline on Green Bonds in its entirety starting in 2023 with updates. Further, the MOE may apply the Guideline to ESG disclosures in the mid to long run.
It is important to pay close attention to the application and development of K-Taxonomy as it will effectively contribute to carbon neutrality and sustainable development goals by connecting corporate investments and financial institution activities with green economic activities.