High borrowing costs and weak policy signals slow growth, while social lending dominates over climate funding, a new report finds.
South Korea’s environmental, social, and governance (ESG) finance market has surpassed KRW2,000 trillion (US$1.5 trillion) for the first time, but its growth has slowed sharply amid policy uncertainty, high interest rates and weak private-sector participation, according to a new report.
The ESG finance market includes funding for activities such as renewable energy projects, social housing, corporate sustainability initiatives and responsible business practices. Banks, pension funds, insurers and asset managers allocate capital to projects or companies that meet ESG standards, often guided by government policies and disclosure rules.
The country’s total ESG-related financing reached KRW2,012.6 trillion by the end of 2024, more than doubling from 2019 levels, Seoul-based nonprofit Korea Sustainability Investing Forum (KoSIF) said in the “2024 Korea ESG Finance White Paper” report on Sunday.
However, annual growth slowed to 8.9 per cent in 2024 from the 20 to 30 per cent range seen in recent years, marking the first time expansion has fallen into single digits. Private-sector ESG finance declined 0.6 per cent year on year due to high borrowing costs and deteriorating profitability, reversing a five-year growth trend.
“The financial industry is highly sensitive to regulation and policy,” KoSIF chairman Kim Young-ho said, as cited by the report, adding that weak policy support under the previous administration had dampened market momentum. He called for consistent government signals to sustain qualitative growth.
Excluding South Korea’s pension fund National Pension Service, ESG finance showed a heavy concentration in the social (S) category, which accounted for KRW763.7 trillion (US$530 billion), or 72.3 per cent of the total. Environmental (E) finance – directly linked to climate action – stood at KRW180.5 trillion (US$125 billion), or 17.1 per cent. Integrated ESG activities accounted for KRW107 trillion (US$74.2 billion), or 10.1 per cent, while governance (G) financing was just KRW4.9 trillion (US$3.4 billion), or 0.5 per cent.
Researchers of the report said the dominance of social finance reflected the prevalence of low-risk, policy-driven lending such as housing loans backed by public institutions, which are easier to classify as ESG.
By instrument, ESG investments made up KRW945.5 trillion (US$655 billion), or 47 per cent, and ESG loans KRW753 trillion (US$522 billion), or 37.4 pere cent, while ESG bonds totalled KRW247.5 trillion (US$171.5 billion), or 12.3 per cent, and ESG-linked financial products KRW66.6 trillion (US$46 billion), or 3.3 per cent, indicating a structure centred on investments and lending.
Environmental finance also showed signs of stagnation, with 61.4 per cent of E-category funds concentrated in loans. Only 29 financial institutions offered renewable-energy financial products in 2024, with many citing regulatory uncertainty as the main barrier to developing dedicated green offerings.
The report also highlighted the need to expand transition finance for carbon-intensive industries such as steel and construction.
Sustainability-linked loans (SLLs), which offer interest rate incentives for meeting emissions targets, fell 20.6 per cent year on year to KRW4.7 trillion (US$3.2 billion) in outstanding balances.
In addition, financial institutions reported KRW3.8 trillion (US$2.6 billion) of liquefied natural gas (LNG) financing as ESG finance. While some taxonomies classify LNG as a transitional energy source, the report warned that doing so risks “greenwashing” and recommended separate disclosure of transition finance and green finance to prevent inflated figures.
KoSIF’s Kim said robust ESG disclosure requirements were essential for building a healthy market ecosystem, noting that both transition finance and stewardship activities rely on reliable ESG data.
“Transparent corporate ESG information must come first for real transformation to occur,” he said.
