Building the Green Korea of the Future
Sustainability has become a priority for South Korea’s government, financial institutions, companies and society as a whole. That is driving greater demand for ESG-linked investment opportunities and risk management solutions. Societe Generale is leading the way, creating innovative investment and risk management products that meet this need. Two recent transactions demonstrate what the Bank can offer clients in South Korea.
South Korea is well known for the so-called ‘Miracle on the Han River’: its rapid transformation from an emerging to developed economy since the 1950s. The country achieved real gross domestic product (GDP) growth averaging 7.3% annually between 1960 and 2019.1
However, growth has come at an environmental price. South Korea is the world’s seventh, largest greenhouse gas emitter and depends on fossil fuels for electricity. The Seoul Metropolitan Area – through which the Han River flows – is among the most polluted cities in the world.2
Green as a policy priority
The situation could now be at a turning point thanks to the green-supporting measures the country introduced recently including a pledge made in 2020 to achieve net-zero emissions by 2050 - the first East Asian country to commit to such goal.3
In an effort to promote and support Environmental, Social and Governance (ESG) investments in response to the growing significance of the underlying factors and responsible investing, the Financial Services Commission (FSC) also has plans to beef up corporate disclosure rules in a bid to promote voluntary disclosure of sustainable management reports by listed companies, with an ambition to cover all KOSPI-listed companies starting 2030.4
ESG financing and investment begins to blossom
Against this backdrop, ESG financing and investment is beginning to blossom in South Korea. Although the market is in the early stages of developing product categories and standards, policy support is helping it to grow fast. Domestic ESG bond issuance has risen from KRW600 billion in 2018 to KRW56.9 trillion ($51 billion) in 2020, while South Korean asset managers hold KRW770 billion ($691 million) of assets under management in 30 ESG-themed equity funds.5
As the market grows, Societe Generale has been working with financial and corporate clients to meet their ESG needs.
The bank worked with a major securities firm in South Korea that was seeking ESG solutions for its institutional clients. Through a swap with an ESG-focused fixed income mutual fund as the underlying asset, Societe Generale was able to offer the securities firm’s clients upside participation when the fund appreciated in value while protecting them against downward movements. The securities firm secures access to this position via periodic fee payments.
This solution met the needs of the securities firm – and its clients – in two main ways. First, it provided access to an underlying fund with clear and well-established ESG investment guidelines, which is important at a time when market standards are still developing.
Secondly, it addressed common concerns about the risk that ESG investments might underperform by protecting their downside through the swap structure and ensuring that the underlying fund is managed by experienced and respected specialists.
Hedging solutions embedding sustainability targets
At the same time, Societe Generale also supported a major South Korean engineering and construction company to develop its first sustainability-linked foreign exchange (FX) derivative trade.
The company has long term exposure to a range of currencies through its international projects and a clear strategic commitment to sustainability. With these needs and priorities in mind, the Bank created a solution that integrated a sustainability target into the client’s hedging strategy.
The 1.5 to 3-year FX derivatives, with a EUR40 million notional, incorporated a sustainability key performance indicator (KPI), under which the client commits to achieving a greater percentage of assets that pursue the highest certifications under the local green construction grade. The involved FX rate will be adjusted accordingly based on the KPI. The sustainability-linked solution helps the client effectively address both the business and the environmental objectives.
An ESG partner for South Korea
To support South Korea’s green ambition, Societe Generale has actively worked with a number of South Korean financial institutions and corporates to issue green, social and sustainable bonds totalling over US$8 billion equivalent in 2020-2021 year-to-date.
South Korea is just one of the many countries who have shown green commitments and are actively progressing its agenda. As the demand for ESG compliance continues to pick up across the globe, Societe Generale continues to strengthen its expertise to remain the ESG banking partner of choice of its clients. The Bank also constantly undertakes commitments in support of the climate transition, including a recent pledge to align its portfolios with trajectories aiming at carbon neutrality by 2050 with the ambitious goal of limiting global warming to 1.5 degrees Celsius.