Following the Paris Agreement in 2015, green investing has become an essential factor in sustainable development and investment strategy. It is being employed by major countries around the world, including the EU, the US and China for setting out targets to reduce greenhouse gas emissions, promote green new deals, and establish targets for achieving carbon neutrality.
After announcing its European Green Deal, which committed a total investment of €1 trillion ($1.19 trillion), the EU introduced the European Climate Law in March 2020, and followed it up with measures such as the guide on climate-related and environmental risks in November 2020, and the EU taxonomy. It has also announced that it will impose a carbon border tax on imports by 2023. President Joe Biden of the US has also announced, as a part of his campaign pledge, an environmental policy shift to rejoin the Paris Agreement, to invest $2 trillion in clean energy and infrastructure, and to introduce its own carbon border tax. Similarly, China has proposed green development as a long-term goal and announced its strategy for achieving carbon neutrality, in part, by improving its current energy infrastructure in 2021.
As a result, the issuance of green bonds has been on a steady rise, and presently accounts for the largest portion of sustainability bonds worldwide. In South Korea, 31 bonds were listed on the Korea Exchange as of the end of November 2020 due to the rapid increase in the issuance of green bonds. As a result, the country has stepped up its environmental, social, and governance (ESG) initiatives, and the Korean Green Bond Guideline (KGBG) was created in December 2020 to define green bonds and promote the establishment of green bond frameworks (GBF) by issuers, forming the basis of pilot projects for green bond issuance in 2021.
Interpreting green bonds
As defined by the Climate Bonds Initiative, a ‘green bond’ is a bond where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible green projects, and which are aligned with the core components of green bond principles.
With the rapid increase in the issuance of green bonds worldwide, resolving the problem of green washing (the classification of non-green bonds as green bonds), has become important to prevent distortion of the essential purpose and impact of green bonds by establishing standards for and evaluating the performance of green bonds. As a result, green bond issuers are pushing for green evaluations by tracking, monitoring, and reporting investments, while some countries, including Japan and Singapore, have even implemented support systems for additional costs incurred.
However, there is a problem that needs to be addressed in advance of these assessment activities – ‘what is green?’
The EU established the EU taxonomy by promulgating a regulation on June 18 2020, to identify and assess environmentally-friendly economic activities in the process of expanding and promoting investment in environmental and climate-related businesses. Based on recommendations by a group of experts in 2020 regarding the EU taxonomy, the EU prepared two technological standards for climate change mitigation and climate change adaptation out of six objectives and announced its plan to legislate the EU taxonomy technical screening criteria for the remaining four objectives for companies to apply and publicise their environmental activities from December 2022.
The International Organization for Standardization (ISO) also has developed its own taxonomy (ISO taxonomy), but it is expected that the EU taxonomy will be legislated, applied to all member countries, and then set as a base for an international standard comprised of the six environmental objectives, robust and science-based technical screening criteria, and social and governance safeguards. In fact, many countries, including South Korea, China, Malaysia and Mongolia, are also establishing their own taxonomy systems that meet their own national standards based on the EU taxonomy.
While developing the K-taxonomy (which is also based on the EU taxonomy), South Korea announced its plan for legislating the K-taxonomy to prevent green washing in the KGBG in December 2020, passed the Environmental Technology and Industry Support Act, and is planning to announce the K-taxonomy guidelines at the end of June 2021. Concurrently, Korean financial institutions are developing green finance standards, and are preparing to double the size of green finance by 2030 based on the K-taxonomy.
Setting environmental objectives
The objective of a taxonomy is to prevent greenwashing and distinguish actual green bonds from non-green bonds. Accordingly, there are several factors that the taxonomy must consider to achieve this objective. First, the taxonomy must propose its environmental goals and scientifically evaluate whether there is a precise classification of economic activities subject to assessment and whether the companies have achieved the reduction of greenhouse gas emission or any other goals set forth therein.
However, if an entity’s economic activity for one of its objectives for the environment does significant harm on any of the remaining objectives, it would detract from the overarching environmental goals of the taxonomy, and thus it is advisable to establish a means of evaluating compliance with its criteria. In addition, because no entity should undermine universal values such as human rights under the guise of addressing environmental concerns, the taxonomy should have a means of evaluating whether an entity has undermined any such universal values or principles. In that respect, a taxonomy is a collection of green economic activities
First, the K-taxonomy, the EU taxonomy and ISO taxonomy all have six environmental objectives. There are some differences in wording, but all are comprised of:
- Climate change mitigation;
- Climate change adaptation;
- The sustainable use and protection of water and marine resources;
- The transition to a circular economy;
- Pollution prevention and control; and
- The protection and restoration of biodiversity and ecosystems.
The taxonomy then identifies industrial classifications and groups that will be applied to each individual company as a premise for assessing whether they are doing well to achieve any of the six environmental objectives.
Depending on these technical classifications, the criteria for evaluating the achievement of six environmental objectives that will be applied to individual companies will vary. Such technical classifications of industries and groups depend on the circumstances of industrial development of the individual countries and applicable laws. For instance, the EU taxonomy currently specifies evaluation criteria and factors for each of its eight macro-sectors and 70 specific business activities, while the K-taxonomy is currently working on setting up evaluation criteria and factors for each of its 8 macro-sectors and 51 business activities.
Achieving green goals
A taxonomy’s primary purpose is to present specific technical screening criteria to assess the extent to which the activities of companies in each target group contribute to the six objectives, allowing individual companies to refer to it and evaluate their own activities.
The EU taxonomy has established two standards for climate change mitigation and climate change adaptation and is working on setting standards for the remaining four objectives as of June 2021. The K-taxonomy also plans to confirm only the standards for climate change mitigation and climate change adaptation as of June 2021, with an intent to establish standards for the remaining four environmental objectives at a later time.
The technical screening criteria reviews environmental certification or greenhouse gas emission standard with positive assessment component, and also assesses the negative components, namely ‘Do No Significant Harm’ (DNSH). The main part of DNSH is compliance with the applicable law of each country related to the six major environmental objectives.
For example, renewable energy businesses such as hydroelectric or thermoelectric energy businesses are required to meet life cycle CO2 100g of greenhouse gas emission standards to produce 1kWh of electricity, while are also required to meet DNSH standard, which will vary by country based on general workplace environmental standards and applicable laws. The variances are attributable to differences in critical issues faced by each country and such country’s individual processes for addressing environmental and sustainability issues depending on the characteristics of that country.
In South Korea, the most important environmental issues to the government and non-governmental organisations (NGOs) are climate change, fine dust/air pollution and waste disposal. Theoretically, if a financial institution invests in hydroelectric projects in the US, France, South Korea, and Indonesia with funds obtained by issuing green bonds, the criteria related to carbon emission in the technical screening criteria would be generally the same amongst the four countries (i.e. carbon reductions as stipulated by the EU taxonomy, the K-taxonomy and ISO taxonomy are the same in terms of greenhouse gas emissions of 100g of life cycle CO2 to produce 1kWh of electricity), while the environmental standards and applicable laws of the workplace standards corresponding to DNSH may differ in all four countries.
When each country has such a different legal system, it will inevitably be difficult to establish a global standard for issuing green bonds because the criteria for taxonomy will vary among different countries. However, differences in business environments due to each country’s different legal system cannot be changed unless a unified legal system (e.g. a single system like the EU) is established. Therefore, from the standpoint of standardisation of green bonds, it is neither realistic nor desirable to unify specific criteria or contents for the assessment of green bonds on a global basis.
Accordingly, the standardisation of green bonds could share universal principles and unify technical aspects while acknowledging the validity of the different legal system of individual countries. The EU taxonomy and the K-taxonomy appear to have followed the above standardisation process. However, in most countries other than the EU, many of the regulations still being enacted in relation to green finance have begun just as legislative guidelines, which must be based on the legal basis of individual countries and are areas where legal experts are needed.
An additional factor to consider in the standardisation of green bonds is: who should evaluate green bonds based on taxonomy? For example, the KGBG requires an external review before the issuance of green bonds of whether the issuance has met the four core factors of GBF: a) use of funds, b) project assessment and selection process, c) management of funds, and d) follow-up report.
The guideline also advises for an external review on an issuer’s report after the issuance of green bonds to confirm its fund management process, intended use of funds, and its effect on improving the environment. To meet this need, organisations that certify green bonds upon issuance are emerging, and include: credit rating agencies, accounting firms, consulting firms and research institutes, and their numbers are increasing. The green bond guidelines also suggests these organisations as examples of external review institutions. In South Korea, these institutions have also been performing post-monitoring and performance management tasks following green bonds issuances. Of course, the ISO also reviews ISO auditors, which assess the compliance with ISO taxonomy, and recommends its own assessment criteria.
Seeking legal advice
A paramount concern for establishing a green bond guideline, with regards to pre- and post- certification, is compliance with applicable environmental laws. The EU taxonomy, the K-taxonomy and other taxonomies’ criteria also need to be in line with the relevant laws and basic principles such as human rights, so ensuring legal compliance in issuing green bonds is critical. Therefore, the involvement of law firms or attorneys is essential in issuing green bonds.
Due to the above considerations, institutions that do not possess relevant licenses to perform legal work that provide certification, or post-monitoring and performance management follow-up tasks, may be inadequate. Confirming legal compliance in the issuance of green bonds with legal experts will be preferable to obtaining such compliance services from non-professional consulting firms, accounting firms or credit rating agencies.
In summary, legal professionals’ active participation should be systemised to prevent green washing and further promote green bonds, because the standardisation of green bonds and ensuring actual compliance with the applicable legal standards requires legal expertise.
Senior foreign attorney
Yoon & Yang
T: +82 2 6182 8502
Seung-Kook Synn is a senior foreign attorney at Yoon & Yang specialising in corporate legal affairs, including governance, international transactions, intellectual property rights, antitrust and risk management.
Prior to joining Yoon & Yang, Seung-Kook worked as a general counsel and senior vice president of corporate sustainability management for SK Group, a Korean major conglomerate including SK Telecom, SK Energy and SK Hynix. The introduction of a full-scale compliance programme for SK’s flagship companies is his signature leading achievement. Based on his experience as an in-house counsel, he provides tailored legal solutions, particularly in governance issues, to corporate clients.
Seung-Kook is a graduate of Yonsei University and later completed his LLM at Cornell Law School and his JD at Vanderbilt Law School. He is admitted to practice in New York.
Keun Woo Lee
Yoon & Yang
T: +82 2 6003 7558
Keun Woo Lee is a partner at Yoon & Yang, where his main practice areas consist of intellectual property protection, privacy protection, trade secrets protection. He also works on matters including e-commerce and other technology, media and telecommunication areas.
In addition, Keun Woo has been representing various clients in criminal proceedings pertaining to personal information, as well as providing advisory services to corporations’ chief officers in charge of protecting personal and corporate information. As a key member of the firm’s ESG group, he has been actively participating in internal and external seminars, webinars and forums as a guest speaker or contributor, particularly on environment and social issues.
Keun Woo is a graduate of Seoul National University College of Law and has also completed a LLM at the University of Southern California Gould School of Law.
Eco & Partners
T: +82 2 2135 6698
Dae-Woong Lim is a principal partner of Eco & Partners and serves UNEP Finance Initiative as a national coordinator in Korea. He is a member of the Presidential Committee on Carbon Neutrality and Finance Development Appraisal Committee of Financial Service Committee in Korea.
Since 1995, Dae-Woong has been advising industry, financial institutions, governments, and international organisations. His specialty is on green finance, climate change, ESG and sustainable development. He is also developing the Korea green taxonomy commissioned by the Ministry of Environment.
Dae-Woong is a graduate of Korea Aerospace University and holds a master’s degree in environmental sustainability from the University of Edinburgh.
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