Climate Risk Management Policy for Government Funds

2016 Green Management-Finance International Seminar
Climate-Environmental Risk
Management Policy
for Government-Sponsored Funds
2016. 10. 19
National Assembly Budget Office
Economic Program Evaluation Division
Director, Ick Jin

• Drastic change in
environment
• Paradigm conflict
• Need for
consensus
Perception Gap
Intro …

Contents : I. Climate Change
Aspect
Threat
Opportunity
Challenge Principle
PolicyClimate Change Climate Finance
Response
Task
Target
Instrument

I. Climate Change : Aspect

I. Climate Change : Threat
Hurricane Katrina (2005)
Typhoon Chaba (2016)

I. Climate Change : Threat
Hydrofluoric Gas Leakage in Gumi (2013)
Oil Spill in Taean Peninsula (2007) Gulf Oil Spill (2010)
Fukushima Daiichi Nuclear Disaster (2013)

I. Climate Change : Opportunity

Contents : II. Climate Finance
Aspect
Threat
Opportunity
Challenge Principle
Response
Task
Target
Instrument

II. Climate Finance : Challenge
Role of financial intermediary … supplying funds and risk management tools

II. Climate Finance : Response
Risk event (wind farm project)
Turbine failure
Turbine performance shortfall
Wind shortage
Drop of electricity price
Default of off-taker
Risk mitigation tool
Technical Insurance
Credit Insurance
New risk … Lack of mitigation tool … Avoiding risk
Financial
Guarantee
Revenue
Equipment
Performance
Output
Performance
Guarantee

Exclusionary screening Avoiding companies on the basis of traditional moral values
Best-in-class selection Preferring companies with better ESG performance
Active ownership Entering into a dialogue with companies on ESG issues
Thematic investment Investing based on social, industrial, and demographic trends
Impact investment Disclosing intention to generate environmental benefits
ESG Integration Including ESG risks and opportunities in investment analysis
☞ [CFA, 2015]: Responsible investing strategy
v Change of perception : “Environmental risk” is assumed as a firm-
specific residual in conventional investing whereas it is incorporated as
a systematic risk factor in responsible investing.
II. Climate Finance : Task

☞ [CFA, 2015]: “Traditional socially responsible investing” is most
closely associated with avoiding morally questionable businesses.
☞ [CFA, 2015]: … we use the relatively neutral term ESG issues to
remain focused on how these issues need to be considered for a
more complete investment analysis and better-informed
investment decisions …
☞ [CFA, 2015]: “Responsible investing” or “Sustainable investing”
is usually characterized by identifying investment risks and
opportunities with the help of ESG analysis.

Variable
Profit Margin (%) Profit Margin (%)
Coef. Std. Err. Coef. Std. Err.
ln (Equity) 1.414 1.560 1.300 1.373
Financial Leverage -0.003 0.004 -0.003 0.004
Asset Turnover 0.006** 0.003 0.006** 0.002
Environmental Score 0.008 0.067
Environmental Rating = B 2.153 2.926
Environmental Rating = C -7.566* 4.085
Credit Rating = B -3.868 4.018 -4.002 3.960
Credit Rating = C -11.162* 6.550 -11.364* 6.386
Credit Rating = D -20.430* 11.624 -20.604* 11.517
Constant -16.378 31.968 -14.051 25.322
“Environmental Rating” graded by KEITI (for 13,509 companies at 2015) is
likely to capture the downside risk of their business performance.
Note: * (**) represents the statistical significance at 10% (5%) level respectively.

Contents : III. Policy
Aspect
Threat
Opportunity
Challenge Principle
Response
Task
Target
Instrument

III. Policy : Principle
Mobilizing climate finance by mitigating market failure
S
D
Expected
return
Amount
0
S’
P2
Q2
D’
Q1
P1

III. Policy : Target
Establishing sustainable “Climate Finance Safety-net” … mobilizing PPP
Climate
Project
Climate
Project
Development
Risk Management
Funding
Screening
Monitoring
Systematic
Risk
Individual
Risk
Catastrophic
Risk
Private
Safety-net
Public
Safety-net
IB, VC, PEF
Institutional
Investors
Government
-sponsored
Funds
Insurers
Guarantors
Reinsurers
Guarantors

III. Policy : Instrument
Legislative changes under consideration … new opportunity
• Paris Agreement ☞ Country program to meet national target
• National Finance Act, National Pension Act ☞ ESG integration
• Financial Investment Services and Capital Markets Act ☞ ESG disclosure
• Toxic Chemicals Control Act ☞ Biocide control regulation
The significant problems we face cannot be solved
by the same level of thinking that created them.
One definition of insane is to keep doing the same
thing and expect different outcomes.
- Albert Einstein -

20
Thank You for Your Attention.
Economic Program Evaluation Division
Director, Ick Jin (realwing@assembly.go.kr)

Climate Risk Management Policy for Government Funds

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