climate and environmental risk management policy for government-sponsored funds (ick jin)

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.




VariableProfit 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

Amount0

S’

P2

Q2

D’

Q1

P1


III. Policy : Target

Establishing sustainable “Climate Finance Safety-net” … mobilizing PPP

ClimateProjectClimateProject

Development

Risk Management

Funding

Screening

Monitoring

Systematic Risk

IndividualRisk

CatastrophicRisk

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 -

2016 Green Management-Finance International Seminar20

Thank You for Your Attention.

Economic Program Evaluation Division

Director, Ick Jin ([email protected])

climate and environmental risk management policy for government-sponsored funds (ick jin)

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