The mitigation and adaptation of climate change require large-scale investment in green projects. Green bonds, which are liquid financial instruments used to finance climate mitigation, adaptation, and green projects, have shown rapid growth in issuance in recent years. Besides financing for climate change, green bonds help ESG management by enhancing the issuer’s reputation for eco-friendly activities. Further, they may create, namely, greenium to reduce the cost of financing.

In 2007, green bonds were first issued by multilateral development banks such as the European Investment Bank and the World Bank. The global issuance volume of green bonds soared from about $800 million in 2007 to $320 billion in 2020, and the total cumulative volume reached $1.5 trillion by October 2021. In 70 countries, sovereign institutions and private companies issued green bonds. The issuance by private companies accounted for 77.9% of the total number of issuance and 63.9% of the total amount. Financial companies accounted for 46.0% of private issuances, higher than non-financial companies, 31.9%. In 40 countries, the public sector, such as the central and local governments, public corporations, and public institutions, issued green bonds, accounting for 25.6% of the total issuance volume. Although developed regions such as Europe and the United States and international organizations have been leading their issuance, it is notable that emerging countries such as China are fast increasing the issuance recently. Since a Korean institution first issued green bonds overseas in 2013, by October 2021, the total stock of green bonds issued at home and abroad by Korea’s public institutions or private companies reached 43.5 billion dollars. In particular, the issuance of green bonds in 2021 increased explosively, approximately ten times more than in the previous year.

Green bonds need a regulatory system defined as the institutional framework regarding the requirements for being a green bond and the means of verifying the requirements and of penalizing for their violation. The International Capital Markets Association (ICMA) and the Climate Bonds Initiative (CBI) presented the Green Bond Principles as the basis for the green bond regulatory framework. These principles aim to strengthen the credibility of green bonds, expand financial support for carbon reduction and responses to climate change, reduce the risk of greenwashing, and set up standards for certification of climate bonds. The Green Bond Principles outline the four core components of green bonds: use of proceeds, the process for evaluation and selection for projects, management of proceeds, and ex-post reporting. Countries specify their green bond guidelines based on these principles, and issuers of green bonds introduce a green bond management regime consistent with these principles.

As a result of statistical analysis on the determinants of the issuance size of green bonds in a country, it is found that the higher the readiness for climate change and the higher the vulnerability to climate change, the greater the issuance of green bonds. However, there appears to be no statistically significant relationship between the size of greenhouse gas emissions and the issuance of green bonds. Among macroeconomic variables, the income level, the sovereign credit rating, and the level of financial market development are positively associated with the size of green bonds issuance at a significant level.

Based on the considerations of the recent green bond issuance trend, the development of the regulatory system, and the determinants of the growth of the green bond market, this study suggests policies to nurture the green bond market in Korea: 

First, upgrading the domestic regulatory system for green bonds is necessary. The regulatory system in first-mover countries is changing its emphasis from self-regulation and ex-ante procedure-centered regulation to binding legal regulation and ex-post performance and impact regulation. While updating the green bond regulatory system, Korea needs to closely analyze the EU regulatory system and make its system closer to the EU one. Second, it is necessary to induce the growth of credible and competent external review institutions, which are crucial to the credibility of green bonds and the market’s growth. To this end, the government can consider introducing a certification system of external review institutions until the market’s self-regulation works effectively. Third, the government needs to issue sovereign green bonds, which may help build best practices for issuing and managing green bonds in Korea. Finally, it is necessary to expand the base of green bond issuers by inducing more companies, such as mid-sized companies, to issue green bonds. To this end, the government needs to consider temporarily subsidizing the incidental costs associated with the issuance of green bonds, such as external review costs.