Bank of Korea Sounds Alarm: Inaction on Climate Change Will Trigger Steep Financial Risks

The Bank of Korea (BOK) has issued a stark warning, projecting a significant surge in financial risks for the nation if decisive action is not taken to combat climate change. In a comprehensive report released on March 25, 2025, the central bank underscored the profound and multifaceted ways in which climate change will destabilize the financial system, impacting everything from household finances to the stability of financial institutions.

The BOK’s analysis paints a concerning picture, detailing how both physical risks – stemming from extreme weather events like floods, droughts, and heatwaves – and transition risks – arising from the shift towards a low-carbon economy – pose substantial threats.

Physical Risks: A Direct Hit to Assets and Productivity

The report emphasizes the escalating costs associated with physical climate risks. Increased frequency and intensity of natural disasters are projected to inflict significant damage on infrastructure, real estate, and businesses across various sectors. This direct destruction of assets will not only lead to substantial financial losses for individuals and corporations but also disrupt supply chains and hinder overall economic productivity. For instance, coastal regions could face increased insurance costs or even become uninsurable due to rising sea levels and storm surges, directly impacting property values and the financial stability of homeowners and mortgage lenders. Similarly, agricultural sectors could suffer from prolonged droughts and altered weather patterns, leading to decreased yields, higher food prices, and financial distress for farmers and related industries.

Transition Risks: Navigating the Shift to a Low-Carbon Future

The BOK also highlights the considerable financial risks associated with the transition to a low-carbon economy. These risks arise from policy changes, technological advancements, and shifting market sentiment as the world moves away from fossil fuels. Industries heavily reliant on carbon emissions could face significant write-downs in asset values as regulations tighten, carbon taxes increase, and demand for their products diminishes. This could lead to financial instability for companies in sectors like coal mining, oil and gas, and even carbon-intensive manufacturing. Banks and other financial institutions holding substantial investments in these “brown” assets could face significant losses, potentially impacting their capital adequacy and overall stability. Furthermore, the pace and predictability of this transition are crucial; a sudden and disorderly shift could trigger widespread financial market volatility.

Household Finances Under Threat

The BOK’s analysis extends to the impact on household finances. Individuals could face increased costs related to climate change, such as higher insurance premiums in disaster-prone areas, increased energy expenses if fossil fuel prices rise during the transition, and potential job losses in carbon-intensive industries. Moreover, the value of their assets, particularly properties in vulnerable locations, could depreciate over time. These factors could collectively strain household budgets and increase the risk of defaults on loans and mortgages, further destabilizing the financial system.

The Interconnectedness of Risks

The central bank stresses the interconnected nature of these risks. Physical damage to businesses can lead to loan defaults, impacting banks. Transition risks affecting specific industries can ripple through the economy, affecting employment and consumer spending. These interconnected vulnerabilities underscore the systemic nature of climate-related financial risks and the potential for cascading failures within the financial system if not adequately addressed.

Call for Proactive Measures

The Bank of Korea’s report serves as a clear call for proactive and comprehensive measures to mitigate these looming financial risks. The BOK emphasizes the need for:

• Clear and Consistent Climate Policies: Providing a stable and predictable regulatory environment to guide the transition to a low-carbon economy.
• Investment in Green Technologies: Encouraging and facilitating investments in renewable energy, energy efficiency, and other sustainable solutions.
• Enhanced Risk Assessment and Management: Strengthening the ability of financial institutions to identify, assess, and manage climate-related financial risks.
• International Cooperation: Working with global partners to address this shared challenge effectively.

The BOK’s stark projections underscore the urgency of integrating climate considerations into financial stability assessments and policy frameworks. Ignoring the financial implications of climate change is not a viable option and will only lead to more severe and costly consequences down the line. The report serves as a critical reminder that addressing climate change is not just an environmental imperative but also a fundamental necessity for safeguarding the long-term stability and resilience of the financial system and the broader economy.