Climate risk management and green finance: an interview with Jeong In-tae

Along with the rising importance of overseeing climate risk, the finance industry is looking into green finance, attempting to direct financial resources to environmentally sustainable projects. Korea's largest guarantee insurance provider Seoul Guarantee Insurance is one financial instition that seeks to promote sustainability through ways such as approving higher guarantee limits for ESG-certified companies. In this interview, SGI's Risk Management team leader Noh Kyu-young shared insights of the specific green finance strategies SGI pursues, the climate risk it addresses, and the challenges presented by ambiguous government guidelines.

Could you first briefly introduce your current job?

I am the team leader of the Risk Management Division at SGI Seoul Guarantee Insurance. Our Risk Management Team is responsible for managing the company’s overall risks. Our company provides guarantees, which means that if a party to a contract fails to fulfill their obligation to pay, our company steps in to cover the payment on their behalf. Therefore, the core of risk management involves monitoring and managing when, under what conditions, and to what extent situations arise where we must make such payments.

What types of risks do you primarily manage?

I can break it down into about five categories. First, we manage credit risk. Credit risk arises when individuals or companies experience a deterioration in their creditworthiness and are unable to fulfill their obligations, which could result in an insurance claim for us. Therefore, we constantly assess the repayment capacity and delinquency history of these individuals or companies, as well as their industry and the overall economic conditions, to manage this risk. For example, we provide guarantees for jeonse (lump-sum rental) loans. Since jeonse has become a major issue recently, if a tenant or landlord fails to return the jeonse deposit when due, resulting in a guarantee claim, we pay out on their behalf. Since such situations can become problematic, managing the creditworthiness of individuals and companies—that is, managing credit risk—is one aspect of our work. 

Second, since we provide guarantees to all companies across the entire economy, we manage concentration risk to ensure we don’t become overly concentrated in specific industries. For instance, to avoid being too heavily weighted toward a single sector like construction or finance, we set limits by industry to manage this risk.

Third, we manage market risk. We invest our capital in bonds, stocks, and other assets, and since market variables like interest rates or stock prices can fluctuate, the value of our investment assets can be affected. Therefore, we manage the risks associated with these investments. 

Fourth, we manage liquidity risk. Recently, as the economy has suddenly deteriorated, the number of guarantee claims has increased significantly. In such situations, we monitor our cash liquidity to ensure we can stably and promptly pay out guarantee deposits.

Finally, we manage operational risk. Operational risk refers to potential issues arising from the company’s personnel or operational systems. For example, last year in July, our company suffered a ransomware attack. So, we also manage risks related to the company’s operations. As I just mentioned, we manage risks by categorizing them into credit risk, concentration risk, market risk, liquidity risk, and operational risk.

I’ve been hearing a lot about the concept of climate finance lately. Do you think the role of climate finance is growing within the financial institutions you work with regarding guarantees?

Yes, certainly. ESG is becoming increasingly prevalent worldwide, and in Korea, the government is now operating a Korean-style green taxonomy. This evaluates whether activities contribute to the six major environmental goals—namely, greenhouse gas reduction, climate adaptation, water resource circulation, pollution prevention, and biodiversity. Consequently, financial authorities are establishing regulations to allow financial institutions to apply this taxonomy to their lending practices, thereby determining whether their financial activities align with the green economy. 

In our case, at SGI, we’re strengthening green finance by offering benefits such as increasing insurance premiums or guarantee limits for companies that can demonstrate their relevance to these initiatives. Furthermore, we have developed and are offering dedicated guarantee products specifically for renewable energy transition projects, such as solar power generation. We have also announced a goal to provide over 100 trillion won in ESG-related guarantees by 2030.

On a broader scale, to what extent is the insurance and guarantee industry as a whole managing climate risk?

In the case of the Bank of Korea, they have analyzed the results of climate stress tests conducted on banks and insurance companies. Through simulations, they have examined how certain climate changes could become key risks to the soundness of financial institutions in the banking and insurance sectors. Furthermore, financial authorities are currently in the process of establishing a system—including guidelines for climate risk management, strategies for managing such risks, risk management tools, and disclosure frameworks. However, specific requirements for individual companies have not yet been finalized. Consequently, we have made this a key business objective for the new year, and our Risk Management Department is scheduled to develop new tools for managing climate risks.

You mentioned that the government currently lacks precise standards. Does that pose any challenges when it comes to managing climate risks?

Well, since there are no clear guidelines on how to manage these risks at the moment, we’re in a situation where the government is telling us we need to implement them, but we’re waiting for government policies to be announced to determine how we can build a system to measure, monitor, and address climate risks within our company.

Also, there have been many instances of extreme weather recently—such as heavy rains, heatwaves, and wildfires. Have these types of risks had an impact on corporate risks or the likelihood of project failure, or have there been changes in risk management approaches?

In our case, since we provide guarantees related to major disasters like fires and earthquakes, if significant risks or losses actually occur due to major climate change, the number of claims we face increases. Naturally, this leads to a decrease in profits and an increase in losses, so we are managing those aspects. When we provide guarantees for such risks, we also purchase reinsurance by asking other overseas reinsurers to reinsure the guarantees we’ve issued. That’s how we manage the risks.

As carbon and environmental regulations are tightening in Korea as well, do you see environmental factors becoming increasingly important in the guarantee underwriting criteria you’re currently reviewing?

Yes, that’s right. Since our company has already declared its commitment to phasing out coal, we impose penalties on companies requesting guarantees from us if they are actually causing environmental pollution. In other words, we’re incorporating climate risks and whether a sector is “green” into our assessment model, and we’re managing this by slightly restricting the guarantees or investments themselves.

On a related note, what efforts is SDI Seoul Guarantee actually making regarding ESG and these increasingly important environmental regulations?

We form partnerships by signing agreements with organizations that run social climate capacity-building programs. For example, we operate a youth climate capacity-building program called “SGI News Plus” in collaboration with the Climate Change Center. Additionally, to promote ESG adoption, we sign MOUs and other collaborative agreements with relevant companies, working with external organizations to advance ESG initiatives.

It seems you are making a wide variety of efforts. Looking ahead to the future, as the environmental and climate crisis continues to worsen in our society, I’m curious if you have any future goals in the role you play at SGI.

First, as I mentioned earlier, the government is currently developing systems to manage climate risk. Once the specifics of those plans are finalized—for example, rather than just labeling something as “climate risk” in theory, we need to precisely classify it alongside the credit and liquidity risks we already manage—my goal is to establish and implement a system this year that accurately categorizes and monitors these risks.  

In accordance with government policy, we plan to first establish this system and then monitor it to see if there are areas for improvement, as well as how it actually affects our guarantee supply in a smooth and meaningful way, and we intend to develop it further based on those findings.

Finally, how do you think the insurance and guarantee industry as a whole can better help society in the face of the climate crisis in the future?

Economic activity, by its very nature, requires companies to secure funding from financial institutions when making investments or conducting business. Therefore, if the entire financial sector gradually reduces financial support for companies that contribute to carbon emissions or environmental pollution, society as a whole will be less exposed to those risks. So, I expect that, on a national level, such polluting industries will gradually shrink and be phased out.