How climate risk is reshaping construction finance: an interview with Yoon Seok-jun

With the rising climate crisis comes a greater risk of extreme weather events, which no longer solely impact individuals in vulnerable residential areas, but also the greater scheme of finance. As climate risk increasingly translates into financial risk, construction companies are seeking ways to assess and manage these exposures, a challenge particularly relevant to organizations like the Construction Workers Mutual Aid Association in Korea. In this interview, Yoon Seok-jun at the association's Credit Review Department presented how the climate crisis is addressed in construction finance, as well as the nation's current progress with eco-friendly construction projects.

First, you mentioned that you work at the Construction Mutual Aid Association. Could you please start by telling us exactly what your job entails?

To put it simply, do you know the National Agricultural Cooperative Federation (Nonghyup)? Places like Nonghyup Bank and Nonghyup are organizations where farmers contribute capital and money to create resources. They use that money to run various projects for farmers or credit programs, generate profits, and then return those profits to the farmers. In a way, the Construction Workers Mutual Aid Association is like a Nonghyup for construction contractors.

So, it’s an institution where construction contractors pool their resources to create a fund, which is then used to provide loans to those in need, as well as offer guarantees and insurance. However, if they were to grant guarantees to just anyone who asked, they’d end up having to pay out a lot of money if a problem occurred later. That’s why it’s crucial to proactively manage risks, such as whether a company might go bankrupt or not. My job is in the Credit Review Department, where we identify construction companies that appear to be struggling or are at risk of default and manage those cases. 

While managing risks like construction delays, have you ever encountered risks related to the climate crisis or climate-related issues at construction sites?

Well, since our clients are construction companies, there are certainly a lot of issues arising these days related to the climate crisis and ESG. However, in our company’s case, since we essentially act as a bank, we don’t directly engage in activities to prevent the climate crisis or anything like that. Instead, we help construction companies identify risk factors caused by climate-related events, and when we provide these services, we charge fees or insurance premiums. We reflect those risks, and we place great importance on that.

To put it simply, due to the climate crisis, we’re seeing sudden floods or torrential rains in a very short period of time. Among the services our company handles is what’s called a defect repair guarantee. When a construction company builds a building, defects can arise later on, so we provide compensation for those issues. But lately, with all these sudden downpours and extreme weather events, when such incidents occur, complaints and claims for refunds of security deposits surge within a short period, creating operational risks. This is a somewhat complex concept, but the core of finance is actually about reducing risk.

So, for example, when constructing a large building, the developer doesn’t use their own money entirely; instead, they secure funding from banks or insurance companies, build the structure, and later pay back the investment along with the corresponding returns. When managing this process, controlling the construction schedule—or “construction period”—is the most critical factor.

This is because, from the bank’s perspective, they need to recover their investment once the building is completed, operations begin, and revenue is generated. However, factors like the climate crisis can cause the construction period to extend. For instance, if a sudden heatwave hits, people can’t work on the site, and there are also risks from rain and other weather conditions. Because of the risk of not being able to control the construction period due to these factors, the likelihood that the project won’t be completed within the set timeframe is increasing. To reflect these risks, we factor them into our pricing. In the past, we might have charged 100 million won for a certain scope of work, but since that’s no longer feasible, we now charge around 50 million won for the same scope of work. It seems that this kind of adjustment is the primary approach being taken.

Do you think construction companies’ ESG levels aren’t yet taken into account in reviews or risk assessments?

If they exist, they do serve as important reference material, but I don’t think their presence or absence is yet a critical factor in this line of work. However, when it comes to overseas financing or similar activities, such factors are sometimes given more weight. Have you heard of “green bonds” lately?

There are green bonds issued specifically to finance eco-friendly development activities or projects with environmental objectives. I believe one or two securities firms in Korea have issued them. Construction companies are going through a very difficult period right now. When construction companies raise funds overseas—since they lack their own capital—there are quite a few cases where they borrow money in the form of green bonds.

So, rather than whether the funds are actually used for eco-friendly projects or not, the immediate issue is a lack of capital. They need to raise funds domestically, but since the financial sector and other institutions in Korea don’t provide much credit support to the construction industry, they turn to overseas markets. They issue green bonds to pool funds from various investors—essentially acting as a “syndicate”—and bring that money back. When doing this, ESG factors are emphasized, and there are certainly processes in place to review and evaluate whether the company has a track record of engaging in eco-friendly projects or similar activities to some extent. However, this only applies in those specific cases; it doesn’t seem like ESG assessments are being used that actively in the domestic financial sector yet.

Earlier, you mentioned that even if ESG isn’t considered much yet, risks related to the climate crisis are increasing. In that case, do you see a trend where Korea is pushing for more eco-friendly construction projects as it seeks to strengthen environmental regulations?

I think there are definitely such projects. I’m not sure if you’ve heard about them recently, but in the past, Korean construction companies built many thermal power plants, both domestically and abroad.

However, due to eco-friendly regulations within the banking sector, there are now restrictions on the banks providing funding for such projects. There are limits—either they can only be done within a certain level, or once that limit is reached, they can’t proceed further. Because of this, structurally, such projects have significantly decreased, and that’s the current state of affairs.

It certainly seems that the structure within the industry is changing. The share of projects that generate a lot of CO2 or similar activities appears to be gradually decreasing, while the number of projects related to eco-friendly solar power and similar initiatives is definitely increasing. If the industry structure changes in this way, financial institutions will need to adapt accordingly. They will have to significantly modify the tools they use to assess a company’s creditworthiness or evaluate the viability of a project under this new structure. In any case, the industrial structure seems to be changing rapidly in line with global regulations, and the financial sector is currently in the process of making efforts to adapt its role accordingly.

You mentioned that changes are needed going forward. Are there specific directions you envision for these changes, or particular aspects you’d like to see transformed to create a more favorable environment?

Well, regarding eco-friendly initiatives, we’re doing this because we all want to live long lives—including the person I’m interviewing right now—and to leave a good environment for our descendants. However, we still live in a capitalist society where money is the most important factor. Investments must yield commensurate returns for funding to be secured. As a result, if we evaluate things solely based on money, eco-friendly initiatives—even though we’re gradually moving in that direction, I don’t think we can achieve the speed we desire solely based on financial criteria.

In any case, as the public and political circles here are taking an interest in this, I think there needs to be some market evaluation—beyond just money—regarding the benefits of eco-friendliness or projects that, while not profitable, prevent the emission of CO2 and other pollutants. Currently, our metrics are focused solely on money, but if we incorporate benefits into the equation and establish a system like that, I believe our country and our economic structure will inevitably shift toward eco-friendliness at a faster pace.

In terms of bringing about that change, what do you think the Construction Mutual Aid Association can do, or what role can your current work play?

As I mentioned earlier, in the financial sector, everything is still about money. It’s about how much profit a company makes over a specific period—that’s what allows them to pay dividends to shareholders later on. Because it’s all about money, we can’t directly respond to these issues immediately. Realistically, other financial institutions, banks, and the financial sector as a whole are subject to global regulations. 

It’s not just the Bank of Korea, the Financial Supervisory Service, or the Financial Services Commission that regulates us; agreements made worldwide also apply to banks. For example, if the U.S. designates a certain account as belonging to a certain organization, that designation isn’t just managed by banks under U.S. jurisdiction—it’s shared globally. As a result, even institutions in Korea are prohibited from handling that account. 

It seems that banks are complying with international ESG standards where they exist, but so far, even at the company where I work—which is in the financial sector but operates more like a government agency with greater flexibility than traditional banks—these standards aren’t being actively implemented. Still, if banks and other leading financial institutions take the initiative and move forward in this direction, I think the rest of the industry will eventually follow.