Bank of Korea Warns of Significant Financial Risks from Climate Inaction
A Stark Warning from South Korea’s Central Bank
In March 2025, the Bank of Korea (BOK) issued a clear and urgent warning: failing to take decisive action on climate change could lead to massive financial losses across the nation’s economy. The central bank’s new climate risk report outlines the deep vulnerabilities within South Korea’s financial system and household economy if environmental threats continue to grow unchecked.
This powerful message highlights that climate change is no longer a distant environmental issue—it’s now a direct threat to financial stability.
Projected Financial Impacts on the Banking and Insurance Sectors
Stress Test Results Reveal Billions in Potential Losses
The BOK, in collaboration with the Financial Supervisory Service (FSS), conducted a climate stress test across South Korea’s largest banks and insurance companies. The results were sobering.
If climate inaction continues:
- Banks and insurance companies could face combined losses of up to ₩45.7 trillion (around $31.8 billion) by the end of the century.
- Losses will stem from loan defaults, investment losses, and insurance payouts caused by increased exposure to climate-related disruptions.
These findings signal a need for urgent risk mitigation and long-term climate adaptation strategies within the financial sector.
The Dual Threats: Physical Risks and Transition Risks
Physical Risks: Direct Impact from Climate Disasters
Climate-related disasters—such as floods, wildfires, droughts, and extreme weather—pose direct physical threats to infrastructure, agriculture, and real estate. The BOK outlined several high-impact consequences:
- Asset destruction in flood-prone areas.
- Disrupted supply chains and business interruptions.
- Reduced productivity due to climate-induced migration and labor shortages.
The ripple effects of these events could severely weaken credit markets and insurance reserves.
Transition Risks: The Economic Cost of Going Green—Too Late
Transition risks refer to financial instability caused by delayed or abrupt shifts toward a low-carbon economy. These include:
- Sudden policy changes such as carbon taxes or emissions limits.
- Stranded assets in fossil-fuel-based industries.
- Market shifts where demand drops rapidly for non-sustainable goods and services.
Companies not aligned with sustainability goals may face collapsing valuations, and banks heavily invested in those companies could suffer cascading losses.
Impact on Households and Individual Finances
The report didn’t stop at institutions. Households are expected to feel the pressure as well:
- Higher insurance premiums in areas prone to natural disasters.
- Increased energy and utility bills during energy transitions.
- Job insecurity in high-carbon industries like coal, oil, manufacturing, and logistics.
- Rising interest rates or loan defaults due to financial strain.
These burdens could reduce consumer spending and worsen income inequality, especially among lower-income households.
BOK’s Strategic Recommendations for Risk Mitigation
To reduce exposure to these looming risks, the Bank of Korea recommends:
- Clear, long-term climate policies that offer consistency for businesses and investors.
- Green technology investment to foster innovation and reduce reliance on carbon-heavy industries.
- Integration of climate risk management into every aspect of the financial system—from credit ratings to capital requirements.
These strategies aim to create a climate-resilient economy that can absorb shocks and protect both institutions and individuals.
Conclusion: A National Economic Priority, Not Just an Environmental One
The Bank of Korea’s warning sends a strong message: the cost of inaction on climate change is no longer theoretical—it’s measurable, immediate, and massive. As climate-related events increase in frequency and intensity, the risks will ripple through every corner of the economy.
Now is the time for proactive investment in sustainable infrastructure, financial reform, and robust climate adaptation strategies. Waiting for the market to adjust on its own could be economically devastating.
This is no longer just an environmental issue. It’s a national economic priority.
FAQs
Q: What is the Bank of Korea’s main concern regarding climate change?
The BOK warns that failing to act on climate change could lead to major financial losses for banks, insurers, and households, posing a systemic risk to South Korea’s economy.
Q: How could climate change affect individuals financially?
People may see rising insurance premiums, higher energy costs, job losses in carbon-heavy sectors, and increased risk of loan defaults.
Q: What are physical and transition risks?
Physical risks come from actual climate disasters (like floods), while transition risks arise from the shift to a low-carbon economy (like stricter regulations or sudden market changes).
Q: What does the BOK recommend?
The BOK recommends long-term climate policy planning, sustainable investment, and integrating climate risk into all financial planning and supervision.
Q: What sectors are most vulnerable?
Industries heavily reliant on fossil fuels, real estate in disaster-prone zones, and financial institutions lacking climate risk frameworks are especially exposed.