Japan and the Republic of Korea are underperforming in their green central banking policies relative to the size of their economies and historic share of emissions.
A new report by Positive Money evaluates 13 countries in East and Southeast Asia for their green central banking — central banks’ and financial supervisors’ operations and policies that contribute to addressing the climate and ecological crisis. The countries included are ASEAN+3, — the ten member states of the Association of Southeast Asian Nations and the three major East Asian economies of China, Japan, and the Republic of Korea.
The East and Southeast Asia Green Central Banking report shows that the largest democratic countries in the region, Japan and the Republic of Korea, fall short of expectations given their large economies, institutional capacities, and historical contributions to global carbon emissions.
With policy toolkits that can shift asset prices and lending conditions, central bankers and supervisors exercise heavy sway over the wellbeing of entire societies. And there is growing recognition that these institutions must put their shoulders behind addressing the climate and ecological crisis.
“Ultimately, their remit is to maintain financial and price stability,” says Kentaro Nunokawa, Japan Energy Campaigner at Market Forces. “That is something that will be affected by climate change.”
“Climate change poses financial stability risks from both the physical and the transition sides, and central banks have a role to guide the industry,” says Aziz Durrani, Technical Assistance Lead at the ASEAN+3 Macroeconomic Research Office.
Where Japan stands out
In Japan, the Bank of Japan’s (BOJ) green lending scheme, its purchase of the government’s Climate Transition Bonds, and the Financial Services Agency’s (FSA) implementation of climate disclosure rules are the main pillars of its green central banking.
The BOJ’s flagship green lending scheme, the funds-supplying operations to support financing for climate change responses, began in September 2022 and offers concessional loans to financial institutions supporting private-sector climate investments. The outstanding balance of these loans accounted for nearly 14% of the BOJ’s total loan portfolio as of January 2025.
The BOJ has also incorporated the government’s climate transition bonds into its liquidity management operations since 2024. By treating the transition bonds on par with standard Japanese government bonds, the BOJ is aiming to make them attractive to financial institutions for liquidity management and risk hedging.
In 2023, the FSA introduced mandatory disclosures for listed companies, in alignment with the International Sustainability Standards Board’s (ISSB) framework.
Both the BOJ and FSA developed guidance to encourage financial institutions to identify and manage climate-related financial risks and engage corporate clients in decarbonization efforts.
Japan’s voluntary standards and phased implementation are weaknesses
While Japan is a regional leader in green central banking, many of its strongest green central banking measures turn out to be weaker than they first appear when finer details are considered.
Crucially, both the BOJ and the FSA lack a clear definition of what constitutes green investment, an absence that has far-reaching consequences.
“The conditions [for the BOJ’s green lending scheme] say banks should submit TCFD- or ISSB-related disclosures,” says Sayuri Shirai, an economics professor at Keio University and an advisor for sustainable policies at the Asian Development Bank Institute. “But the Bank of Japan doesn’t specify what needs to be included” in those disclosures, such as scope 3 emissions metrics, she added.
Another weakness is the timeline and scope of the FSA’s mandatory TCFD-aligned disclosure rule. Under the current schedule, only 68 companies with a market capitalization over JPY3 tn will be subject to the rule starting in March 2026. One year later, the requirement will expand to include companies with a capitalization of over JPY 1tn. Whether the rule will become mandatory for smaller firms has not yet been decided.
“So in that sense, it’s not really a stringent disclosure,” Shirai explains.
Alarmingly, the BOJ’s green lending scheme and the government’s climate transition bond offer transition finance to energy projects including ammonia co-firing, blue hydrogen, gas-fired power plants, and carbon capture and storage. Observers have criticized these technologies for their potential to prolong the use of fossil fuels.
Korea’s monetary policy and climate risk progress
In the Republic of Korea, the Bank of Korea’s (BOK) monetary policy is the strongest area of Korea’s green central banking policies. Having incorporated USD$19.61bn of ESG assets, the BOK’s foreign reserves management is largely aligned with climate goals. It has also excluded coal and fossil fuel-linked companies from its reserves portfolio through negative screening, and the BOK is exploring further expansion of green assets. Further, the BOK offers preferential lending terms to commercial banks supporting green small- and medium enterprises (SMEs).
“The government has also established a dedicated climate and sustainability unit within the BOK and the central bank upgraded its climate risk stress testing models,” Durrani of AMRO said.
In the area of financial policy, the Korean Financial Services Commission’s (FSC) guidelines on climate risk management strengthen risk management practices across the financial sector and the Ministry of Environment’s 2021 K-Taxonomy further clarifies what activities are eligible for green investments.
Korea’s green measures lag behind
Despite taking important steps in greening its monetary policy, the East and Southeast Asia Green Central Banking report argues that the Republic of Korea’s “policy action remains underdeveloped and uneven.”
The BOK’s delivery of its green monetary operations and regulatory frameworks has lagged behind its early ambitions. It has not integrated green securities into its open market operations or collateral frameworks, even after committing to this in 2021. The lower funding rate of its lending for green SMEs, however, is not tied to green lending volumes and lacks clear definitions of what constitutes green.
The BOK’s green operations are also hindered by the absence of green Korean government bonds, the report found.
Japan and Korea should strengthen green central banking policies to become true regional leaders
Given the report’s findings, central banks and financial supervisors “need to translate into clear, measurable outcomes.” Durrani says. “Things like stronger disclosure rules, conditionality for public finance when making grants and loans, integrating climate risk stress testing results into supervisory practice.”
Japan lacks a binding national green taxonomy and standards to align financial flows with environmental objectives.
“They need to have rigorous criteria for what is green and what is transition,” explains Nunokawa.
This would help the BOJ develop a clearer framework for aligning its broader portfolio with climate goals. The Japanese central bank should also make climate risk management standards mandatory instead of relying on voluntary guidance, as well as expanding the scope and ambition of monetary policy to include more green assets in its asset purchase programs.
For the Republic of Korea, the report recommends that the BOK implement capital requirements that vary with banks’ green loans, integrate green securities into its core monetary operations, embed climate considerations into supervisory processes, and require financial institutions to disclose zero-carbon targets. The BOK should also systematically embed just transition principles into its operations to manage impacts on vulnerable economic sectors.
With these measures, Japan and the Republic of Korea, as two of the three largest economies in Asia, could potentially lead the region’s green finance push.
“This is a great opportunity for ASEAN+3, the region as a whole, to step forward and say let’s try and set the agenda for how we want to move to a low-carbon economy,” said Durrani.
This page was last updated October 3, 2025