Momentum Builds for Green Taxonomies in ASEAN

In November 2021, the ASEAN Taxonomy Board released the first version of the ASEAN Taxonomy for Sustainable Finance, introducing a common ground language for the region to help investors, lenders, and corporations understand the environmental impact of economic activities.

The ASEAN Taxonomy

In the 87-page ASEAN Taxonomy criteria, the Taxonomy board outlined the main economic activities of countries across the region, supporting the different economic characteristics of member countries and their respective transition paths going forward. Singapore, Malaysia, and the Philippines being service-focused countries would have a different path than Brunei and Indonesia, which rely on the oil gas industry.

With these various economic strengths in mind, the ASEAN Taxonomy introduced a two-tiered framework system that includes a "Foundational Framework (FF)" and a “Plus Standard (PS)”.

The Fundamental framework adopts a principles-based approach and focuses on the qualitative assessment of economic activities, which is applicable to all kinds of activities. It comprises four environmental objectives and two essential criteria. Under the framework, the economic activity has to contribute to the following four environmental objectives:

 
1. Climate Change Mitigation
 
2. Climate Change Adaptation
 
3. Protection of healthy ecosystem biodiversity
 
4. Promote resource resilience transition to a circular economy.

More importantly, the activity must also not violate the Essential Criteria of "Do no significant harm" and "Remedial efforts to transition". The Taxonomy Board provides the following Sector Agnostic Decision Tree for one to determine the nature of the economic activity.

Economic activities are classified into three levels based on their fulfilment of environmental objectives and the outcome of essential criteria.

 
• Green – The best outcome with most objectives achieved and without significant harm to other environmental objectives.
 
• Amber – Medium with some objectives met but harm to the environment, which can be remediated in the future.
 
• Red – The worst, as activities cause harm to the environment without remedial measures.

In addition to the Foundation Framework, Plus Standard acts as a complement that adopts a science-based approach and provides activity-level screening criteria and thresholds for determining taxonomy eligibility.

A keynote to take is that the Taxonomy Board divides industries into 6 Focus Sectors and 3 Enabling Sectors:

Focus Sectors:

 
1. Agriculture, forestry, and fishing;
 
2. Manufacturing;
 
3. Electricity, gas, steam, and air conditioning supply;
 
4. Transportation and storage;
 
5. Construction and real estate activities;
 
6. Water supply, sewerage, waste management, and remediation activities.

Enabling Sectors:

 
1. Information and communication;
 
2. Professional, scientific, and technical activities;
 
3. Carbon capture, utilisation, and storage.

Economic activities are then classified as Green, Amber, or Red PS based on the score computed from the respective   decision matrix, where higher scores stand for higher emissions.

A Comparison with the EU Taxonomy

While EU standards are often seen as the gold standard, ASEAN members are finding their own path to contribute to   climate action. Importantly, to a higher degree than Europe, ASEAN countries are still heavily dependent on fossil fuels in the medium term. Activities that enable a low-carbon transition from these fuels, such as natural gas, are more likely to be included in the region's green taxonomy. This makes it challenging to align the two blocs' sustainability agendas.

The ASEAN Taxonomy has certain common grounds and some important differences when compared to the EU Taxonomy. The current EU taxonomy focuses largely on activities that are unconditionally green and does not yet fully address transition activities toward net zero.

What aspects could be improved?

The key concern with the ASEAN Taxonomy is that it is not legally binding, since it is intended to provide a common framework for interoperability across national markets. Although this by itself is a strong step forward, and we can expect the smaller countries to benefit from this, we can see the larger countries within the region deviating from the framework to form their own taxonomy interpretations. This may lead to continued fragmentation rather than a firm regional position.

Another aspect that is subject to much debate is the multi-tiered approach. Although flexibility is provided for member nations, the structure is highly complex and it is difficult for users to track the different assessment criteria for the same activity across nations. In addition, not all activities under the taxonomy would be aligned to the Net Zero by 2050 goal, which implies that investors from jurisdictions with more stringent taxonomies would have to consider if they could leverage the ASEAN taxonomy while considering local requirements they must meet

Which countries in APAC are leading the drive?

Following a slow start, a multitude of initiatives across all countries in the region are forming, for example:

 
• Australia - Australian Sustainable Finance Initiative (ASFI), a financial sector-led sustainability organisation, has organised a call in March 2022, hoping to establish a form of taxonomy
 
• China - Established EU-China Common Ground Taxonomy in Nov 2021
 
• Hong Kong - The Cross-Agency Steering Group launched Centre for Green Sustainable Finance (GSF Centre) in June 2022
 
• Indonesia - Green Taxonomy Sustainable Finance OJK – guidance rather than mandatory
 
• Japan - Launched Basic Guideline on Climate Transition Finance in May 2021, not considered as taxonomy but rather a principle-based guideline
 
• Korea - K-Taxonomy established in April 2021 that outlines criteria and principles that consider the economic activity to be considered green
 
• Malaysia - Bank Negara Malaysia (BNM) published Malaysia"s national climate-focused sustainability taxonomy for the financial sector, the Climate Change and Principle-based Taxonomy (CCPT) in April 2021
 
• Philippines - Sustainable Finance Roadmap launched in 2021 highlighting the importance of, and planning the development of a Green Taxonomy
 
• Singapore - GFIT (Green Finance Industry Taskforce) is expected to release the criteria thresholds for the remaining five focus sectors and the remaining environmental objectives in late 2022, and to finalise the full Singapore Taxonomy in 2023

What does it have to do with you?

Upon the first introduction of the EU Taxonomy draft in July 2020 and the first Taxonomy reports submission deadline in Jan 2022, entities are only left with less than a year to gather data and relevant reporting mechanisms ready for submission. A similar timeline can be largely expected for taxonomy reporting in the ASEAN region. If   you are a corporate or financial institution in the ASEAN region, get ready to begin your reporting by contacting hello@greenomy.io.

About Greenomy

Greenomy helps corporates, credit institutions, and asset managers measure, disclose and improve their sustainability levels according to new EU sustainable finance standards (EU Taxonomy, SFDR, and NFRD/CSRD). We are a one-stop sustainability reporting software, generating substantial time and cost savings, recognised recently with first place at the G20 TechSprint competition for Sustainable Finance solutions. For more information about Greenomy, please visit our website.