How Asean designed a green taxonomy for an Asia of contrasts

April 10, 2024|Written by Katy Lee

From high-tech Singapore to developing nations like Myanmar, the Association of Southeast Asian Nations (Asean) spans a region of huge diversity – which makes its push for a shared green investment taxonomy a fascinating challenge.

New taxonomies have sprung up around the world over the past few years, spurring hopes that these systems for classifying green and less green business activities will encourage a global shift towards sustainable investment.

Asean provides a potential template for how taxonomies could be developed for other regions around the world. The 10-nation bloc, which is projected to represent the world’s fourth-largest economy by 2030, has just unveiled a third version. But when work started on the project three years ago, Eugene Wong remembers there were plenty of naysayers.

“We had a lot of stakeholders from out of the region who said, ‘You guys will never agree, don’t waste your time’,” said Wong, CEO of the Sustainable Finance Institute Asia (SFIA), which hosts the Asean Taxonomy Board.

Asean’s members include Indonesia, the world’s largest coal exporter, and oil and gas-dependent Brunei. Developing a classification defining “sustainable” investments for the whole region was bound to be tricky.

What’s more, “every country has a central bank, a capital market regulator, an insurance regulator and a ministry of finance. And obviously, everyone has a slightly different mandate,” Wong told Green Central Banking.

So how did Asean manage to turn its taxonomy into a reality?

In part by recognising that governments stood to gain from cooperating on green finance, according to Najwa Abu Bakar, who leads SFIA’s work on the taxonomy. From an investment standpoint, “consistency and credibility” in the definition of green concepts benefit everyone, she said.

A two-part taxonomy

South-east Asia’s rapid industrialisation has made the region a growing contributor to global emissions, making initiatives to speed up the low-carbon transition all the more vital.

But with member states at varying stages of economic development, the idea of a just transition – ensuring the poorest do not get left behind – is crucial in Asean.

It’s one of the reasons why its taxonomy has such a striking design. Asean’s is a taxonomy of two parts: the Foundation Framework, intended for use by companies or governments setting off on the journey towards sustainability, and the stricter Plus Standard for those seeking to show their capacity to meet tougher environmental requirements.

Both use a traffic light system, with activities classified as green, amber and red according to their impact on the environment.

“You might find that the tiers are very unusual,” acknowledged Wong. But this structure ultimately means that “every member state can adopt the tier that is suitable for them today, and try and push themselves to the next tier as quickly as possible”.

To qualify, an economic activity must contribute to one of four objectives: climate change mitigation or adaptation, biodiversity protection, or the transition to a circular economy. It must do no significant harm to any other objective or society at large, and companies must detail the measures taken to address harmful impacts.

Where the Foundation Framework uses questions and flowcharts to allow users to categorise an economic activity, the Plus Standard sets out technical criteria for each level, with companies required to provide evidence that the activity meets the various benchmarks.

Crucially, Plus Standard’s “green” tier has significant overlap with the European Union’s taxonomy – a feature intended to make comparisons easier for investors operating in both Europe and Asia.

South-east Asia’s taxonomy boom

Those comparisons are becoming a complicated business for international investors, given the proliferation of different taxonomies around the world.

South-east Asian governments have been particularly busy on this front. Malaysia alone has two taxonomies, one issued by the central bank and one by the securities commission. Indonesia published a new version of its national taxonomy in February; that came soon after Singapore published its own in December. Thailand is developing one, as is Vietnam.

Might an overarching regional taxonomy simply add to the confusion? Wong dismisses the idea. The two-part structure, he explains, makes it easier for national taxonomies to find compatibility with Asean’s.

“I don’t think that’s a contradiction, it is actually a design element,” he said. “If we didn’t have the Asean taxonomy, it’s going to be very confusing because there’s no baseline.”

Moving forward, national taxonomies across the region are being designed with Asean’s in mind. “There’s a lot of cooperation, actually, between the national taxonomy developers and the Asean taxonomy board,” Abu Bakar said.

A work in progress

Chaired by Brunei’s central bank and vice-chaired by the Monetary Authority of Singapore, the board is wasting no time in making tweaks and improvements, incorporating feedback from member states and other stakeholders.

The third edition was released for consultation on 27 March, just five weeks after version 2 came into force. The second version added technical screening criteria for the energy sector; the latest update adds them for transport, construction and real estate.

Abu Bakar said forestry, fishing and agriculture, waste management, and manufacturing were next on the agenda. “It was always the plan for it to be a phased approach,” she said.

Adam Ng, an expert on Asian green financial regulation at WWF, sees room for improvement – not least the fact that the taxonomy remains “limited to a few sectors”. Adding agriculture will be crucial, he told Green Central Banking.

“That is something that contributes about a quarter of global emissions, so it’s a key sector,” he said, noting that Asean includes major agricultural producers like Indonesia, Vietnam and Thailand.

He added, however, that the existing technical criteria appear to be “somewhat robust” – and that ultimately a taxonomy spanning south-east Asia can only be a good thing.

“A taxonomy of this nature acts as a guide for policymakers and regulators in this region to design incentives, and also for domestic regulation to promote more green practices,” he said.

This page was last updated April 10, 2024

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