ASEAN Sectoral Bodies Publish Taxonomy for Sustainable Finance

Aim to make inclusivity and credibility central to the regional taxonomy for sustainable finance.

In a collective effort by the Association of Southeast Asian Nations (ASEAN) Member States, the ASEAN Taxonomy Board on Wednesday (10 November) released Version 1 of the ASEAN Taxonomy for Sustainable Finance.

The four ASEAN sectoral bodies that make up the Board are the ASEAN Capital Markets Forum (ACMF), the ASEAN Insurance Regulators Meeting, the ASEAN Senior Level Committee on Financial Integration, and the ASEAN Working Committee on Capital Market Development.

The new ASEAN Taxonomy comes as nation-states meet in Glasgow for critical climate talks at COP26 in a concerted global effort to limit global warming to 1.5 degrees Celsius, compared to pre-industrial levels.

In conjunction with COP26, the Asian Development Bank (ADB) launched a plan to speed the closure of coal-fired power plants in Indonesia and the Philippines in an effort to lower the region’s biggest source of carbon emissions. This provides the backdrop to a much-needed regional taxonomy, providing a common language across ASEAN for financing sustainable economic activities.

Serving as a reference point, Version 1 of the ASEAN Taxonomy aims to frame discussions with public and private stakeholders in a collaborative and ongoing developmental effort.

“The ASEAN Taxonomy is intended to be a living document that is constantly reviewed in line with technological, scientific, social and economic development,” said Noorrafidah Sulaiman, ASEAN Taxonomy Board Chair, Brunei Darussalam Central Bank.

Multi-tiered approach

Intended to be an integral building block in attracting the flow of investments and funding into sustainable projects across the region, the ASEAN Taxonomy Board opted for a multi-tiered approach with two main elements, a principles-based Foundation Framework and a Plus Standard.

While the Foundation Framework is intended to provide a qualitative assessment of activities, the Plus Standard adds metrics and thresholds to further qualify and benchmark eligible green activities and investments.

Under the Foundation Framework, economic activities must fulfil at least one of the environmental objectives and all essential criteria stipulated in the taxonomy.

The taxonomy includes four environmental objectives, namely, climate change mitigation, climate change adaptation, protection of healthy ecosystems and diversity, and promotion of resource resilience and transition to a circular economy.

The taxonomy stipulates two essential criteria, namely, Do No Significant Harm (DNSH), and remedial measures to transition.

“The principle of DNSH means that an economic activity which contributes substantially to an environmental objective shall also not significantly harm any of other environmental objectives,” the report explains.

Furthermore, an assessment must be undertaken to ascertain whether such economic activities are causing significant harm to the broader environment while fulfilling one or more of the environmental objectives.

Specific guidance

The taxonomy also includes a list of focus sectors that the Plus Standard will cover as a first step, comprising six material sectors based on their greenhouse gas (GHG) emissions and gross value add, in addition to three enabling sectors whose products and services contribute to achieving environmental objectives.

The six material sectors include: agriculture, forestry and fishing; electricity, gas, steam and air conditioning supply; manufacturing; transportation and storage; water supply, sewerage and waste management; and construction and real estate.

Meanwhile the three enabling sectors include information and communication; professional, scientific and technical; and carbon capture, storage and utilisation.

The ASEAN Taxonomy also includes a sector-agnostic decision tree aimed at guiding users in classifying economic activities under the Foundation Framework, with suggestions for additional sector-specific guidance for ASEAN Member States and entities who seek more specific guidance.

Furthermore, the Plus Standard will take a ‘stacked approach’ in developing activity-level thresholds. This means that for each activity there are multiple decarbonisation pathways and therefore there could be more than one threshold that can be referenced at a single point in time.

The main motivation for multiple thresholds is to cater to the different starting points of entities across ASEAN undertaking a particular activity, allowing for “higher emissions for a limited period, while incentivising progression to lower emissions by having a mechanism whereby those less ambitious tiers have a clearly stipulated expiry year, after which they are no longer applicable,” the report says.

Additional capacity building will be needed for multiple thresholds, which require granular data for activities for all the ASEAN Member States. As such, this will take time to develop.

Achieving inclusivity 

Version 1 of the ASEAN Taxonomy follows previous sustainable finance initiatives by the ASEAN sectoral bodies, such as the ASEAN Green, Social and Sustainability Bond Standards, and the ASEAN Sustainable Banking Principles.

“No other taxonomy initiative shares the opportunities and challenges of the ASEAN Taxonomy and as such, the ASEAN Taxonomy has taken an innovative approach to enable it to be effective, practical and usable,” the report says.

“The multi-tier approach of having a Foundation Framework and a Plus Standard achieves the dual requirements of inclusivity and credibility.”

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