Asia-Pacific

Too Much Leeway Offered by Updated ASEAN Taxonomy

Second version of the voluntary guidance limits utility to investors by allowing companies and countries to “pick and choose”. 

The recently finalised iteration of the Association of Southeast Asian Nations’ (ASEAN) sustainable finance taxonomy has “room for improvement”, after falling short on interoperability and defining low-carbon activities.  

According to the ASEAN Taxonomy Board, Version 2 (V2) of the taxonomy, which went live on 19 February, aims to build on the 2021 draft, with enhanced clarity and usability ensuring it serves as a science-based classification system for sustainable economic activities.  

“It’s a start,” said Ramnath Iyer, Research Lead for Sustainable Finance, Asia, at the Institute for Energy Economics and Financial Analysis. “But it is not robust enough, [as it] provides a lot of leeway for companies and countries to pick and choose as they wish [due to it being voluntary guidance].” 

Because many countries across the region are also developing their own taxonomies, “there is a question of whether the taxonomy becomes a theoretical exercise, with ASEAN member states choosing some aspects, and avoiding or changing the ones they are not comfortable with”, he added. 

Another problem arises from the fact the taxonomy offers ASEAN members two approaches to assessment. A principles-based ‘foundation framework’ includes criteria for assessing economic activities that contribute to at least one of the four environmental objectives: climate change mitigation, climate change adaptation, protection of healthy ecosystems and biodiversity, and promotion of resource resilience and transition to a circular economy.  

It also highlights the importance of social criteria, alongside do no significant harm (DNSH) and remedial measures to transition (RMT). Users can then categorise activities as ‘green’, ‘amber’ or ‘red’, according to their level of sustainability. 

Alternatively, the taxonomy’s ‘plus standard’, which also uses this ‘traffic light’ approach, goes further by prescribing technical screening criteria (TSC) to categorise economic activities into three tiers. Tier one is considered ‘green’, while tier two and three are ‘amber’ and expected to gradually ‘sunset’ over time. 

Currently, the taxonomy has TSCs for the energy sector, including electricity, gas, steam and air conditioning supply.  

With two methods of assessment, interoperability between taxonomy users is likely to be “hampered”, Iyer said. “There is room for improvement in unifying the two methods. If steps are taken to ensure the standards are accepted across the region, V2 can contribute to cohesion rather than becoming yet another standard that adds to confusion.” 

Member states should align more with the ASEAN taxonomy to allow investors to compare transition plans and support high-performing companies, said Anjali Viswamohanan, Director of Policy at the Asia Investor Group on Climate Change (AIGCC).  

“There should be more clarity on which activities investors can deploy capital to, based on regulations that they are subject to in their own jurisdictions,” she added.  

Cutting out coal 

One of the most welcome updates to the ASEAN taxonomy is its inclusion of an assessment framework for phasing out coal.  

The taxonomy defines coal phase-out as “an activity whereby processes involving combustion of coal, such as coal-powered generation of electricity, are shut down over time in line with aims to reduce greenhouse gas (GHG) emissions”.  

Criteria such as emissions intensity, absolute emissions reduction, and the reduction in period of operations have been considered in the development of the associated TSCs.  

Coal power generation still accounts for a significant portion of the region’s carbon emissions, producing almost twice the amount of emissions produced by gas.  

“While coal is clearly stated in the appendix [of V2] as a high-carbon activity, low-carbon is left undefined,” Iyer from IEEFA pointed out. “These need to be better defined for those choosing to follow the foundation framework approach.” 

Updated last August, ASEAN member country Indonesia’s own taxonomy defines new coal-fired power plants as “transitional”, which runs the risk of sending mixed messages among investors. Similar to the Singaporean taxonomy, Indonesia’s taxonomy includes provisions for financing aimed at accelerating the closure of coal-fired power plants, in line with the country’s Just Energy Transition Partnership 

Taxonomies are designed to ensure that the winding down of high-carbon activities such as fossil fuel production are matched by an acceleration in clean energy-focused investments. Research published in 2022 estimated that it would cost up to US$6 trillion to scale renewables across ASEAN to reach 65% of the energy mix by 2050. 

“ASEAN is growing in importance economically, and also hosts a large population,” said Iyer. “It is also a region crucial to climate, both from an emissions standpoint as well as being home to carbon sinks in the form of rainforests. It’s important that such a region facilitates sustainability as well as economic progress by implementing a forward-looking and interoperable taxonomy that makes it easier for finance to flow into the region.”

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