Sustainable development is a strategic priority for ASEAN, with Southeast Asia being one of the regions most vulnerable to the impact of climate change. The ASEAN Economic Community Blueprint 2025 highlights the importance of sustainable economic development as an integral part of the region’s growth strategy.
ASEAN is committed to contributing to the global and regional climate goal of achieving carbon neutrality by 2050. Financing is the key to supporting and advancing the transition to net zero. In November 2021, the ASEAN Taxonomy Board released the first version of the ASEAN Taxonomy for Sustainable Finance (ASEAN Taxonomy), which introduces a common language across the region for the financing of sustainable activities and provides a framework for discussions among ASEAN countries. It helps financiers and investors understand the sustainability impact of a project or economic activity.
The ASEAN Taxonomy
Each of the ten ASEAN countries has its own economic characteristics, and therefore has a different transition path. For example, Singapore, Malaysia, Thailand and the Philippines are service-based economies, while Brunei’s economy is dominated by the oil and gas industry. Meanwhile, agriculture remains an important sector for Indonesia, Vietnam, Laos, Cambodia and Myanmar.
The ASEAN Taxonomy has five key principles:
- It aims to be an overarching guide for all ASEAN Member States, providing a common language and complementing their respective national sustainability initiatives.
- It will take into consideration widely used taxonomies and other relevant taxonomies, as appropriate, and will be contextualised to facilitate an orderly transition towards a sustainable ASEAN.
- It will be inclusive and beneficial for all ASEAN Member States.
- It will provide a credible framework, including definitions, and, where appropriate, be science-based.
- It will align with, or at the least not be in conflict with, the sustainability initiatives taken by the capital market, banking and insurance sectors.
The ASEAN Taxonomy introduces a multi-tiered framework, comprising a “Foundation Framework” (which allows a qualitative assessment of activities on their contributions to transition) and a “Plus Standard Framework” with metrics and thresholds (which allows users to further qualify and benchmark eligible green activities and investments).
The Foundation Framework adopts a principles-based approach, applicable to all economic activities. Under the Foundation Framework, an economic activity must fulfil at least one of the four environmental objectives – climate change mitigation and adaptation, protection of healthy ecosystem and biodiversity, promotion of resource resilience, and transition to a circular economy. Most importantly, the economic activity must do no significant harm to the broader environment and conduct remedial measures to transition. The Foundation Framework uses a single sector agnostic decision tree to assess and classify activities into different categories.
Complementing the Foundation Framework, the Plus Standard adopts a science-based approach, providing activity-level technical screening criteria and thresholds to determine if an economic activity is eligible for the taxonomy. At the early stage, Version 1 of the ASEAN Taxonomy covers economic activities in key sectors that are important to the region, economically and environmentally. These are divided into focus sectors and enabling sectors. The focus sectors include the six most material sectors in terms of greenhouse gas (GHG) emissions and gross value added (GVA). Altogether they account for over 85% of GHG emissions and 55% of GVA in ASEAN. The three enabling sectors include sectors whose products and services contribute to achieving environmental objectives.
Initial Priority Sectors Covered in the Plus Standard
Activities are classified as “green FF”, “amber FF”, “red FF”, “green PS”, “amber PS” and “red PS”, based on their contribution to the environmental objectives of the taxonomy. Activities classified as green or amber contribute to the transition to low carbon in the ASEAN region; those that do not contribute to the environmental objectives are classified as red. Economic activities should also be assessed against the relevant local environmental laws as a minimum safeguard.
The Way Forward
In summary, the ASEAN Taxonomy allows users to choose between the Foundation Framework or the Plus Standard for each sector, as well as different decarbonisation pathways under the Plus Standard. The Foundation Framework can be seen as a starting point for industry players who would like to begin their sustainability journey in ASEAN with smaller steps. However, using the Plus Standard should be the eventual goal of all users of the taxonomy.
Version 1 of the ASEAN Taxonomy focuses on climate change mitigation as its primary environmental objective and uses it as a focus for the classification of activities. It is expected that the other three environmental objectives will be more significant and an increasing number of sectors will be looked at in future versions. The actual criteria and thresholds of the Plus Standard will also be developed in the next phase of taxonomy development.
Although it is not legally binding, the ASEAN Taxonomy can be compared to the prominent EU Taxonomy in the following areas:
- The environmental objectives of the two taxonomies are largely aligned. The ASEAN Taxonomy identifies four environmental objectives and two essential criteria, while the EU Taxonomy established six environmental objectives. Both taxonomies put an emphasis on climate change mitigation and adaptation, transition to a circular economy, and protection of biodiversity and ecosystems, which all are the key elements of sustainable development.
- Both taxonomies cover economic activities in the sectors with the highest contribution to carbon emissions in the region, as well as those enabling their transformation. The EU Taxonomy covers a slightly broader range of sectors than the ASEAN Taxonomy – it includes: forestry; environmental protection and restoration activities; manufacturing; energy; water supply, sewerage, waste management and remediation; transport; construction and real estate; information and communication; professional, scientific and technical activities; financial and insurance activities; education; human health and social work activities; and arts, entertainment and recreation.
- Unlike the EU Taxonomy, the ASEAN Taxonomy is strictly concerned with environmental impacts, at least in its early stage. Under the EU Taxonomy, an economic activity must be carried out in compliance with minimum social and governance safeguards, including business and human rights. However, these are absent from Version 1 of the ASEAN Taxonomy.
Users of the ASEAN Taxonomy should be aware that each of the ASEAN countries are at different stages in their transition path, as well as taxonomy development. For example, the Central Bank of Malaysia published a national climate-focused sustainability taxonomy for the financial sector, the Climate Change and Principle-based Taxonomy, in April 2021. The Green Finance Industry Taskforce of Singapore also launched a consultation on a proposed taxonomy for Singapore-based financial institutions in January 2021. Against this backdrop, industry players are advised to take into account national sustainability initiatives, alongside the ASEAN Taxonomy, when planning their sustainability journey in ASEAN.