Indonesia, Malaysia, Philippines, Policy and Regulation, Singapore

Could the Asean taxonomy help standardise south-east Asia’s ESG efforts?   

A coal mine in North Kalimantan. Unlike its peers, Indonesia’s taxonomy has classified financing for coal-fired power plants as ‘green’ under certain circumstances (Photo: Dimas Ardian/Bloomberg)

South-east Asia’s diverse economies are striving for a common language to drive the region’s green credentials, but country-specific characteristics make this a complex task

South-east Asia is looking to boost its environmental, social and governance credentials through a recent boom in green taxonomies. Thailand, Singapore, Malaysia, the Philippines and Indonesia have all developed individual frameworks, with the taxonomy developed in November 2021 by the Association of Southeast Asian Nations, a political and economic union of regional states, serving as a common language.

“Each of the 10 Asean member states has its own set of systems and policies regarding sustainable finance,” says Brian Ho, sustainability and climate leader at Deloitte Southeast Asia. “As a result, the [Asean] taxonomy will provide a common language across various jurisdictions, enabling effective communication and coordination for labelling economic activities.”

The principles-based foundation framework in the Asean taxonomy provides guiding questions, decision trees and use cases to help countries adapt their practices to address environmental objectives.

Most of the national taxonomies follow at least some of the approaches outlined in the Asean taxonomy, such as using traffic light systems for the classification of activities and using a principles-based taxonomy rather than a more prescriptive model, says Ramnath Iyer, sustainable finance lead, Asia at the Institute for Energy Economics and Financial Analysis. 

A common language

The latest version of the Asean green taxonomy was published in February 2024 and focuses on four environmental objectives, namely: climate change mitigation; climate change adaptation; the protection of healthy ecosystems and biodiversity; and resource resilience and the transition to a circular economy.

“To be classified under the Asean taxonomy, an activity must demonstrate that it contributes to at least one of these environmental objectives and does not have any adverse effects on other objectives,” says Ho at Deloitte.

The Asean taxonomy has a more complex structure than some of its regional counterparts, and uses a traffic-light assessment approach that is sector agnostic. This classifies activities as green, amber or red – with red activities assessed as those that significantly harm the environment – while each classification also has various tiers that offer a more granular, activity-level technical assessment.

“The taxonomy also features three essential criteria, which are minimum criteria that must be fulfilled when implementing an activity,” says Ho. “These are: do no significant harm; remedial measures to transition; and social aspects.”

The social aspects criteria encourage companies to ensure any projects they have invested in both minimise the negative environmental impacts on people living close to them, and do not use child labour.

Country-specific characteristics

While the Asean taxonomy offers regional guidance, different countries continue to insert country-specific provisions into their own taxonomies, making life more complicated for companies and investors.

For example, under the Philippine and Malaysian taxonomies, there are no quantitative criteria for classifying activities as green, amber or red. Instead, the taxonomies rely on a principles-based approach that involves companies answering questions related to the nature of their activities and their potential impacts. 

Meanwhile, the Singapore and Thai taxonomies include clear quantitative criteria. For example, retrofitting a building that results in 30 per cent lower emissions would meet the amber criteria under Singapore’s standards.

“The Singapore taxonomy gives very clear technical criteria for what level of emissions and what pathways are acceptable for an activity to be classified as green, amber or red,” says Iyer at the IEEFA. “It also covers a much broader range of sectors as it applies to 10 broad sectors.”

Singapore released its taxonomy for sustainable finance in December 2023, following efforts in recent years to establish itself as the leading green finance hub in the region. The city-state’s taxonomy is focused on the same four environmental objectives as outlined in the Asean taxonomy, with the additional objective of pollution prevention and control. 

The Philippines is the most recent country in the region to have adopted sustainable finance taxonomy guidelines, which were unveiled on February 14. Unlike its counterparts, this includes specific provisions for a simplified approach to assessing the economic activities of micro, small and medium-sized enterprises.

Malaysia’s central bank issued its climate change and principle-based taxonomy in April 2021. The country was one of the early regulatory leaders in south-east Asia to pursue a standardised classification system for climate-related exposures. 

“There has been a recognition among regulators of the need to bring these various taxonomies together,” says Helena Fung, head of sustainable finance and investment for Asia Pacific at the London Stock Exchange Group. “We’ve done a lot of market advocacy around the fact that there is the potential for the fragmentation of regulation and what that means for market participants, and how the fragmentation of frameworks actually could be detrimental in terms of the orientation of capital towards some of the activities that these taxonomies are intended to support.”

Thailand’s development of its taxonomy has been split into phases. Phase I was released in June 2023 to support climate change mitigation, aimed at reducing greenhouse gas emissions in the energy and transportation sectors.

“The Thai taxonomy currently only covers the energy and transportation sectors, and the Indonesian taxonomy currently is only applicable to the energy sector – and even here, with very lenient emission thresholds,” notes Iyer.

In February 2024, work began on the second phase of the Thailand taxonomy to expand its scope to cover the manufacturing, construction and real estate, waste management, and agricultural sectors.

Diverging on coal

Indonesia stands out from the rest of the region due to its decision to classify the financing for new coal-fired power plants as “transitional”, which caused an uproar among international investors. Financing for CFPP is classified as a “green” activity if the power plant is involved in the processing or mining of minerals deemed critical to the energy transition. 

“Financiers subject to international standards may find the Indonesian taxonomy’s unique classifications problematic,” says Iyer. “The inclusion of CFPP is not in the EU taxonomy – or most other taxonomies.”

Similarly to Indonesia, China’s earlier decision to include “clean coal” in the list of projects eligible for green bonds under its green taxonomy faced an international backlash. However, in 2021 China officially removed clean coal and fossil-powered generation, including gas and liquefied natural gas, from the definition of “eligible green project” in its taxonomy.

“China took out its so-called clean fossil fuels out of its taxonomy a couple of years ago, and that was very well received as it was more in line with international perspectives,” says LSEG’s Fung.

All taxonomies in south-east Asia are currently voluntary, though mandatory reporting requirements are starting to emerge. From 2025, Philippine banks will have to report to the banking regulator on their exposures to the various activities based on the taxonomies, and Indonesian financial institutions will have to do the same for energy sector exposures from 2024, says Iyer.

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