ASEAN Taxonomy Board begins work on regional sustainable finance and transition taxonomies
- ASEAN’s regional taxonomy will cover both green and transition related issues
- With joint EU-China ‘common ground’ taxonomy report expected to be released later in 2021, national taxonomy development is likely to grow rapidly
- Proliferation of national taxonomies will create fragmentation, opportunities for greenwashing and increasing the need for regional coordination
The new ASEAN taxonomy under development could be an important marker of the next phase of taxonomy development, centered on both financing green activities and raising definitions around the transition of unsustainable activities in emerging markets. The Taxonomy Board will be tasked to “develop, maintain and promote a multi-tiered taxonomy” by the end of 2021 “that will take into account ASEAN’s needs, as well as international aspirations and goals”.
A communiqué from the ASEAN Finance Ministers and Central Bank Governors’ meeting at the end of March announced the formation of the ASEAN Taxonomy Board. With progress beginning around the same time as the European Union and China co-chair work on a ‘Common Ground’ taxonomy, regional coordinating taxonomies could be used to combine a common approach with local relevance and ambitions.
Apart from the European Union, regional taxonomies are not yet common. However, if a global common ground taxonomy sparks more national taxonomies, regional taxonomies could become essential to address inconsistencies between different taxonomies and raise ambition over time. In the absence of regional coordinating taxonomies, it is a significant risk that excessive fragmentation will develop, opening significant opportunities for greenwashing or a ‘race to the bottom’ on standards.
In this context, the ASEAN taxonomy could be useful to coordinate national taxonomies that are already in development in Malaysia or planned in Indonesia. Although not all the details are yet clear about the division of responsibilities for taxonomy development between the national and regional taxonomies, a brief description from the Sustainable Finance Institute Asia, which will host the Taxonomy Board, explains:
“The ASEAN Taxonomy will be the overarching guide for all ASEAN Member States (AMS), complementing their respective national sustainability initiatives and serving as ASEAN’s common language for sustainable finance. It will be designed to ensure that AMS have a framework that suits their economic and social structures that other frameworks may not be able to address. Transition is a key element of ASEAN’s sustainability agenda and the ASEAN Taxonomy will incorporate an effective pathway to enable an orderly transition.
One of the most critical issues with taxonomy development in emerging markets is whether it has the ambition to cover just ‘green’ activities, or if it provides categorization for all economic activities. The latter approach was the structure used by Malaysia’s ‘principles-based taxonomy’, which covers all economic activities in six categories from green activities conducted by businesses that have no significant harm to activities that are outright prohibited.
This distinguishes it from other taxonomies such as the European Union’s where environmentally marginal activities face a sharp split between ‘in’ and ‘out’ of the taxonomy. The green taxonomy is useful from the perspective of investors measuring the ‘green alignment’ of their portfolios, but the stark dividing line creates a pressure point that affects access to capital more intensely than perhaps the marginal difference between included and excluded activities would warrant.
A rigorous division of sustainable and unsustainable activities may be more important in a developed market where minimum environmental standards are higher, and the influence of taxonomies occurs more on a marginal basis primarily seeking to avoid lock-in of unsustainable technologies where green alternatives are feasible.
The same logic does not apply in the same way in emerging markets, where in some cases there may be a smaller investment universe of green projects, and much more impact can be created by providing incentives and a pathway to transition away from the most unsustainable technologies. However, even though the fundamental case for a greater focus on green and transition is strong, the standards and guidelines relating transition are not so clearly defined as for green activities.
What is considered a transition investment is less clearly defined and more likely not to be science based in practice. At the same time, there are legitimate reasons for divergence between countries and regions, but some divergence can undercut needed progress. Creating regional taxonomies that overlay national taxonomies can help to add structure if not to harmonize at least a move in that direction over time and reduce competitive incentives to undercut rather than raise ambition within national standards.
Want to learn more about how RFI Foundation can help you identify your biggest opportunities in responsible finance? Contact us for more information through our Membership Page or by email at email@example.com.
Republished from the RFI Foundation’s weekly newsletter. Subscribe for free here!