Transition finance taxonomies and plans should aim to guide industries in reducing their greenhouse gas emissions, yet Asia’s governments working on defining their taxonomies have shown varied ambition on setting criteria to phase out polluting coal and natural gas.
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This results in conflicting signals sent to the financial markets which is “extremely problematic”, said Christina Ng, managing director of independent think tank Energy Shift Institute at the recent Bloomberg Sustainable Business Summit in Singapore.
The nonprofit Ng helms tracks insights and financial strategies for Asia’s energy transition. Speaking on a panel discussing if the global warming limit of 1.5°C defined in the Paris Agreement can be kept alive, Ng said that the “goal post” should not be moved, but that there is a need to fix a stark problem in transition finance in the region.
“A key failure is that financial markets are still pricing for delay,” she said. “The reason is that there is a lack of policy clarity from governments and regulators.”
Citing Japan as an example, Ng said its updated Green Transformation (GX) strategy which sets out a roadmap to decarbonise the economy is “bold and ambitious”, but a lack of stringent criteria means that sovereign transition bonds – the centrepiece of the long-term plan – are allowing corporates to raise financing without clearly committing to a fossil fuels phase-out.
“So we are questioning: What are the near-term [emissions] reduction targets of these companies? And are our climate finance frameworks really science-aligned?”
Japan is positioning itself as a global leader in transition finance, setting an issuance target of 20 trillion yen (US$140 billion) worth of GX Transition Bonds over 10 years from FY2023. This will support upfront investment towards achieving its 2050 net zero goal and catalyse private finance to raise a total of JPY 150 trillion yen (US$1 trillion). However, climate observers have criticised how Japan is still doubling down on fossil fuel imports and championing natural gas.
In March this year, environmental law charity ClientEarth highlighted that funds raised with the GX Transition Bonds have a number of “non-green uses”, such as gas infrastructure development, carbon capture, utilisation and storage (CCUS), as well as hydrogen and ammonia.
On its website, it said: “The transition to a decarbonised society needs to be aligned with the pathway to achieving the Paris Agreement temperature goals. Financial support for high carbon-emitting sectors could lead to carbon lock-in that prolongs the life of fossil assets. Two questions must be asked: Is the transition scientifically credible? Is this entirely off the track for transition finance?”
ICJ ruling as ‘steroids’ for corporate climate action?
Ng stressed that the lack of clarity on the criteria for transition financing extends beyond Japan.
“We see that Asia’s financial markets are increasingly diverging from science-aligned climate action…[Governments and regulators] are working on sustainable finance taxonomies, but it is still unclear what gets financed under ‘transitioning’ and you have new coal and gas projects coming on board. It is extremely problematic,” she said, adding that there is a need for more short-term and mid-term accountability.
Ng did not say which taxonomies she was referring to, but highlighted a recent effort between the Monetary Authority of Singapore (MAS) and People’s Bank of China (PBOC) to advance taxonomy interoperability and advance discussions on taxonomy criteria for transition activities as a positive step. The Singapore-Asia Taxonomy is the first taxonomy to include a “transition” category and sets out thresholds and criteria for defining transition activities that contribute to climate change mitigation.
On the same panel, Singapore climate scientist Dr Winston Chow echoed Ng’s sentiments that government policies are lacking in clarity and ambition. He also underscored that the world should stick to the Paris Agreement goal to pursue efforts to limit temperature rise to 1.5°C, rather than look for a new approach to measure climate progress.
The battle to keep global warming within 1.5°C has been a rallying cry for climate action for nearly a decade, but in the past year, studies and media reports that ask if the goal is unattainable or already dead have emerged. In November last year, The Guardian cited climate scientists saying that the internationally agreed goal is “deader than a doornail”, with 2024 being the first year to register an annual temperature anomaly exceeding the threshold.
But Chow, who is professor of urban climate at the Singapore Management University and the co-chair of Working Group II under the Intergovernmental Panel on Climate Change (IPCC), noted that this messaging is “a little mistaken” and there is still “wiggle room” for meeting the ambitious goal.
“The science shows that if we get to net zero by 2050, there is still a chance of [temperatures] peaking and coming back down to 1.5°C or below. It is useful and important to tell people there is still hope to strive for a more liveable world if we get our act together,” he said.
A historic ruling from the world’s top court will add new impetus to these efforts, added Chow. States and businesses will need to make the necessary calculations and considerations on climate to avoid the potential threat of lawsuits, he said.
Last month, the International Court of Justice (ICJ) said in a legally non-binding opinion that states have a responsibility to do what they can to limit global warming to the critical threshold of 1.5°C. In its advisory opinion, it added that failure to do so may expose countries and companies to be liable for possible reparation costs.
Speaking to Eco-Business on the sidelines of the summit, Chow noted that Asia has been slower to respond to the ICJ ruling, but that the decision could have an impact on ongoing litigation in Southeast Asia such as in Indonesia and the Philippines where climate-vulnerable communities have brought lawsuits against corporations for climate-related losses. These would be precedents that corporate legal departments will need to increasingly refer to.
“It’s like steroids added to the push for climate action…The game is changed with this ruling. You can expect potential litigation,” said Chow.
He said companies will also be looking to 1.5°C-aligned frameworks or standards from regulators for guidance as they work to avoid legal risks.
In its ruling, ICJ said that states have a legal duty to monitor the emissions of corporates, including those that produce and consume dirty energy. Emitters can also be held responsible for the resulting harms, it said.
