Harmful for Southeast Asia's sustainable finance if taxonomies diverge too much: China expert

Observers say that member nations of regional grouping Asean should be adopting the Asean Taxonomy. Interoperability is key if countries were to launch their own taxonomies.

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More than a year after the launch of the Asean Taxonomy, it has not seen widespread adoption, said Cheng Lin, director of the Centre for International Collaborations at the Beijing Institute of Finance and Sustainability. Image: Sean Pollock/ Unsplash

 

Chinese observers familiar with Southeast Asia are increasingly concerned about the lacklustre adoption of the Asean Taxonomy. Too many domestic taxonomies that are inconsistent with one another could hinder the advancement of sustainable finance in the region instead of improving it, said a director at the Beijing Institute of Sustainable Finance.

Although country-specific taxonomies can cater for unique characteristics of their domestic markets, at a global level, sustainable finance taxonomies “cannot be too diversified”, said Cheng Lin, director of the Centre for International Collaborations at the Beijing Institute of Finance and Sustainability. 

In a recent interview following the launch of the report Unleashing Sustainable Finance in Southeast Asia, produced by the World Bank with International Finance Corporation (IFC), its investment arm, Cheng told Eco-Business about his concerns. “Too many taxonomies will create the problem of market segmentation, with each market having limited liquidity,” he said. 

In Southeast Asia, for instance, Cheng believes that “the Asean taxonomy and its technical threshold should be promoted” even as each country is encouraged to produce their own taxonomies aligned with the regional framework. There are 10 member countries of Asean, which altogether make up just 3.4 per cent of the global economy, according to SP Global data.

Cheng’s comments come more than a year after the Asean Taxonomy was launched in November 2021 with the aim of aligning the development of sustainable finance in the region. A taxonomy is a tool that can help investors understand whether an economic activity is classified as environmentally sustainable. However, the taxonomy has “not seen very wide application or adoption among members within the region or outside of the region,” Cheng said.

While financial institutions in Asean may already be applying the taxonomy for their own internal classification of green loans, widespread adoption has been hampered by other factors including a lack of supporting policies and a limited suite of sustainable finance products.

In contrast, in China, financial institutions were consulted before its green taxonomy was launched, Cheng said. Suites of sustainable finance products were launched by financial institutions two weeks after the taxonomy was published, he added.

“That was able to kick off the market very quickly [in China]. I didn’t see such coordination work in the Asean market,” Cheng Lin said, following the launch of the report.

The report revealed that scarcely any firms in Southeast Asia have received sustainable financing, with limited expertise in assessing sustainable investments being one of three critical gaps that has prevented more financing from flowing towards sustainable activities in the region.

Room for improvement

That being said, the development of country-specific taxonomies can still provide an opportunity for mutual comparison, so that future versions can be improved. Taxonomies developed by Southeast Asian nations can also be further compared to other taxonomies developed in other regions, Cheng said.

At the report’s launch, Dr Ma Jun, president of the IFS, said the Common Ground Taxonomy, developed between China and the European Union, and with its first version published on November 2021, could be revised in the future to include other Asian regions, including Southeast Asia.

Cheng added that this would involve aligning the Common Ground Taxonomy and the Asean Taxonomy, as well as the taxonomies of Central Asian countries. However, this will depend on the readiness and availability of comparable regional taxonomies, he said.

Since the launch of the Asean Taxonomy, only two member countries, Indonesia and Malaysia, have launched their own taxonomies for sustainable finance and investments. Indonesia published its Green Taxonomy 1.0 in January 2022 while Malaysia’s Securities Commission launched its Principles-Based Sustainable and Responsible Investment (SRI) Taxonomy in December 2022.

A key concern given the growing number of taxonomies being launched by various countries and jurisdictions is their interoperability, said Gillian Tan, the Monetary Authority of Singapore’s recently appointed chief sustainability officer.

This is why Singapore’s taxonomy is largely building off the EU’s wide-ranging taxonomy for sustainable activities, she said at the report launch. The country’s Green Finance Industry Taskforce (GFIT) published its second consultation paper for its taxonomy in May 2022.

Tan added that Southeast Asia continues to need more transition financing to help high carbon emitting firms and industries transition towards cleaner processes, and a “green or not green” approach to taxonomies that ignore brown or energy transition activities would hamper this effort. The Asean Taxonomy instead adopts a traffic light system, in which the environmental impact of economic activities are classified as green, amber or red, depending on their level of climate change mitigation. 

While significant progress has been made in the development of Asean taxonomies, there is room for improvement in the development of Southeast Asian taxonomies, the World Bank report said.

“For example, although the environmental objectives in the taxonomies of Indonesia and Malaysia are similar to the initial environmental objectives of the EU taxonomy, other aspects, such as circular economy and biodiversity, are not covered in depth,” the report said. 

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