The Association of Southeast Asian Nations (ASEAN), which makes policy frameworks for a region of 650 million people, is expected to be influenced by what is happening in Europe, where a deadlock over natural gas inclusion is testing its own taxonomy plans.
ASEAN, a block of 10 member states in Southeast Asia, says its classification system for investors will also have to address the region’s specific needs, including the fact that it is still heavily reliant on coal.
It plans to introduce a set of categories and definitions to identify environmentally sustainable economic activities and investment opportunities with a progress report on the framework’s development expected by the end of this year.
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“It will be designed to ensure that ASEAN member states have a framework that suits their economic and social structures that other frameworks will not be able to address,” the bloc’s finance minister and central bank governors (AFMGM) said on 30 March in a joint statement.
Efforts to produce guides that will help investors direct their money into environmentally friendly investments come amid mounting pressure to drastically slash carbon emissions to meet the Paris Agreement goals.
The Asian Development Bank reckons that Asia will need to invest $26 trillion between 2016 and 2030 (USD$1.7 trillion per year) in infrastructure to maintain its growth momentum, tackle poverty, and respond to climate change with Southeast Asia accounting for 5.7 per cent of investment needs. If it were a single economy, ASEAN would be the fifth largest in the world.
“While the ASEAN taxonomy recognises international aspirations and goals, it will take into consideration the region’s unique needs and as such will be beneficial to all ASEAN member states,” AFMGM said.
It [ASEAN taxonomy] will be designed to ensure that ASEAN member states have a framework that suits their economic and social structures that other frameworks will not be able to address.
Joint statement from ASEAN Finance Ministers and Central Bank Governors’ meeting, 30 March 2021
Until now, investors have been navigating a medley of green standards but a sustainable finance rulebook may help ASEAN capture green financing opportunities that could be worth USD$3 trillion between 2016 and 2030, according to a report by ASEAN Working Committee on Promoting Sustainable Finance.
ASEAN and fossil fuels
Standards guiding sustainable finance are still evolving across Asia. The challenge for ASEAN will be to produce a framework that can straddle development disparities in a region with gross domestic product per capita ranging from USD$1,441 to USD$64,567 and are in different phases of driving down greenhouse gas emissions. The region remains heavily reliant on fossil-fuels.
Singapore, through its Green Finance Industry Taskforce (GFIT), convened by the Monetary Authority of Singapore (MAS), issued a proposed taxonomy in January to support green finance in ASEAN. It is the region’s most robust framework yet and will likely provide the bedrock for ASEAN’s overarching guidelines.
Converse to drafts of the European Union’s landmark sustainable finance taxonomy, Singapore’s proposed rulebook currently includes fossil fuel activities such as natural gas, which will continue to play a “significant role” in ASEAN’s energy future, according to the paper.
“The APAC economy and ASEAN economies are different, they start from the higher carbon intensity base,” Mervyn Tang, senior director, global head of ESG research for Fitch Ratings told Eco-Business.
In emerging market economies, like Vietnam or Indonesia for example, it will not make sense to have the same threshold as the EU, Tang said. “Singapore’s taxonomy consultation paper has been very clear in identifying the difference between having the same metrics and same thresholds.”
Singapore’s proposed framework for the region does emphasise the need for transition away from fossil fuels, but this may not be enough for investors who are increasingly shifting focus from big carbon emitters, like oil majors, to those providing finance for carbon-intensive projects, including banks.
It could be unwise from either a climate crisis or an economic risk perspective to include gas in the green financial taxonomy.
John Sayer, director, Carbon Care Asia
Some financial bodies are calling for an end to investment in fossil fuels to meet zero-carbon targets with some banks looking to reduce their exposure to clients who make the bulk of their money from thermal coal.
Goldman Sachs, HSBC, BNP Paribas and 24 other banks are coming under pressure from a coalition of large investors that manages $11 trillion in assets, to commit to eliminating emissions across their operations by 2050, including those generated from lending, trading and underwriting, and set interim reduction targets. The group of investors have also asked the banks to increase their green lending.
“It could be unwise from either a climate crisis or an economic risk perspective to include gas in the green financial taxonomy,” noted John Sayer, director of Carbon Care Asia in a recent op-ed published by Eco-Business. “This will create incompatibility with other green taxonomies, reduce international investment in projects and companies labelled under such a taxonomy, or will lead to a second screening to bring projects up to Paris-compatible standards,” he wrote.
Europe’s taxonomy divisive
The EU’s cornerstone Sustainable Finance Action Plan is designed to be the world’s first classification system for green financial products that is driven by science-based criteria. It is regarded as a blueprint for other regions and is likely to influence the creation of green ESG products in Asia.
“Clearly, the EU taxonomy as part of the action plan has become the initial template for how the different ASEAN taxonomies have been built out,” said Tang.
Brussels had planned to publish an updated draft of a taxonomy for sustainable finance this week but Europe’s efforts have become mired in vested interests that want natural gas to be explicitly recognised as a low-emission technology raising fears that the investor rule book is merely a greenwashing exercise.
Nathan Fabian, chair of the EU’s advisory platform, warned in a letter on 9 April that, “Deviating from environmentally sound parameters within the taxonomy, by stretching the current taxonomy framework beyond scientific rigour, introduces substantial risks to its intended purpose and to the credibility of the project overall.”
Many of the EU’s 27 states have rallied the commission to allow gas and nuclear power as part of the transition to net zero arguing that their exclusion from the taxonomy would financially disadvantage activities needed to bring down emissions.
A delay in passing the taxonomy could allow pro-gas states to form powerful alliances that will increase pressure on the commission to include gas. However, its inclusion will compromise the integrity of the taxonomy and may undermine the development of robust global standards, say some.
“It has become a heavily watered-down taxonomy influenced by political interests,” Dr Theodor Cojoianu, lecturer at Queen’s University, Belfast and a member of the advisory panel, told Eco-Business.
“This piece of legislation was meant to provide scientific evidence and clarity to investors, but it has become a heavily debated tool for funnelling funds into economic activities that, in the case of gas, you cannot scientifically justify,” Cojoianu said.
Finding common ground
An increase in disclosure and transparency around negative environmental and social aspects of financing in European markets will demand Asia, and elsewhere, to comply and accelerate their own efforts when developing standardised frameworks. Working towards a universal environment-focused investment rulebook is likely to be where the EU and Asia will find common ground.
Yi Gang, governor of China’s central bank said at the China Development Forum in March that it was pushing for greater convergence of green investment taxonomy finance systems with its global partners - including the EU.
“I think with a lot of green issues, there are going to be a few areas where there are different views across states and governments – as you would in any policy – but there is still a lot of common ground,” said Tang. “This exercise on a common ground taxonomy gives you a solid green core, then we will see regions have different segments around it to capture things they might want to have in their domestic market.”