On November 10, 2021, the Association of Southeast Asian Nations (ASEAN) released Version 1 of the ASEAN Taxonomy for Sustainable Finance (the “ASEAN Taxonomy“). First announced in March 2021, the ASEAN Taxonomy will provide a common language for sustainable finance among the ten ASEAN Member States (AMS) that, together, comprise the fifth largest economy in the world. This is a necessary and timely development as ASEAN remains highly vulnerable to climate change, which has had a significant impact on the people, businesses and governments of ASEAN.
Version 1 is a significant step in ASEAN’s sustainability journey, as this initial document will provide the framework for continuing discussions among AMS as the ASEAN Taxonomy develops. In this Blog Post, we highlight key aspects of Version 1 of the ASEAN Taxonomy and compare this new framework against the world’s most prominent sustainability taxonomy, the EU’s Taxonomy Regulation (the “EU Taxonomy“).
The ASEAN Taxonomy is guided by the following five key principles:
- The ASEAN Taxonomy will be the overarching guide for all ASEAN Member States, providing a common language and complementing their respective national sustainability initiatives.
- The ASEAN Taxonomy will take into consideration widely used taxonomies and other relevant taxonomies, as appropriate, and shall be contextualised to facilitate an orderly transition towards a sustainable ASEAN.
- The ASEAN Taxonomy shall be inclusive and beneficial to all ASEAN Member States.
- The ASEAN Taxonomy shall provide a credible framework, including definitions, and where appropriate, be science-based.
- The ASEAN Taxonomy will be aligned with the sustainability initiatives taken by the capital market, banking and insurance sectors, or at least not conflict with them.
These principles will orient the ongoing development of the ASEAN Taxonomy and could inform efforts to develop regional taxonomies in other partsof the world.
The ASEAN Taxonomy will incorporate a multi-tiered approach intended to reflect the varied stages of development, economies and other circumstances of the ten AMS.
Clearly, industrial development has brought a range of environmental issues and related challenges to ASEAN. As noted in the ASEAN Taxonomy, the region is “increasingly a contributor to, and is becoming a victim of, the global environmental challenges of climate change.” These growing challenges will require a more fundamental transition, including a shift in business models, but also a flexible approach to developing a regional taxonomy.
Accordingly, the ASEAN Taxonomy includes a common “Foundation Framework” will apply to all AMS, while a separate “Plus Standard” will provide additional, more detailed guidance and scope for AMS to further qualify and benchmark eligible green activities and investments on a sectoral basis.
Under the Foundation Framework, economic activities must fulfil at least one of four environmental objectives to potentially qualify as “sustainable”:
- Climate Change Mitigation (e.g., avoiding or reducing greenhouse gas emissions)
- Climate Change Adaptation (e.g., building resilience to the physical impacts of climate change)
- Protection of healthy ecosystem and diversity (e.g., preventing pollution or deforestation)
- Promotion of resource resilience and transition to circular economy (e.g., managing waste)
In addition, all activities must meet two “essential criteria”: activities must not significantly harm any environmental objective and efforts must be taken to identify and mitigate the activity’s potential adverse environmental impacts (e.g., formal environmental impact assessments may be required for larger projects). All activities must also be assessed against relevant environmental laws instituted by AMS as a “minimum safeguard” to avoid contravention of local regulations.
Economic activities will be categorized as either Green, Amber or Red based on a decision tree incorporating various factors relevant to each environmental objective. For example, with respect to the objective of Climate Change Mitigation:
- Green activities clearly contribute to or enable Climate Change Mitigation;
- Amber activities contribute to decarbonisation where mitigation of other harm to environmental objectives is necessary; and
- Red activities do not contribute to or enable Climate Change Mitigation and/or fail to meet other safeguards.
The Plus Standard will provide additional, detailed technical screening criteria for specific economic activities. Initially, the ASEAN Taxonomy will address activities in six priority sectors representing 85% of GHG emissions and 55% of Gross Value Added in ASEAN:
- Agriculture, forestry and fishing
- Electricity, gas, steam, and air conditioning supply
- Transportation and storage
- Construction and real estate activities
- Water supply, sewerage, waste management and remediation activities
The Plus Standard will identify granular activity-level criteria and thresholds for economic activities in these sectors to further determine whether a specific activity is categorized Green, Amber or Red.
The Plus Standard will also identify “enabling sectors” that have a significant ability to enable other sectors to contribute to the environmental objectives. For example, the information and communication sector has been identified as an enabling sector for Climate Change Mitigation for its ability to provide innovative data-driven solutions and the physical infrastructure, such as data centres, needed to effectively manage and reduce GHG emissions.
Multinationals operating in ASEAN will be particularly interested in the degree to which the ASEAN Taxonomy aligns with the EU Taxonomy. While the development of the ASEAN Taxonomy remains at an early stage, two key insights can be drawn from Version 1:
- Environmental Objectives Are Largely Aligned: The ASEAN Taxonomy identifies four key environmental objectives that an activity may contribute to in order to be classified as “sustainable”, while the EU Taxonomy identifies six such objectives. At first glance, it may seem that the ASEAN Taxonomy is more restrictive in this regard. The frameworks, however, are largely aligned as the ASEAN Taxonomy has effectively taken four specific objectives from the EU Taxonomy and grouped them into two broader objectives. EU Taxonomy objectives 3 (sustainable use and protection of water and marine resources) and 6 (protection and restoration of biodiversity and ecosystems) are reflected in one ASEAN Taxonomy objective: Protection of healthy ecosystem and diversity. EU Taxonomy objectives 4 (transition to a circular economy) and 5 (pollution prevention and control) are also reflected in one ASEAN Taxonomy objective: Promotion of resource resilience and transition to circular economy.
- ASEAN Minimum Safeguards Are Strictly Environmental: In the EU Taxonomy, an economic activity must meet certain “minimum safeguards” in order to be “sustainable”. According to Article 18 of the EU Taxonomy, this requires alignment with the principles of the OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights, ILO core conventions and the UN International Bill of Human Rights. Together, these principles represent international best practices for managing human rights impacts. These principles are notably absent from the ASEAN Taxonomy, where the only “minimum safeguard” that must be assessed is national environmental law.
ASEAN has made clear that Version 1 is the foundation for the ongoing development of the ASEAN Taxonomy. Market participants can expect the framework to evolve as the multitude of stakeholders in ASEAN provide their feedback and detailed technical screening criteria are developed. Parties are likely to focus on the degree to which the ASEAN Taxonomy aligns with the EU Taxonomy, as well as national taxonomies in Singapore and Malaysia and the Common Ground Taxonomy under development by China and the EU. However the ASEAN Taxonomy develops, it will play a critical role in helping businesses and governments align their activities toward a more sustainable future.