ASEAN Taxonomy V2: A Work-In Progress Requiring Immediate Implementation
Wong Hsu-sheng, Chief Operations Officer of GoImpact Capital Partners and Senior Fellow (Sustainability) at the Singapore Institute of International Affairs
Market participants have been calling for years for globally standardised technical screening criteria for sustainable finance. It is a fundamental requirement as it serves as a common reference point for the proper identification of environmentally friendly economic activities, to reduce greenwashing and facilitate cross-border investments. This need for a standardised criteria may have been met in ASEAN with the release of Version 2 of the ASEAN Taxonomy on 27 March 2023. Version 2 builds on Version 1 that was released without much fanfare on the wings of the 26th United Nations Climate Change Conference of Parties in November 2021, and is an impressive attempt by ASEAN to match the EU Taxonomy that is currently leading global taxonomy efforts.
Changes to the Essential Criteria
Where Version 1 of the ASEAN Taxonomy was silent on human rights, Version 2 now includes these by incorporating Social Aspects as a third Essential Criteria alongside those of “Do No Significant Harm” and “Remedial Measures to Transition”. This is an important change that brings the ASEAN Taxonomy into closer alignment with the EU Taxonomy. This convergence between two important economic regions is a significant step towards achieving a global taxonomy for sustainable finance.
At first glance, the introduction of Social Aspects may sit uneasily in the ASEAN region, particularly where there are differences over the application of human rights and labour laws. However, the ASEAN Taxonomy attempts to overcome this by requiring Social Aspects to be assessed on a company level, based on the country of incorporation. In other words, if the company is already in full compliance with the human rights and labour laws of the country that it is incorporated in, it should be able to meet the Social Aspects Essential Criteria requirements without much difficulty. There is an additional requirement that the company should conduct a relevant impact assessment on the people living close to its investments and strengthen its community engagement activities – but this is already embedded in the local regulations and laws of many ASEAN regimes.
One ongoing concern is the requirement that the assessments of “Do No Significant Harm” and “Remedial Measures to Transition” should be based on the location of the activity. The location of the activity itself is defined to be where resources are combined to produce specific goods or services. However, the environmental circumstances at the point of resource extraction, as well as at the end of the life cycle of the product or service, may be vastly different from the point at which the resources are combined to produce that good or service. By focusing the activity on the place of production, companies may end up ignoring certain environmental issues that exist at the beginning and the end of the product or service’s life cycle. A proper consideration of the activity’s full role in the Circular Economy may not take place.
Expanding the Foundation Framework and the Plus Standard
The ASEAN Taxonomy allows users to choose between the Foundation Framework or the Plus Standard for each activity. The Foundation Framework allows a qualitative assessment of activities on their contributions to transition, using a single sector agnostic decision tree to assess and classify activities into different categories. The principles-based Foundation Framework has been expanded in Version 2 by providing easy-to-use guiding questions, decision trees and use cases that address all Environmental Objectives and Essential Criteria, thereby allowing any ASEAN Member State (“AMS”) to apply the framework and immediately commence its sustainability journey in a consistent and structured manner.
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The Plus Standard adopts a more advanced assessment and methodology that is based on specific Technical Screening Criteria and science-based thresholds in classifying activities. Version 2 sets out for the first time the Technical Screening Criteria for the first focus sector, namely, Electricity, Gas, Steam and Air Conditioning Supply. Technical Screening Criteria for other focus sectors will be published in subsequent versions of the ASEAN Taxonomy.
Crucially, each AMS can decide which activity falls under the Foundation Framework or Plus Standard assessment methodologies, and which Tiers are to be used for classification. But this begs the question: why should one comply with the higher standard? The Plus Standard process flow actually recommends that the company itself voluntary favour the Plus Standard before it is implemented – but it is unclear why a company would want to do this as it would require more onerous reporting requirements and greater resources. Committing an activity to the Plus Standard also requires an AMS to commit to certain targets, set up a Technical Screening Criteria review body and aim to “sunset” Amber Tiers, with certain deadlines that will be monitored. All of this will require resources and time, which some States can ill-afford given political and economic realities on the ground. For those pollutive activities that are also central to the economic policies of an AMS, the adoption of the Plus Standard and its rigorous monitoring and reporting requirements might actually be seen as a disincentive. From an investor standpoint, it also results in added complexity as it may result in the same activity having essentially different frameworks across the same region.
Conclusion
As a regional standard that brings similar parameters and requirements to those seen in the EU Taxonomy, a successful rollout of the ASEAN Taxonomy will do much to counter allegations of rampant greenwashing and raise local sustainability standards to match those of their regional peers. Doing so will also help boost much-needed foreign investment and financing inflows to drive the growth of sustainable development. But more work needs to be done. More Technical Screening Criteria needs to be drafted and it is still uncertain what incentives exist to encourage companies and governments to adopt the Plus Standard. However, it is imperative that all of ASEAN comes together to at least implement the Foundation Framework in order to better defend against the existential threat that is looming. If all of ASEAN were to only adopt the Foundation Framework, we would see significant positive changes for sustainable finance in the region.
Wong Hsu-sheng is the Chief Operations Officer of GoImpact Capital Partners, a Sustainability and ESG education services company, and a Senior Fellow (Sustainability) at the Singapore Institute of International Affairs. Established in 1962, the Singapore Institute of International Affairs (SIIA) is a non-profit and independent think tank committed to producing policy analysis, fostering in-depth dialogues, and bridging gaps between policymakers, private sector decision-makers and experts to shape public policy and social responses. Centred around ASEAN focused themes, the Institute aims to deliver policy analysis in international affairs and on issues driving environmental sustainability. Please look out for the Building a Digital-Green ASEAN report that we will be publishing soon, which identifies other horizontals that are necessary to accelerate ASEAN’s movement towards a net-zero target.