ASEAN Taxonomy Finance

Rapid industrialisation in the Association of Southeast Asian Nations (ASEAN) has led to social and environmental challenges, including climate change impacts, poor air quality, and waste management. The ASEAN Taxonomy Board (ATB) was established in March 2021 to develop, maintain, and promote an ASEAN Taxonomy to be science-based, inclusive method of classifying Activities according to their contribution to the environment in the region. Version 1 of the ASEAN Taxonomy was published in November 2021. The ATB called for stakeholder consultations after publication of Version 1. Over 80% of respondents emphasised the need for a common language. The lack of standardised and credible data was seen as the greatest challenge to successful implementation. International investors want ASEAN to align with international green investment standards, but the process is complex and tailoring the ASEAN Taxonomy to individual countries could be beneficial. National taxonomies in ASEAN have also been developed. These national taxonomies have varying scopes and approaches, with some establishing defined criteria and others emphasising a principles-based approach. The ASEAN Taxonomy is a guide designed to enable a just transition towards sustainable finance adoption by ASEAN Member States (AMS). It provides alignment on underlying principles and helps harmonise the classification of sustainable activities and assets across ASEAN. The taxonomy was conceived based on five principles and offers two assessment approaches – the FF and PS – to cater to diverse potential users across the AMS. Six Focus Sectors and three Enabling Sectors have been identified as being particularly important in the ASEAN sustainability journey and are covered under the PS. The ASEAN Taxonomy is based on four EOs: Climate Change Mitigation, Climate Change Adaptation, Protection of Healthy Ecosystems and Biodiversity, and Resource Resilience and the Transition to a Circular Economy. To be classified under the ASEAN Taxonomy, any Activity must demonstrate that it contributes to at least one of these EOs and does not have any adverse effects to other EOs. EO1 focuses on decarbonisation pathways for Activities, requiring them to align with decarbonisation trajectories in line with the Paris Agreement. EO2 concentrates on reducing the negative effects of climate change and increasing resilience through implementing processes or actions. EO3 concentrates on protecting the natural ecosystem and biodiversity, promoting sustainable use of natural resources, and minimising adverse impacts on the environment. EO4 focuses on promoting resource resilience and the transition to a circular economy through principles such as minimising resource use, optimising resource yield, and closing resource loops through effective waste management, which can be achieved by adjusting business operations and implementing circular economy principles via adapted products, production, technologies, and processes. The ASEAN Taxonomy requires any Activity to fulfil three Essential Criteria (EC) for classification: Do No Significant Harm (DNSH), Remedial Measures to Transition (RMT), and Social Aspects (SA). DNSH ensures that an Activity that contributes to one EO does not cause significant harm to another objective. RMT ensures that any significant harm is either removed or rendered insignificant. SA focuses on social aspects that could be harmed by an Activity, such as human rights, labour rights, and impact on people living close to the investments. The ASEAN Taxonomy Version 2 and subsequent versions centre around the classification of Activities. An Activity takes place when resources such as capital, goods, labour, manufacturing 13 techniques or intermediary products are combined to produce specific goods or services. An Activity is not the same as the facilities used to conduct the Activity. TSC classify Activities based on their contributions to EOs using quantitative, qualitative, or nature of Activity-based criteria. Under the ASEAN Taxonomy, ‘classification’ refers to an Activity’s contribution to an EO, while ‘Tier’ refers to the different levels of TSC. PS has Tiers 1-3 aligned with Green, Amber Tier 2, and Amber Tier 3 classifications, while the FF does not use the Tier system and only has Green and Amber classifications. In all cases, a Red classification means that an Activity is not aligned with the ASEAN Taxonomy. The ATB is responsible for maintaining the ASEAN Taxonomy, including consultation with representatives from AMS, delegation of tasks, and approval of any changes to the ASEAN Taxonomy. The ATB also sets TSC for each Tier of each defined Activity in a manner that will allow flexibility for individual AMS while representing a decarbonisation framework for ASEAN that balances ambition for sustainability with economic and technical realities. AMS are responsible for setting policies for Activities that occur within their own territory and aligning themselves with Tiers that reflect their own transition policies within their own territory on an Activity-by-Activity basis. The assessment methodology for Activities seeks to determine if the Activity meets the principles of at least one of the EOs, avoids significant harm to other EOs, remediates any harm caused, meets all social aspects criteria, and the appropriate assessment approach is selected based on AMS policy and country-level preference. The process for assessing an Activity using the FF involves using principles-based guiding questions and a decision tree which determine the fulfilment of EO and EC. To assess an Activity using the PS, evidence is also required of fulfilment of the EO and EC. However, in this case, specific criteria are laid out in Annexes. The PS in future versions of the ASEAN Taxonomy will expand their coverage to a wider list of Activities across all focus sectors identified in Version 1, with subsequent versions incorporating qualitative process and/or practice-based criteria. ASEAN Taxonomy has diverse potential users including member states, regulators, banking institutions, users of capital, and rating agencies. Future versions will expand the coverage of Activities in all focus sectors and provide more qualitative process and/or practice-based criteria. Users may also assess entities and portfolios by aggregating Activity assessments, which will be discussed in subsequent versions of the ASEAN Taxonomy. Financial instruments may make use of similar procedures as described in the ASEAN Green Bond Standards, and future versions of the ASEAN Taxonomy will provide a system for classifying entities and portfolios based on an aggregation of Activities.

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