Asian taxonomies aren’t uniformly rigorous and use varying standards

Green finance taxonomies, or classification systems for sustainable financing, vary in scope and definition across Asian jurisdictions. A new Institute for Energy Economics and Financial Analysis (IEEFA) report examines the policy approaches, challenges, and opportunities in Asia's green finance landscape through a comparative analysis of regional and national green and sustainable finance taxonomies. The report offers recommendations for businesses and investors to make informed decisions on sustainable economic activities.

“In Asia, due to the differences among the national standards, taxonomies have often created confusion while trying to codify and promote green standards and concepts,” says report author Ramnath N. Iyer, IEEFA's Sustainable Finance Lead, Asia. “In addition, none of the Asian jurisdictions have made reporting data against the taxonomies mandatory.”

Iyer summarizes the characteristics of a well-designed taxonomy as providing clear definitions and objectives, being interoperable with other taxonomies while accounting for national transition needs, aligning with internationally accepted standards, and requiring mandatory compliance and reporting.

“A comprehensive taxonomy can also mitigate the risk of greenwashing by enforcing stringent reporting requirements and maintaining transparency,” says Iyer.

Balancing transition needs and real actions

While fossil fuels account for a large share of the electricity generation and transport in many Asian countries, businesses need financing to develop and implement plans to transition to a greener future.

“Financing for these activities cannot be shut down abruptly as it would significantly shock economic activity,” says Iyer. “Not all economies can transition at the same speed, and not all sectors can transition simultaneously. Recognizing these challenges is particularly crucial for Asian economies.”

The Association of Southeast Asian Nations (ASEAN) Taxonomy for Sustainable Finance, along with the frameworks of Singapore, Thailand, Indonesia, and the Philippines, has instituted a three-tiered system to categorize activities into green (compliant), amber (transitioning), and red (non-compliant).

“This approach encourages companies to improve their practices over time, acknowledging the complexities of transitioning economies,” says Iyer. “However, there is no universal definition for what constitutes transition financing, which poses the risk that it could support heavy polluters without driving meaningful change. This also raises reputational risks for investors and financiers, leading to hesitancy on their part. As a result, essential activities may go unfunded.”

A robust taxonomy should allow for the classification of activities that are on a path toward sustainability when backed by clear plans and rigorous metrics to enable monitoring. The category should have a sunset clause.

“An activity classified as amber cannot stay amber forever – it must either progress to green or be downgraded to red with a sunset date,” adds Iyer.

Leaders and laggards in Asia

According to Iyer, the Singapore-Asia Taxonomy for Sustainable Finance is the most comprehensive. It covers a broad range of sectors and has detailed thresholds, or Technical Screening Criteria (TSC), delineating which activity is permissible and when.

“The Singapore, Thailand, and Hong Kong taxonomies have the most stringent quantitative criteria. Only those with lifecycle emissions under 100 grams of carbon dioxide per kilowatt-hour (gCO₂e/kWh) are classified as green,” says Iyer. “In contrast, Malaysia and the Philippines follow a principles-based taxonomy that avoids using quantitative criteria. The decision of whether an entity is doing enough remains subjective.”

China’s Green Bond Endorsed Projects Catalogue (GBEPC), first released in 2015, specifically excludes gas financing as eligible under its green framework. While the Hong Kong, Singapore, and Thailand taxonomies are similar in this regard, most Asian taxonomies are more permissive with gas.

Iyer also identifies the Indonesian taxonomy as an outlier in terms of its lenient classification criteria.

“In Indonesia, financing for new and existing coal plants is classified as green or transition finance. It also allows for the use of carbon offsets and assumes the widespread availability and adoption of the unproven carbon capture and storage (CCS) technology,” says Iyer.

Carbon offsets are generally not an acceptable form of emission reduction for taxonomy purposes. The Indonesian taxonomy contradicts prevailing standards and risks losing credibility in international sustainable finance if such financing is classified as green or transition finance.

Lessons from the European Union (EU) model

According to Iyer, the EU Taxonomy regulation, established in 2021, is the most comprehensive framework and is the only taxonomy that has made reporting mandatory for corporations.

“The EU’s Corporate Sustainability Reporting Directive (CSRD) mandates that companies disclose their taxonomy alignment, providing a clear framework for accountability. Most Asian taxonomies, however, have limited or non-existent mandatory requirements for disclosure, being entirely voluntary,” says Iyer.

Iyer adds that few Asian taxonomies mention criteria such as "Do No Significant Harm" (DNSH) and “Minimum Safeguards” (MS), which ensure that an activity promoting one of the taxonomy-approved goals does not negatively affect any other objectives.

This contrasts with the EU taxonomy where failure to meet the DNSH or MS standards automatically renders an activity ineligible for green status, regardless of its positive attributes.

DNSH guarantees that an activity that supports one objective does not do so at the expense of other environmental or social objectives. MS usually refers to social measures, such as fair treatment of workers and preventing child or bonded labor. Country taxonomies usually regard MS standards as being met if the country’s relevant laws are followed.

The EU taxonomy delineates six environmental objectives, ensuring comprehensive coverage across various sectors.

“One common shortcoming across Asia is that taxonomies have a narrow focus on particular environmental objectives and disregard other goals, such as biodiversity protection and pollution prevention, which also have the potential to play positive roles in achieving environmental goals,” says Iyer.

Read the report: Sustainable finance in Asia: A comparative study of national taxonomies

Author contact: Ramnath N. Iyer ([email protected])

Media contact: Josielyn Manuel ([email protected])

About IEEFA:

The Institute for Energy Economics and Financial Analysis (IEEFA) examines issues related to energy markets, trends and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. (www.ieefa.org)