Asian Hopes for Sustainable Finance Will Rest on More Credible Taxonomies

The need for immediate and serious climate action that cuts greenhouse gas emissions more rapidly than the current trajectory is a very clear takeaway from the recently published Intergovernmental Panel on Climate Change (IPCC) report.

This will be particularly true for Asia’s high carbon emission markets like China, Japan and South Korea, and for energy growth markets such as Indonesia, Vietnam and the Philippines. 

One catalyst for the transition to reduce greenhouse gas emissions in power generation is the growing market for green and sustainability-linked loans and bonds in Asia’s leading capital markets.

Like their global counterparts, Asian policymakers have been rushing to encourage development of the policy pillars needed to kickstart green and sustainable bond markets in the region’s capital markets.

The market is responding but given the lacklustre and inconsistent environmental, social and governance (ESG) reporting standards across the region, sustainable finance investors’ concerns about the risks of corporate greenwashing are growing and could be a material barrier to market development.

Almost all company statements and reports globally—including about half of the statements from the energy sector—contain a high likelihood of misleading claims about a company’s environmental awareness according to research led by Professor Andreas Hoepner at University College Dublin.  The problem can be exacerbated when hasty lenders and bond investors buy into the corporate rhetoric and fund them.

A robust sustainable finance market is significant to a cost-effective transition in Asia. Given this, enforcing higher disclosure standards to minimise misrepresentation will be a crucial market building block.

At the same time, the development of more proactive policies deserves more attention. This is where sustainable finance taxonomies, if designed properly, should play a role.

A taxonomy is a document that is usually binding, and which expresses factual and science-based views on the sustainability of an asset class. It specifies the technical requirements of an asset or project that companies must satisfy to enable the labelling of projects as green or sustainable.

Investors rely on taxonomies to determine what clean and sustainable assets the market needs to meet the objectives of the Paris Agreement while taking comfort they are deploying capital to real sustainable investments.

In theory, therefore, a taxonomy facilitates efficient capital allocation and supports the acceleration of a sustainable energy transition.

This matters particularly to ESG-focussed players in search of genuinely sustainable investment opportunities available through green and sustainability-linked bonds and loans.

Business activities or assets that make their way into a green taxonomy are those that in theory would qualify for funding through these sustainable debt instruments.