Low adoption of South-east Asia’s transition taxonomies due to inconsistent standards: report
Sustainable Fitch notes that the limited uptake can also be attributed to the high benchmarks required for activities to qualify as transition, and therefore able to access sustainable financing
SEVERAL financial markets in South-east Asia have developed sustainable financing classification systems with a special category for carbon-intensive businesses that are trying to go green.
However, a recent report by Sustainable Fitch found that there is low adoption of these sustainable financing guidelines for hard-to-abate companies transitioning their businesses, which is particularly important for the region’s energy sector.
This is because there is a lack of consistency on what economic activities qualify as transition, and the criteria for various power-generation activities to be eligible for sustainable financing – including those sourced from coal – also varies.
“Though guidance exists, sustainable finance stakeholders appear to be adopting a wait-and-see approach to observe whether the market coalesces around a particular taxonomy,” said the report.
“There have been few, if any, sustainable finance issuance frameworks that reference alignment with any sub-sector amber category technical screening criteria across the available transition taxonomies,” it added.
Traffic-light system
Sustainable finance taxonomies – which are classification systems that define what economic activities would qualify for sustainable financing – in South-east Asia have differed from other markets in its use of a traffic-light system, with the introduction of an amber category to represent transition activities.
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A green category refers to businesses that are environmentally sustainable, while a red category consists of activities that are harmful to the climate.
The traffic-light system has been adopted by the four South-east Asian taxonomies studied in the report. These are taxonomies for the whole Asean region, as well as the national taxonomies of Singapore, Thailand and Indonesia.
Sustainable finance taxonomies have shifted since the European Union first released its version in 2021. While that served as the landmark framework for regulators and investors, its focus on purely green environmental activities was ill-suited for South-east Asia – which is still highly reliant on fossil fuels, such as coal, for power generation.
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This prompted Asean markets to develop their own taxonomies that better capture and support nuanced transition efforts, as well as broaden access to sustainable financing for a wider range of industries. This includes those that rely on coal-fired power to fuel economic growth.
The emergence of various taxonomies with a transition category has created a new problem, however.
The report stated that there were notable differences in how these taxonomies define and categorise coal-related activities. These differences reflect each jurisdiction’s unique economic, environmental and social priorities.
“The region’s reliance on coal-fired power stems from its abundant coal reserves and the need for affordable energy to support rapid economic growth, which competes with environmental commitments,” said the report.
“Some countries prioritise economic growth and energy security, maintaining coal’s substantial role in the energy mix, while others seek to transition to cleaner energy sources via a more rapid phase-out and phase-down.”
In the case of coal-fired power plants, financing the early shut-down of these plants can be classified under both the green and amber categories in the Asean taxonomy, while the Singapore taxonomy sets out distinct qualifying criteria for coal phase-out outside the traffic-light system.
Indonesia’s taxonomy classifies captive coal power plants – which refer to off-grid plants that supply power to industrial activities such as mining – as eligible for sustainable financing within certain thresholds, on the basis that the minerals mined are critical for energy transition as they are raw materials for electric vehicles and battery storage systems.
In addition to these differences across the taxonomies, the report stated that limited uptake could also be attributed to the high benchmarks required for activities to qualify as transition and therefore able to access sustainable financing.
For one thing, high-emitting companies are required to have granularity and transparency in their disclosures to be aligned with the screening criteria for transitional activities. Such a high level of disclosure is something many markets have yet to achieve, as most remain at the nascent stages of adopting sustainability and climate-related reporting requirements.
Growing energy needs
The second and probably more important factor is that South-east Asia’s energy needs will grow over the next few decades, with the majority of it fuelled by coal.
Although the Asean Centre for Energy estimated that renewable energy sources – including wind, solar, geothermal and bioenergy – would account for more than one-third of the growth in regional energy demand by 2035, this will be insufficient to curb the region’s energy-related greenhouse gas emissions, said the report.
In addition, South-east Asia attracts only 2 per cent of global clean energy investment.
Hence, the capabilities of domestic industries may not be able to meet the ambitions set out in the transition taxonomies.
“These factors underscore the large gap in the region’s energy landscape and sustainable finance goals. While countries may intend to implement criteria guiding early phase-out financing eligibility, practical opportunities to apply these taxonomies are limited,” the report stated.
Reputational risk could be another reason deterring companies from adoption, as they are wary of being perceived as greenwashing.
“This cautious approach, coupled with the complexity of integrating transition-focused frameworks into existing industrial and economic activities, has hindered the adoption of these novel transition taxonomies in the energy sector, despite an intention to facilitate a gradual shift towards lower-carbon systems,” it added.
If the market eventually does converge to a single standard on what qualifies as transition, it could bolster credibility and therefore reduce reputational risks, which are seemingly keeping issuers and investors on the sidelines from wider adoption.
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