Given the growing importance of climate issues, ASEAN is committed to contributing to the global agenda and implementing its own climate action targets. In the ASEAN Climate Change Status Report, the ASEAN Secretary-General stressed that to accelerate the green transition towards net zero emissions and sustainable development, there is a need to increase access to climate finance, technology and knowledge transfer in priority areas such as adaptation, climate change mitigation, disaster risk reduction and clean energy transition.
To support ASEAN’s commitment to sustainable development, the ASEAN Capital Markets Forum (ACMF) launched the Green Bond Standards (2017), Social Bonds and Sustainability Bonds (2018), with support from regional central banks and insurance regulators. In 2020, three related documents were released, which outlined the 2020-2025 sustainable development roadmap, aligned with the Paris Agreement and the United Nations Sustainable Development Goals, and recommended enhanced ASEAN cooperation in sustainable finance and the transition to a low-carbon economy. These documents highlighted the importance of a regional taxonomy to support the transition. In response, the ASEAN Finance Ministers and Central Bank Governors agreed to establish the ASEAN Sustainable Finance Taxonomy Board to develop and promote the new system. On November 10, 11, together with the 2021th Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26), the ASEAN Taxonomy Board announced the ASEAN Taxonomy for Sustainable Finance (ASEAN Taxonomy).
The ASEAN Taxonomy is a sustainable finance system that focuses primarily on environmental objectives and develops a common language to define what is “green”. It serves as a reference point for sustainable projects and activities in the region, helping issuers and investors better assess the sustainability impact of economic activities. This makes investment decisions more transparent and efficient.
To respond to the diversity of development levels and financial systems of member countries, the system is designed based on five core principles to ensure flexibility and relevance in the transition to a sustainable economy across the region, namely:
- Principle 1: The ASEAN Taxonomy provides overall guidance for all ASEAN member countries, providing a common language and complementing each country's national sustainable development initiatives.
- Principle 2: The ASEAN Taxonomy will refer to internationally widely used taxonomy systems as well as relevant green taxonomy systems where appropriate, and adapt them to the specific characteristics and context of the region. The objective is to support a clear and consistent transition path towards sustainable development across the ASEAN region.
- Principle 3: ASEAN Taxonomy shall be inclusive and beneficial to all ASEAN Member States.
- Principle 4: ASEAN Taxonomy shall provide a credible framework, including clear and science-based definitions.
- Principle 5: ASEAN Taxonomy shall be aligned with, or at least not inconsistent with, existing sustainable development initiatives in the capital markets, banking and insurance sectors.
The structure of ASEAN Taxonomy is designed according to a multi-layer model, including the Foundation Framework and Plus Standards.
The Framework applies to all ASEAN Member States and stakeholders, and is based on a commitment to keep global temperature rise below 2⁰C, preferably not exceeding 1,5⁰C, while enhancing climate resilience and protecting the environment. Under the Framework, economic activities must meet at least one environmental target and two principles set out in the ASEAN Green Taxonomy.
The Framework addresses four environmental objectives, including: (i) Mitigating climate change; (ii) Adapting to climate change, (iii) Protecting biodiversity and ecosystems; and (iv) Promoting resource recovery and transitioning to a circular economy, and two core principles: (i) Do not cause significant harm to an environmental objective, meaning that an economic activity that contributes significantly to an environmental objective should not cause significant harm; and (ii) Implement corrective measures to transition from a high-emission to a low-carbon economy. Actions to mitigate climate and environmental impacts should be assessed based on the principle of prioritizing avoiding risks in the first place, or if this is not possible, reducing them to an acceptable level.
Although it does not use indicators and thresholds to determine suitability for the classification system, the Principles-Based Framework helps users, investors and donors understand the impact of capital expenditure on climate objectives and related improvement actions. The transparency and clarity of its approach make it a reliable reference point and can serve as a basis for reference while the technical criteria of the Additional Standards are being developed.
The Plus Standard provides more detailed guidance to help countries identify and assess eligible green activities and investments. It also sets out specific criteria and thresholds to determine whether an activity contributes to environmental objectives and to assess its compliance with the taxonomy.
The Plus Standard focuses on key economic sectors that play an important role in climate change mitigation, both directly and indirectly. As each economic activity requires its own assessment criteria, the Plus Standard identifies key sectors and provides detailed guidance for assessing their compliance with the ASEAN classification system.
Two parameters were selected to cover both environmental and economic criteria: Greenhouse Gas Emissions (GHG emissions); and Gross Value Added (GVA). These parameters help users understand the role of major economic sectors in reducing greenhouse gas emissions, thereby identifying key sectors with high potential to contribute significantly to ASEAN's environmental and climate goals. The key sectors were selected based on the ISIC (International Standard Industrial Classification) system. Through that, the classification system identifies the six most important sectors: (i) Agriculture, forestry and fisheries; (ii) Electricity, gas and air conditioning supply; (iii) Manufacturing; transport and storage; (iv) Water supply; (v) Water and waste treatment; (vi) Construction and real estate) and three supporting industries whose products and services contribute to the achievement of environmental goals: (i) Information and communication; (ii) Professional, scientific and technical expertise; and (iii) Carbon capture, storage and utilization.
The Plus Standard provides a clear view of the climate impacts of activities through science-based quantitative indicators and thresholds. The multi-tiered structure of the standard is designed to accommodate the different levels of preparedness of ASEAN Member States while encouraging effective climate action.
Under the ASEAN Taxonomy, economic activities, projects or companies that are assessed for their compliance with the ASEAN Green Taxonomy Core Framework and Additional Criteria will be divided into three main groups: Green, Amber and Red, based on their level of contribution to sustainable development goals and green transition potential.
- Green are activities that have a clear positive impact on the environment, consistent with sustainability standards such as reducing greenhouse gas emissions, using renewable energy, or protecting ecosystems.
- Amber activities are those that are not yet green but are on a transition path, meaning they have a clear plan to improve their environmental performance in the future.
- Red are activities that are not aligned with sustainability goals, have negative impacts on the environment, and do not have a clear transition roadmap.
The ASEAN Taxonomy is a strategic step for Southeast Asia to further integrate into the global sustainable development trend. The first version of the ASEAN Taxonomy has fully integrated the core elements of a sustainable financial system, suitable for the diverse needs of member countries. With a multi-layered approach, users can flexibly choose between the Foundational Framework or the Complementary Standards depending on the specific sector and conditions, thereby ensuring comprehensiveness and practicality. With a solid scientific foundation and transparent approach, this system becomes a reliable reference point for countries and investors in the direction of climate action, while supporting ASEAN countries to build a consistent and transparent green economic development strategy.