Divergent Asian Taxonomies Create Confusion for Investors
No country in the region has made reporting against the frameworks mandatory, further increasing greenwashing risk and due diligence costs.
Differences in standards, metrics and goals between taxonomies across Asia are causing uncertainty for investors, lenders, businesses and other stakeholders, potentially slowing capital flows to environmentally sustainable projects.
Such was the warning issued by the Institute for Energy Economics and Financial Analysis (IEEFA) in a report that examined policy approaches, challenges and opportunities in Asia’s green finance landscape through a comparative analysis of regional and national sustainable finance taxonomies.
“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,” said report author Ramnath Iyer, Sustainable Finance Lead for Asia at IEEFA. “In addition, none of the Asian jurisdictions have made reporting the data mandatory. A comprehensive taxonomy can mitigate the risk of greenwashing by enforcing stringent requirements and maintaining transparency.”
Though the diversity in approaches reflects each country’s situation and context – each of them being at various stages of their net zero transition – it also presents significant challenges for interoperability and consistency, the report noted.
“The uncertainty and negative impact come from the variations and divergences in what is considered ‘green’: countries have different perspectives depending on their stage of development, resource endowment, fossil-fuel dependence, etc.,” said Iyer. “However, widely differing standards for emissions calculations causes confusion for investors and lenders, among others.”
Examining the discrepancies between existing various taxonomies in the region, the report identified leaders and laggards. The Singapore-Asia Taxonomy for Sustainable Finance was described as the most comprehensive – covering a broad range of sectors and including detailed thresholds to delineate which activity is permissible.
“The Singapore, Thailand, and Hong Kong taxonomies have the most stringent quantitative criteria – only those with lifecycle emissions under 100 grammes of carbon dioxide per kilowatt-hour are classified as green,” said 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.”
Although China – through the Green Bond Endorsed Projects Catalogue – Hong Kong, Singapore and Thailand all exclude gas financing, most Asian taxonomies are more permissive in that regard. In particular, the report described Indonesia as an “outlier” due to a lenient classification criteria.
“In Indonesia, financing for new and existing coal plants is classified as ‘green’ or ‘transition finance’,” said Iyer. “It also allows for the widespread use of carbon offsets, and assumes the availability and adoption of unproven carbon capture and storage technology. Carbon offsets are generally not an acceptable form of emission reduction for taxonomy purposes.”
As such, Indonesia’s green finance framework contradicts prevailing standards and risks losing credibility globally, he explained.
Multi-fold risk
According to Christina Ng, Managing Director at the Energy Shift Institute, IEEFA’s report echoes many of the fragmentation concerns raised in recent years and discussed at key global forums – including Group of 20 meetings.
“The differences in taxonomies primarily stem from varying national priorities – such as economic growth, industrialisation and energy security – and differing international commitments across the region,” she said. “These priorities influence the objectives of each country’s taxonomy, leading to inconsistencies or unclear criteria.”
Both Indonesia and Japan, for example, prioritise economic growth as a key objective within their frameworks, resulting in activities such as coal power or liquefied natural gas (LNG) blended products being labelled as ‘green’ or ‘transitional’. However, most other taxonomies in the region recognise that sustainable investments must meet climate goals and facilitate economic transformation.
“Investors may struggle with this lack of consistency: an investment deemed sustainable in one country may not be recognised as such in another, leading to confusion and mismatched expectations,” Ng explained. “Navigating multiple, potentially conflicting taxonomies increases the complexity and cost of due diligence, as well as the risk of non-compliance.”
Investors could also inadvertently invest in projects that aren’t environmentally sound, she warned. To mitigate these risks, they should perform due diligence, engage with regulators to push for harmonised taxonomies, and diversify their sustainable investments.
“These challenges can restrict cross-border capital flows: investors may hesitate to enter unfamiliar markets with disparate taxonomies, facing high transaction costs, legal risks, and reputational concerns,” Ng added.
In addition, fragmented taxonomies with unclear standards can encourage greenwashing, with projects labelled ‘sustainable’ despite not meeting stringent criteria. In turn, this fragmentation could hamper the development of a cohesive green finance ecosystem in Asia.
“This can have a negative impact for the countries themselves, as unless they are a sizeable part of the portfolio, the financier may decide to simply look elsewhere rather than spending time decoding activities, given the poor regulatory anchor,” said Iyer.
The IEEFA report noted that a well-designed taxonomy should provide clear definitions and objectives, be interoperable with other taxonomies while accounting for national transition needs, and align with internationally accepted standards. It should also mandate compliance and reporting.
“Well-designed taxonomies can effectively guide investments towards environmentally beneficial activities and foster a sustainable financial ecosystem, ensuring the transition to a greener economy is accelerated, effective, and equitable,” said Iyer. “[This] is crucial for fostering a sustainable financial ecosystem in the region.”
Until international harmonisation between taxonomies is achieved, however, it will likely remain impracticable to mandate them.
Follow the lead
The IEEFA report identified the EU Taxonomy regulation as the most comprehensive framework – the only regime to mandate reporting by corporations.
“The EU Corporate Sustainability Reporting Directive requires companies to disclose their taxonomy alignment, providing a clear framework for accountability,” said Iyer. “Most Asian taxonomies have limited or non-existent mandatory requirements for disclosure.”
While the EU taxonomy delineates six environmental objectives, ensuring comprehensive coverage across sectors, a common shortcoming across Asia is a narrow focus on particular environmental objectives, typically focused on climate risk, with a total disregard to others – such as biodiversity protection and pollution prevention, Iyer explained.
According to Ng, the success of the EU taxonomy is largely due to the strong, centralised institutions that drive policy harmonisation across the bloc, despite diverse national economic contexts.
“Unlike the EU, Asia lacks a centralised regulatory body to enforce a common sustainability framework,” she said. “Asian countries maintain sovereignty over their regulatory systems, further complicating alignment.”
While regulators across the region are already cooperating, additional steps are necessary to effectively address fragmentation, Ng argued. This could include a more proactive involvement from international bodies like the International Organization of Securities Commissions, which could establish a baseline global taxonomy for countries to adhere to – aiming to reduce discrepancies while respecting local nuances.
“An important development on the horizon is the upcoming COP29, where the Central Bank of Azerbaijan is expected to propose a global framework to unify the world’s green and sustainable finance taxonomies,” she added.
The proposal was developed in collaboration with the International Platform on Sustainable Finance, which pioneered the first Common Ground Taxonomy between the EU and China in 2021, as well as the International Finance Corporation’s Sustainable Banking & Finance Network.
Iyer agreed that regulators have a central role to play in helping to align taxonomies – both regionally and globally.
“Regulators can do their bit by making sure the rules they formulate are in line with what is followed and accepted internationally, making it easy for finance to flow to projects in their country,” he said. “Protecting fossil assets by giving them a green or transition label too easily could compromise faith in the system, and thus the ability of truly green projects to raise preferential or cheap finance.”
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