ASEAN Releases Version 2 of the Sustainability Taxonomy for Southeast Asia

On March 27, 2023, the ASEAN Taxonomy Board released Version 2 of the ASEAN Taxonomy for Sustainable Finance (the “ASEAN Taxonomy“). As we reported here, Version 1 of the ASEAN Taxonomy was first published in November 2021 and it was designed to promote the transition towards sustainable finance by the ASEAN member states which, together, comprise the fifth largest economy in the world. 

Version 2 of the ASEAN Taxonomy took into account comments received from stakeholder consultations conducted in mid-2022 and expands on the conceptual thinking of the multi-tiered framework set out in Version 1. The ASEAN Taxonomy is meant to be interoperable with the EU Taxonomy and other national Taxonomies of ASEAN member states. In this Blog Post, we highlight the key aspects of the two assessment approaches as applied in Version 2 of the ASEAN Taxonomy, i.e. the ‘Foundation Framework’ and the ‘Plus Standard’.

Foundation Framework

As we previously reported, any economic activity seeking classification under the ASEAN Taxonomy must:

• contribute to at least one of the four environmental objectives (“EO”), namely (1) climate change mitigation; (2) climate change adaptation; (3) protection of healthy ecosystems and biodiversity; and (4) promotion of resource resilience and transition to circular economy; and

• fulfil the minimum requirements of the three essential criteria (“EC”): (1) not significantly harm any other EO; (2) measures taken to remediate or mitigate the activity’s potential adverse environmental impacts; and (3) an obligation to avoid causing social harm (which is newly incorporated in Version 2 to highlight the importance of social aspects in the ASEAN Taxonomy).

Under Version 2 of the ASEAN Taxonomy, users adopting the principles-based Foundation Framework are able to assess economic activities by using qualitative guiding questions, decision trees and use cases specifically designed for each EO and EC. Following the guiding questions, economic activities will be categorised as either “Green” which clearly contribute to or enable Climate Change Mitigation; “Amber” which contribute to decarbonisation where mitigation of other harm to environmental objectives is necessary; or “Red” which do not contribute to or enable Climate Change Mitigation and/or fail to meet other safeguards.

Plus Standard

Both the Foundation Framework and the more robust Plus Standard use “Green”, “Amber” or “Red” colour codes to classify the activity’s level of contribution to an EO.  The Plus Standard goes further by prescribing technical screening criteria (“TSC”) to categorise economic activities into Tiers 1, 2 or 3. Activities which meet Tier 1 TSC are considered “Green” under the Plus Standard. Activities which meet Tiers 2 or 3 are considered “Amber” under the Plus Standard.

Note, however, that the ASEAN Taxonomy does not provide TSC for all tiers of economic activities. Currently, TSC is available for “Tier 1 Green”, “Tier 2 Amber” or “Tier 3 Amber”. The latter two classifications which refer to activities transitioning to a more sustainable development will gradually “sunset” over time, and the goal is for all activities to transition into “Tier 1 Green”.  

Version 2 of the ASEAN Taxonomy provides the TSC tiers for the energy sector, i.e. the Electricity, Gas, Steam and Air Condition Supply sector, which is one of the six priority sectors identified in Version 1, and the Carbon Capture, Utilisation and Storage enabling sector, which is identified as one of the sectors that have a significant ability to enable other sectors to contribute to the EOs. Companies are required to provide evidence of fulfilment of the EO and the EC (if applicable) under the Plus Standard.

Next Steps

The ASEAN Taxonomy Board is aiming to finalise the TSC for the Energy sector in early 2024, with the TSC for all six priority sectors (as identified in Version 1) to be finalised in phrases by 2025. Also, it is expected that future versions of the ASEAN Taxonomy will establish an assessment mechanism for not only economic activities, but also entities and portfolios based on the aggregation of such activities.

Other Regional Developments

On February 15, 2023, the Green Finance Industry Taskforce (“GFIT”) in Singapore published its final consultation (“Final Consultation”) on the green and transition taxonomy designed for Singapore-based financial institutions (“Singapore Taxonomy”). The current phase of the Singapore Taxonomy is focused on climate change mitigation, and it seeks to align with international taxonomies including the EU Taxonomy and the ASEAN Taxonomy. In our previous blog posts, we discussed the first consultation (here) and second consultation (here) of the Singapore Taxonomy.

The Final Consultation proposes detailed technical criteria for the remaining five of the eight focus sectors identified by GFIT, namely (1) Industry, (2) Information and Communications Technology, (3) Waste & Water, (4) Agriculture & Forestry, and (5) Carbon Capture and Storage.

One key highlight of the Final Consultation is the proposed utilisation of the measures-based approach for the Industry sector in light of the challenges associated with decarbonisation and the lack of certainty of technologically and economically feasible low-carbon alternatives. Under the measures-based approach, an amber category is established for implementing technologies or measures that contribute to emissions reduction, instead of specific economic activities.

Further, GFIT has released a separate public consultation on the “Do No Significant Harm (DNSH)” criteria, which ensure that activities contributing to climate change mitigation do not significantly harm any other environmental objectives of the Singapore Taxonomy.

Following the conclusion of the Final Consultation, GFIT is anticipated to consider feedback received from all three rounds of public consultations and publish the final version of the Singapore Taxonomy by the first half of 2023.

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