Sustainable Finance Taxonomies: A Guide for Developing Asia

BACKGROUND PAPER
Channeling Sustainable Finance:
The Role of Taxonomies
Eugene Wong
DISCLAIMER
This background paper was prepared for the report Asia-Pacific Climate Report 2024. It is made available here
to communicate the results of the underlying research work with the least possible delay. The manuscript
of this paper therefore has not been prepared in accordance with the procedures appropriate to formallyedited texts.
The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views
of the Asian Development Bank (ADB), its Board of Governors, or the governments they represent. ADB
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i
Channeling Sustainable Finance:
The Role of Taxonomies
Eugene Wong
Sustainable Finance Institute Asia
Note: In this report, “$” refers to United States dollars.
CONTENTS
CONTENTS ................................................................................................................................. i
LIST OF TABLES, FIGURES, BOX............................................................................................. ii
ABBREVIATIONS ...................................................................................................................... iii
ABSTRACT ................................................................................................................................ iv
I.
INTRODUCTION ............................................................................................................. 1
II.
UNDERSTANDING TAXONOMIES................................................................................. 3
A.
Defining Taxonomies ....................................................................................................... 3
B.
Transition in Taxonomies ................................................................................................ 8
C. The Need for Taxonomies ..............................................................................................13
III.
THE RISE OF SUSTAINABLE FINANCE TAXONOMIES IN DEVELOPING ASIA .........17
A.
Comparison of Key Design Elements .............................................................................18
1.
Taxonomy Objectives .................................................................................................18
2.
Sector Coverage .........................................................................................................21
3.
Climate Ambitions and Decarbonization Pathways Referenced for Taxonomy
Assessments .....................................................................................................................23
4.
B.
Other Eligibility Criteria and Perspective on Technology .............................................25
Assessments ..................................................................................................................28
IV.
TAXONOMY GOVERNANCE .........................................................................................32
V.
ADDRESSING AND NAVIGATING THE INFLUENCE OF MULTIPLE TAXONOMIES ...32
A.
One Activity, Multiple Taxonomies ..................................................................................32
B.
Challenges in Developing and Implementing Taxonomies and Policy Approaches .........35
VI.
CONCLUSION ...............................................................................................................41
APPENDIX: ILLUSTRATION OF THE GOVERNANCE STRUCTURE OF FIVE TAXONOMIES
ANALYZED ...............................................................................................................................42
SELECTED REFERENCES ......................................................................................................44
i
LIST OF TABLES, FIGURES, BOX
Tables
Table 1: Overview of Official Taxonomy Approaches ................................................................12
Table 2: Comparison of Environmental Objectives ....................................................................18
Table 3: Additional Taxonomy Characteristics ..........................................................................26
Table 4: ISIC 351 (Electric Power Generation, Transmission, and Distribution) Thresholds ......29
Figures
Figure 1: Types of Taxonomies .................................................................................................. 4
Figure 2: Comparison of Multiple Classifications in Taxonomies ................................................ 7
Figure 3: Broad Users and Uses Identified ................................................................................16
Figure 4: Taxonomy Building Blocks .........................................................................................17
Figure 5: Coverage of Mongolia SDG Taxonomy ......................................................................20
Figure 6: Comparison of Taxonomy Sectoral Coverage ............................................................22
Figure 7: References to the Paris Agreement and Nationally Determined Contributions in
Taxonomy Application ...............................................................................................................25
Figure 8: Comparison of Coal Phase-Out Criteria .....................................................................31
Figure A1: ASEAN Taxonomy and European Taxonomy Development Governance Structures
.................................................................................................................................................42
Figure A2: Singapore Taxonomy and Malaysia Climate Change and Principle-Based Taxonomy
Governance Structures .............................................................................................................43
Figure A3: Indonesia Taxonomy Governance Structure ............................................................43
Box
Box 1: Importance of Addressing Transition through Taxonomies—How the ASEAN Taxonomy
Facilitates Inclusivity and Transition ..........................................................................................10
ii
ABBREVIATIONS
AMS
ASEAN Member States
ASEAN
Association of Southeast Asian Nations
BNM
Bank Negara Malaysia
BSP
Bangko Sentral ng Pilipinas
CCUS
carbon capture, utilization, and storage
CCPT
Climate Change and Principle-Based Taxonomy
CPO
coal phase-out
CGT
Common Ground Taxonomy
DNSH
do no significant harm
IEA
International Energy Agency
ILO
International Labour Organization
ISIC
International Standard Industrial Classification
MAS
Monetary Authority of Singapore
NDCS
Nationally Determined Contribution
NACE
Nomenclature generale des Activities economiques dans
OECD
Organisation for Economic Co-operation and Development
OJK
Otoritas Jasa Keuangan (Financial Services Authority of Indonesia)
RMT
Remedial Measures to Transition
SDGs
Sustainable Development Goals
SDS
Sustainable Development Scenario
SRI
Sustainable and Responsible Investment
TSC
Technical Screening Criteria
THI
Indonesia Green Taxonomy
iii
ABSTRACT
Taxonomies are increasingly gaining prominence as a powerful tool for classifying sustainable
activities to guide action, especially in orienting capital. Understanding taxonomies and the role
they play is important for all stakeholders, including policymakers, investors, and real economy
participants. The paper examines the various official taxonomies in developing Asia, referencing
them to other taxonomies where relevant, providing insights into the characteristics of existing
taxonomies and the approaches that they take. It explains how taxonomies should be designed,
navigated, used, and made interoperable as well as the challenges faced in taxonomy
implementation. Taxonomies reflect national ambitions not just in environmental goals but also
economic and social goals. Transition taxonomies can provide guidance for users with different
starting points on using different pathways to reach the same agreed or pledged destination. This
helps ensure that the orientation of capital and sustainability agenda goals are not misaligned.
Taxonomies are a link between the financial sector and the real economy and need to be able to
engender a “whole of economy” approach. As such, there is a need to incorporate the input of all
relevant stakeholders. There are six key dimensions that are critical for a taxonomy’s success: (i)
relevance; (ii) comprehensiveness; (iii) usability; (iv) robustness of ambition, or ability of an
economy to meet its goals; (v) interoperability and equivalence; and (vi) future-proofed.
Challenges exist in creating a taxonomy, as well as in implementing it, such as capacity,
availability of data, and jurisdictional readiness. However, these should not stop the introduction
of taxonomies as these challenges can be overcome with time and experience.
Key words: sustainable, financing, climate, carbon-neutral, transition, transition finance,
Sustainability Taxonomy, Transition Taxonomy, Green Taxonomy, Social Taxonomy, energy,
transportation and storage, construction and real estate, agriculture, manufacturing, water,
mining, carbon capture, information and communication, Paris Agreement
iv
I.
INTRODUCTION
With the impacts of climate change becoming more prominent by the day and the clock ticking,
directing resources to address this challenge is critical. The finance sector plays a vital role in
scaling up climate action. In a high-emissions scenario, developing Asia could face gross
domestic product (GDP) losses of 24% due to climate change (ADB 2023a). Developing Asia will
need $13.8 trillion in financing from 2023 to 2030 to sustain economic growth, reduce poverty,
and respond to climate change. The Association of Southeast Asian Nations (ASEAN) alone
would need $3.1 trillion of infrastructure investments when adjusted for climate (ADB 2023b). At
the same time, the United Nations Sustainable Development Goals (SDGs) are also progressing
slower than needed.
In orienting capital toward sustainability and sustainable economic activities, including climate
action, the important question of where financing should be directed and what would qualify for
financing and investment to meet the sustainability agenda has arisen. This has resulted in the
return to a familiar solution adopted in biology to classify organisms, “taxonomies.”
Taxonomies can be described in simple terms as comprehensive classification systems. There
exists a plethora of official and private taxonomies that have been developed and issued. As of
March 2024, more than 50 official taxonomies (national and regional) have been developed or
are in development, with more in the form of proprietary taxonomies belonging to significant
private sector entities. This potentially brings the number of taxonomies related to sustainability
to over 200, ranging from proprietary and market taxonomies to widely referenced official
taxonomies. Initially, sustainability and green definitions were less comprehensive and
sophisticated, with the market providing broad principles and/or criteria, which were less complete
and consistent. The consistency in the market’s approach improved considerably with the
issuance of the Green Bond Principles by the International Capital Market Association in 2014,
followed by the Social Bond Principles and Sustainability Bond Guidelines.
However, this suite of principles provided broad guidance and as such, did not incorporate specific
eligibility criteria. At the same time, the early forms of taxonomies began to emerge, such as
Climate Bond Initiative’s Green Taxonomy (in 2013), which focused solely on climate change
mitigation and was used for certification purposes; and the People’s Republic of China (PRC)
China Green Bond Endorsed Projects Catalogue 2015 Edition (PRC Catalogue 2015) in 2015,
which applied to green bond issuances by financial institutions in the PRC. Additionally, the
1
Multilateral Development Bank–IDFC Common Principles for Climate Mitigation Finance Tracking
Version 2 was published in 2015. In 2018, the European Commission established the Technical
Expert Group on Sustainable Finance to assist in developing the European Union (EU) Taxonomy
for Sustainable Activities (EU Taxonomy), which came into force in 2020 (European Commission
2020).
Taxonomies are normally not standalone solutions but are part of an ecosystem. For instance,
the EU Taxonomy is one of the cornerstones of the EU Sustainable Finance Framework with
Disclosures and Tools being the other two, while ASEAN’s Sustainable Finance Ecosystem has
three pillars: taxonomy, transition finance frameworks, and disclosure.
Taxonomies can provide a common language in identifying sustainable activities. In reflecting the
principle of “common but differentiated responsibilities,” adhered to in the Paris Agreement, a
common but differentiated approach for taxonomies needs to be considered. This means that a
taxonomy’s approach and assessment criteria may also need to be jurisdictionally contextualized
to address national circumstances, including the different starting points, economic and social
circumstances, and resources. Jurisdictional contextualization has resulted in the proliferation of
taxonomies, making it essential to embed interoperability into the design of a taxonomy.
Alternative approaches to sustainable finance taxonomies for providing guidance in identifying
sustainable activities are also being used. These include the Japan Sector Roadmaps, which
provide definitive directions for transition toward achieving carbon neutrality in 2050 for
greenhouse gas (GHG)-intensive industries, developed by the Ministry of Economy, Trade and
Industry of Japan. The Japan Sector Roadmaps describe the technologies required to achieve
carbon neutrality in challenging sectors by 2050. They are annexed to Japan’s Basic Guidelines
on Transition Finance, which serve as a reference for companies looking to raise funding using
transition bonds and/or loans.
Given the important role of taxonomies, it is important to understand how they should be designed,
how to navigate them, who should use them, how they should be used, and how they can be
interoperable. This paper explores the landscape for a selection of official taxonomies in
developing Asia,1 referencing them to other taxonomies where relevant.
1
This paper explores only official taxonomies. The Climate Bonds Initiative Taxonomy can be referenced as a
proprietary or market taxonomy with international application.
2
II. UNDERSTANDING TAXONOMIES
A.
Defining Taxonomies
A sustainable finance taxonomy is a comprehensive classification system that clearly defines
which activities or projects are eligible for financing or investment based on criteria that meet the
sustainability objectives of the taxonomy. Sustainable finance taxonomies can have a variety of
configurations to meet specific needs. As such, it is difficult to rigidly and narrowly categorize
taxonomies; instead, taxonomies are best defined by the key outcomes that they are intended to
achieve and the approaches that they take.
There are five features of taxonomies that have been issued or are currently under development:
(i)
Feature 1: Elements addressed. Sustainable finance taxonomies can cover different
elements of sustainability as described in Figure 1. It should be noted that a taxonomy
could include varying degrees of each of these elements and is not restricted to only
one element. For instance, a Green taxonomy may have social and transition elements
and a Transition taxonomy may emphasize “just” transition that gives weight to social
aspects. As such, while a taxonomy can be classified based on its predominant
element(s), it should not be “boxed in” as only containing that element. In addition,
elements such as transition can be interpreted differently. For instance, the EU
Taxonomy includes activities that are not considered as “green” or “sustainable”, but
have no technologically or economically feasible low-carbon alternatives as
transitional activities if they meet certain criteria.
At the same time, the Association of Southeast Asian Nations (ASEAN) Taxonomy
for Sustainable Finance (ASEAN Taxonomy) incorporates transition by applying a
multitiered threshold approach to allow a transition pathway for economic activities.
In practice, transition taxonomies are generally taken to mean taxonomies that
explicitly support and facilitate transition, for instance, by having a specific transition
category or multiple thresholds for their Technical Screening Criteria (TSC), such as
Bank Negara Malaysia’s (BNM) Climate Change and Principle-Based Taxonomy
(CCPT) and the Principles-Based Sustainable and Responsible Investment
Taxonomy (SRI Taxonomy) of Securities Commission Malaysia; the ASEAN
Taxonomy; the Singapore-Asia Taxonomy (Singapore Taxonomy); Thailand
Taxonomy Phase 1 (Thailand Taxonomy); Indonesia Taxonomy for Sustainable
3
Finance; and the Philippine Sustainable Finance Taxonomy Guidelines (Philippines
Taxonomy). One way of describing taxonomy elements is provided in Figure 1.
Figure 1: Types of Taxonomies
Source: Author analysis.
The PRC Green Bond Endorsed Projects Catalogue 2021 Edition (PRC Catalogue)
and Mongolia Green Taxonomy address climate and environmental aspects
independently of social aspects.
The EU Taxonomy has been described by some as being a “binary” green taxonomy
in nature, as there is only a single threshold to determine whether an activity is aligned
to the EU Taxonomy. On the other hand, in the ASEAN Taxonomy, there can be
multiple thresholds for each economic activity that results in different taxonomy
classifications, rather than only one classification that qualifies.
It is important to point out that under the EU Taxonomy, to be “taxonomy-eligible”, an
economic activity should substantially contribute to at least one of the six
4
environmental objectives of the EU Taxonomy. If it further meets the relevant TSC,
satisfies the do no significant harm (DNSH) test, and complies with the minimum
social safeguards requirement, then it is categorized as “taxonomy-aligned.”
However, in this paper, “taxonomy-eligible” is defined as an economic activity that
contributes to at least one taxonomy objective and satisfies the relevant criteria to be
classified as Green, Amber, or their equivalents under the relevant taxonomy. This
includes economic activities that are specifically listed or recognized as taxonomyeligible in a taxonomy, as discussed below.
The EU and ASEAN taxonomies cover more than just climate objectives and include
criteria that prevent harm to other environmental objectives as well as social aspects.
(ii)
Feature 2: Whitelist and performance outcome-based taxonomies. Some
taxonomies are based on the performance outcomes of economic activities (ASEAN,
the EU, the Republic of Korea), and are referred to as TSC-based or principles-based
taxonomies (as relevant). Others prescribe what is eligible for investments
(Bangladesh, the PRC, Kazakhstan, Mongolia) and are referred to
as Whitelist
taxonomies. Some taxonomies have Redlists, which specify excluded or ineligible
activities. Performance outcomes-based taxonomies are generally technology-neutral
(although some may reference technologies), while Whitelists do refer to specific
technologies.
(iii)
Feature 3: Principles-based vs TSC-based. Performance outcomes-based
taxonomies can either be principles-based or TSC-based. A principles-based
taxonomy uses broad principles to classify economic activities. Examples of this
5
include the Philippines Taxonomy, both Malaysia taxonomies (CCPT and SRI), as well
as the Foundation Framework of ASEAN Taxonomy. The Indonesia Taxonomy also
incorporates a principles-based component. Principles-based frameworks are useful
in helping users who do not have sufficient data to use a TSC frame in starting to
classify their economic activities in broad, predefined terms. Assessments under
taxonomies that use TSC apply a variety of quantitative and qualitative thresholds.
Qualitative thresholds include compliance with processes or practices. Principlesbased taxonomies need to provide sufficient guidance in their use so that the results
produced are consistent and credible. Principles-based taxonomies have the
advantage of ease of use and rapid deployment, providing a means to start addressing
taxonomy objectives faster. However, to meet specific targets, TSC will be needed.
(iv)
Feature 4: Economic activity vs financial instruments vs entity assessments.
The application of taxonomies can be at the economic activity level, entity level, or
financial instruments. For instance, the PRC Catalogue and the Mongolia (Green and
SDG) taxonomies apply at the financial instruments level. The taxonomies of ASEAN;
EU; Hong Kong, China; Indonesia; Malaysia (CCPT and SRI); the Philippines;
Singapore; South Africa; and Thailand operate at the economic activity level. In
addition, through activity aggregation methodologies, the EU, Singapore, and South
Africa taxonomies allow the activity level assessments to be translated into entity-level
assessments.
(v)
Feature 5: Single classification vs multiple classifications. Taxonomies can adopt
an approach where an activity is either taxonomy-eligible or not; based on whether a
TSC is met (e.g., EU and South Africa taxonomies); or if it is listed as eligible (the PRC
and Mongolia). Alternatively, under a taxonomy, an activity can have more than one
6
classification based on the criteria that it meets (ASEAN, Singapore, and Thailand).
The Traffic Lights approach is a common example of a multiclassification approach
using the common categories of Green (meets ambition or criteria), Amber
(transitioning), and Red (ineligible). Some taxonomies extend the concept by using a
wider classification system; for example, BNM’s CCPT, which has five categories,
while others may have fewer classifications, such as the Indonesia Taxonomy with
only Green or Transition. Multiple classifications are helpful in providing an avenue to
incorporate transition into taxonomies as seen in Figure 2.
Figure 2: Comparison of Multiple Classifications in Taxonomies
ASEAN= Association of Southeast Asian Nations, CCPT = Climate Change and Principles-Based, TSC = Technical
Screening Criteria.
Note: Classification of C1 to C5 in the CCPT is based on how an activity meets the criteria of the Guiding Principles.
Sources:
ASEAN Taxonomy Board. 2024. ASEAN Taxonomy for Sustainable Finance Version 3;
Bank Negara Malaysia. 2021. Climate Change and Principle-Based Taxonomy;
Financial Services Authority of Indonesia (OJK). 2024. Indonesia Taxonomy for Sustainable Finance;
Securities and Exchange Commission of the Philippines. 2024. Guidelines on the Philippine Sustainable Finance
Taxonomy.
The growth in the number of taxonomies has been underpinned by the need and desire to cater
to local specificities and serve specific objectives, including national priorities and agendas as
reflected in the features of the selected taxonomies. As the purpose of a taxonomy includes
7
promoting capital flow toward specific themes, separate taxonomies can be developed for
separate themes. Mongolia developed an SDG Finance Taxonomy following on from the
Mongolia Green Taxonomy to specifically encourage investments into SDG-aligned activities and
the creation of incentives to support those capital flows. The Mongolia SDG Taxonomy will
eventually replace the Mongolia Green Taxonomy. The Securities Commission Malaysia created
its SRI Taxonomy, following on from BNM’s CCPT, with additional emphasis on social aspects.
Taxonomies can have either mandatory application, such as in the PRC or the EU, or be
voluntary, such as in the Republic of Korea and ASEAN region. Financial institutions under BNM
are required to report under the CCPT while the Central Bank of Mongolia and the Financial
Regulatory Commission of Mongolia require financial institutions to report against the Mongolia
Green Taxonomy.
Taxonomies may opt to combine assessment frameworks to provide more useful assessment
coverage. As such, taxonomies may contain a combination of principles-based, TSC-based, as
well as Redlist and Whitelist assessment frameworks.
B.
Transition in Taxonomies
It is unrealistic to decarbonize immediately due to hard-to-abate sectors, economic activities with
no technologically and economically feasible low-carbon alternatives, infrastructure bottlenecks,
and the risk of economic and social dislocations for economies that are not sufficiently resourced
or prepared. As such, transition is necessary. A transition can be said to be the intersection of
ambition and reality that, in the case of climate change action, can provide a realistic pathway for
successful decarbonization. Countries, as well as companies, have different starting points and
as such, it is important to provide different pathways to accommodate the different starting points
toward a common end goal.
There are activities that support the transition to a climate-neutral economy and those that enable
activities to contribute substantially to environmental objectives—although they themselves do
not substantially contribute to any environmental objectives. While there is presently no globally
accepted standard for what constitutes a credible transition activity, incorporating a pathway for
transition into taxonomies has become increasingly common to ensure that taxonomies better
reflect the reality on the ground. The incorporation of transition into taxonomies often results in a
8
specific Amber classification, particularly in a Traffic Lights approach, as discussed previously,
being applied.
All taxonomies in the ASEAN region incorporate specific transition categories, making them
Transition taxonomies (Box 1).
Apart from recognizing transition categories specifically, allowing for a grace period to rectify any
residual harm caused to a taxonomy objective in pursuit of another can support transition efforts.
In the ASEAN Taxonomy, this is known as Remedial Measures to Transition (RMT). It should be
emphasized that the ASEAN Taxonomy has found it important enough to include RMT as an
essential criterion to enable activities that substantially contribute to one of its objectives, despite
creating residual harm to another while ensuring that this unintended consequence can be
remedied within an appropriate period. The Indonesia, Malaysia (CCPT and SRI), and Philippines
taxonomies have also applied RMT in a similar manner to the ASEAN Taxonomy. Under the
Thailand Taxonomy, any activity that does not meet its DNSH criteria, but meets the relevant
TSC, may be considered eligible under either the Green or Amber category if the company
provides a plan on how the deficiencies will be remedied within 3 years.
The Singapore Taxonomy does not include allowance for RMT. Instead, in addition to having an
Amber classification, the Singapore Taxonomy introduced the concept of “Amber Measures”,
which are measures that do not meet the Amber activity thresholds but enable an activity to
improve and align with “Green or “Amber” over a defined period. This is, however, limited to
certain sectors. It is worthwhile noting that in the Singapore Taxonomy, DNSH criteria is included
as a best practice and is not a requirement for an activity to be taxonomy-eligible.
Unlike the ASEAN Taxonomy and ASEAN Member States (AMS) national taxonomies,2 the EU
Taxonomy does not include a specific transition category. Instead, transition activities in hard-toabate sectors (e.g., electricity generation from fossil gaseous fuels) that do not hamper the
development or deployment of low-carbon alternatives are included and classified as taxonomyeligible for a limited period under certain conditions. It should be noted that the EU had previously
consulted on extending the taxonomy to include transition and immediate performance levels
while Australia and Canada are developing transition taxonomies.
2
The AMS national taxonomies comprise the Indonesia, Malaysia, Philippines, Singapore, and Thailand taxonomies.
9
Box 1: Importance of Addressing Transition through Taxonomies—How the ASEAN
Taxonomy Facilitates Inclusivity and Transition
In charting the sustainability journey for the Association of Southeast Asian Nations (ASEAN), it is
crucial to consider the diverse circumstances of ASEAN Member States (AMS) and the challenge
this poses in developing a regional taxonomy, which is to act as a common language for sustainable
finance. ASEAN Member States are at varying stages of development and have different economic
and social structures as well as resources, resulting in different starting points and the need for
different pathways.
At the time the ASEAN Taxonomy was being developed, gross domestic product (GDP) per capita
per annum of AMS ranged from $1,286 to $59,785. In 2022, the range stood at $1,161–$82,795. In
addition, ASEAN did not (and still does not) have a regional net zero target date, and there are
variations to each AMS’ ambition. These challenges presented the need for a carefully considered
approach in developing a sustainable finance classification framework that was inclusive yet aligned
to meet Paris Agreement goal with a 1.5ºC ambition.
A multitiered approached, both in the
assessment frames as well as in the Technical Screening Criteria (TSC), was envisaged to address
the needs of ASEAN to allow for different starting points and journeys but with the aim of reaching
the same goal.
The ASEAN Taxonomy explicitly incorporates transition in the following manner:
•
Incorporate two frames for assessment, the Foundation Framework (principles-based frame)
and Plus Standard (TSC-based frame) to allow AMS with different states of readiness and
data availability to immediately commence their transition journey.
•
Apply a traffic-lights system in both the Foundation Framework and Plus Standard to enable
a multiclassification approach that provides a distinct Amber classification for transition
activities.
•
Translate the Traffic Lights system into a multitiered approach for TSC that includes a Green
Tier reflecting the taxonomy’s climate ambition, which is, wherever possible, benchmarked
to the EU Taxonomy together with two tiers carrying Amber classifications that provide a
progressive pathway to transition toward Green. All current AMS national taxonomies also
include an Amber or Transition Tier.
●
Include the concept of Remedial Measures to Transition to provide real economy participants
with the opportunity to progress on a pathway to Green while being allowed a specified
timeframe to incorporate remediation measures to mitigate the residual harm caused to an
environmental objective in the pursuit of another.
Source: Author’s analysis.
10
When incorporating transition into taxonomies, it is important to ensure that lock-ins and
backloading are appropriately addressed. One concern is that having a transition category would
result in carbon lock-ins as investments are directed toward improving high-emitting assets
(OECD 2022a). Taxonomy safeguards such as the sunsetting of transition tiers after a period can
play a meaningful role in avoiding lock-ins as it will propel users to improve the performance of
their activities, over that period, toward the Green performance level. Through sunsetting,
transition TSCs will expire after a certain period. In addition to sunsetting, scheduled threshold
resets, where thresholds are reset to more stringent levels prior to the sunset date of a transition
tier, also help ensure a move toward the Green performance level to discourage backloading.
Apart from sunsetting and scheduled threshold resets, taxonomies that are developed as living
documents will also see the criteria initially set change over time due to advancements in
scientific, technological, and economic circumstances and become progressively more stringent
to promote a pathway to Green.
While sunsetting is an important safeguard for Transition taxonomies, the need for certainty
amidst changing thresholds for investors and financiers needs to be addressed. An approach
used is grandfathering, which is or is planned to be addressed in ASEAN, the EU, Indonesia, and
South Africa. Grandfathering allows financial instruments that are taxonomy-eligible to retain their
classification for a certain period, notwithstanding a change in the applicable TSC. Grandfathering
can provide certainty to the market on the treatment of financial instruments and ease volatility
concerns in using taxonomies (GTAG 2023). In the ASEAN Taxonomy, the mechanisms of
sunsetting and grandfathering working in concert was designed to allow AMS to reflect their
national priorities by extending or limiting sunset dates when applying the ASEAN Taxonomy,
resulting in individual glidepaths. The Singapore Taxonomy, however, contains provisions that
directly sunsets Amber activities, resulting in an existing classification becoming ineligible after
sunsetting.3
Taxonomies may also encapsulate activities to avoid future emissions as part of the
decarbonization objective and to support transition. For instance, given the region’s reliance and
commitments on coal, the early retirement of coal-fired power plants or coal phase-out (CPO) is
specifically catered for in several taxonomies in the ASEAN region. The frameworks used by, and
approaches to transition, for a selection of taxonomies are provided in Table 1.
3
The guidance on Amber activities on page 20 of the Singapore-Asia Taxonomy provides that at the sunset date the
activity must either follow the Green criteria or be taxonomy-ineligible.
11
Table 1: Overview of Official Taxonomy Approaches
Taxonomy
Assessment
Framework
Issuer
Taxonomy Type
ASEAN Taxonomy for
Sustainable Finance
ASEAN Taxonomy Board
Sustainability Taxonomy;
Transition Taxonomy
Indonesia Taxonomy for
Sustainable Finance*
Otoritas Jasa Keuangan (Financial
Services Authority of Indonesia)
Sustainability Taxonomy;
Transition Taxonomy
Malaysia Climate Change and
Principle-Based Taxonomyb
Bank Negara Malaysia
Transition Taxonomy
Malaysia Sustainable and
Responsible Investment
Taxonomy
Securities Commission Malaysia
Sustainability Taxonomy;
Transition Taxonomy
Philippine Sustainable Finance
Taxonomy
Financial Sector Forum
Sustainability Taxonomy;
Transition Taxonomy
Singapore-Asia Taxonomy
Green Finance Industry Taskforce
Sustainability Taxonomy;
Transition Taxonomy
Thailand Taxonomy Phase 1
Thailand Taxonomy Board
Sustainability Taxonomy;
Transition Taxonomy
Hong Kong Taxonomy for
Sustainable Finance
Hong Kong Monetary Authority
Green Taxonomy
PRC Green Bond Endorsed
Projects Catalogue 2021
Edition
People’s Bank of China, National
Green Taxonomy
Development and Reform Council, China
Securities Regulatory Commission
Republic of Korea Green
Taxonomy
Ministry of Environment
Sustainability Taxonomy
Mongolia Green Taxonomy
Financial Stability Commission of
Mongolia
Green Taxonomy
Mongolia Sustainable
Development Goals Taxonomy
Bank of Mongolia, Deposit Insurance
Corporation of Mongolia
Sustainability Taxonomy
Bangladesh Sustainable
Finance Policy
Bangladesh Bank
Sustainability Taxonomy
Kazakhstan Green Taxonomy
Ministry of Industry and Infrastructure
Development
Green Taxonomy
European Union Taxonomy for
Sustainable Activities
European Commission
Sustainability Taxonomy
Sustainable Taxonomy of
Mexico
Ministry of Finance and Public Credit
Sustainability Taxonomy
South African Green Finance
Taxonomy
Taxonomy Working Group, as part of
South Africa’s Sustainable Finance
Initiative, chaired by National Treasury.
Sustainability Taxonomy
Principles-based
Whitelist
TSC-based
Redlist
SDG = Sustainable Development Goals, THI = Indonesia Green Taxonomy, TSC = Technical Screening Criteria.
a
The Indonesia Taxonomy refers to the predecessor Indonesia Green Taxonomy (THI) for matters not covered by
the Indonesia Taxonomy for Sustainable Finance. The THI includes a Redlist.
b
Financial institutions are encouraged to refer to Bank Negara Malaysia’s Value-based Intermediation Financing and
Investment Impact Assessment Framework sectoral guides for more detailed guidance to conduct Environmental,
Social and Governance impact assessments in specific sectors
Sources: Author analysis of
ASEAN Taxonomy Board. 2024. ASEAN Taxonomy for Sustainable Finance Version 3;
Astana International Financial Center. 2021. Kazakhstan Green Taxonomy;
12
Bank Negara Malaysia. 2021. Climate Change and Principle-Based Taxonomy;
Bank of Thailand. 2023. Thailand Taxonomy Phase 1;
Bangladesh Bank. 2020. Sustainable Finance Policy for Banks and Financial Institutions;
European Commission. 2020. Taxonomy: Final Report of the Technical Expert Group on Sustainable Finance;
Financial Services Authority of Indonesia (OJK). 2022. Indonesia Green Taxonomy Edition 1.0;
Financial Services Authority of Indonesia (OJK). 2024. Indonesia Taxonomy for Sustainable Finance;
Government of the Republic of South Africa. 2022. South African Green Finance Taxonomy. 1st ed.
Hong Kong Monetary Authority. 2024. Hong Kong Taxonomy for Sustainable Finance;
Ministry of Environment of Korea. 2021. The Korean Green Taxonomy;
Ministry of Finance and Public Credit Mexico. 2023. Sustainable Taxonomy of Mexico;
Monetary Authority of Singapore. 2023. Singapore-Asia Taxonomy for Sustainable Finance;
Mongolian Sustainable Finance Association. Mongolia’s Sustainable Finance Journey & SDG Taxonomy;
Mongolian Sustainable Finance Association. 2019. Mongolia Green Taxonomy.
National Treasury; People’s Bank of China. 2021. Green Bond Endorsed Projects Catalogue;
Securities and Exchange Commission of the Philippines. 2024. Guidelines on the Philippine Sustainable Finance
Taxonomy;
Securities Commission Malaysia. 2022. Principles-Based Sustainable and Responsible Investment Taxonomy.
C.
The Need for Taxonomies
Taxonomies serve many purposes and there are various ways a taxonomy can be used by
different users. The array of uses of a taxonomy would depend on its design and its place in the
sustainable finance ecosystem. Taxonomies help with the following:
(i)
Providing consistent language and reference for different stakeholders. The
primary purpose of taxonomies is to help direct capital toward sustainable activities
that align with the relevant taxonomy’s objectives, such as environmental objectives.
They provide common language for various stakeholders including investors, lenders,
real economy participants, and governments. Different groups of users can use the
same taxonomy to meet their individual needs. Investors can invest based on
taxonomy-eligible activities and banks can use a taxonomy’s criteria in providing loans
and setting conditions for them. A taxonomy can help in financial product creation and
the creation of asset classes. In addition, policymakers can use a taxonomy to set out
policies to promote activities that contribute to the relevant taxonomy objectives (see
below). Taxonomies help providers of capital make more informed decisions in a
simpler way.
As a common language, taxonomies help lower transaction costs, such as due
diligence cost for investors, and can increase confidence to invest or finance. Without
a common language, investors and lenders would need to carry out additional due
diligence to understand an investment or funding opportunity. This can be a
disincentive to providing capital. Given the urgent need for investment into climate
13
change action, the absence of a credible taxonomy would result in reduced and
delayed action. Importantly, taxonomies help link the financial sector and the real
economy in relation to the sustainability agenda by guiding how the real economy can
be financed in line with a sustainability or climate action agenda. For this reason,
taxonomies must be designed with input from the real economy. Having a common
language also reduces operational costs by identifying sustainable activities and
harmonizing sustainability targets across various user groups. This is very important
in helping drive a whole economy approach to sustainability as disparate action can
lead to fragmentation.
(ii)
Helping businesses and project owners understand what they need to do to be
eligible for sustainable financing. Real economy participants are often uncertain as
to what they need to do to align to sustainability goals and to access financing. They
can use a taxonomy to assess their sustainability performance to provide investors
and financiers with better information to aid decision making processes. They can also
be guided by a taxonomy in shaping their operational and technological
transformations and investments.
(iii)
Supporting risk management and strategic decision-making. A taxonomy can be
used to provide benchmarks in risk and opportunity analysis to understand risks
including impairment, stranding, and greenwashing, as well as to identify and assess
opportunities. The use of a taxonomy can also reduces greenwashing by providing
credible benchmarks.
(iv)
Converting undertakings and pledges, such as the Paris Agreement or national
pledges, into tangible action including by guiding government policy and
market action. A taxonomy can help articulate the obligations of a country into clear
targets. This articulation can help with government policy, including investment road
maps, criteria for qualification for subsidies and incentives, and support for
government climate action programs. In the case of taxonomies catering to a diverse
group like the ASEAN Taxonomy, an overarching taxonomy can provide a frame for
users with different starting points to take different pathways to reach the same agreed
or pledged destination. Without such guidance, the orientation of capital and
sustainability agenda goals may be misaligned.
14
The development of taxonomies accounts for the needs and capabilities of the taxonomy
jurisdiction. Taxonomies of developed countries like the EU and the Republic of Korea were
designed to support the EU Green Deal and the Korean Green New Deal, respectively. The PRC
Catalogue is aimed at, inter alia, building a green financial system, supporting structural
transformation, and facilitating sustainable economic growth in line with its net zero target. In all
three cases, the taxonomy design aligned to the jurisdictional starting points, goals, and
capabilities. In ASEAN, the economic and social conditions and resource availability necessitated
transition to be a key feature.
Figure 3 provides an overview of the key users and uses identified across official taxonomies. It
should be noted that the more comprehensive, credible, and relevant a taxonomy is, the more
uses may unfold. For instance, prudential regulators may use taxonomies for risk and capital
adequacy assessments, banks may price loans based on taxonomies, trade agreements and
rules may refer to taxonomies, and taxonomies may be referenced for imports.
As an illustration of user needs impacting taxonomy design, in Indonesia and the Philippines, a
simplified principles-based framework has been introduced to accommodate micro, small, and
medium-sized enterprises (MSMEs) and small and medium-sized enterprises (SMEs)
respectively, which make up approximately 99% of business establishments in those countries.4
Usability is an important consideration for developing countries owing to the lack of data and/or
capability to carry out more detailed TSC-based assessments. Additionally, as SMEs and MSMEs
make up approximately 97% of the ASEAN economy, this group must be part of the efforts for
the region to reach its decarbonization goals. In this instance, in ensuring usability to cater to its
diverse user base, both in terms of countries and businesses, the ASEAN Taxonomy provides a
choice of two alternative assessment frames—a principles-based frame, i.e., the principles-based
(Foundation Framework) and a TSC-based frame, i.e., the Plus Standard—for assessments to
ensure that every member state and business has a frame that can be used immediately
(principles-based) with the eventual goal of adopting the TSC-based frame.
4
In Indonesia, a principles-based approach as well as simplified DNSH and Social Aspects criteria for MSMEs are
provided. In the Philippines, a simplified approach for MSMEs in assessing activities is provided.
15
Figure 3: Broad Users and Uses Identified
Sources: Author analysis of
ASEAN Taxonomy Board. 2024. ASEAN Taxonomy for Sustainable Finance Version 3;
Astana International Financial Center. 2021. Kazakhstan Green Taxonomy;
Bank Negara Malaysia. 2021. Climate Change and Principle-Based Taxonomy;
Bank of Thailand. 2023. Thailand Taxonomy Phase 1;
Bangladesh Bank. 2020. Sustainable Finance Policy for Banks and Financial Institutions;
European Commission. 2020. Taxonomy: Final Report of the Technical Expert Group on Sustainable Finance;
Financial Services Authority of Indonesia (OJK). 2022. Indonesia Green Taxonomy Edition 1.0;
Financial Services Authority of Indonesia (OJK). 2024. Indonesia Taxonomy for Sustainable Finance;
Hong Kong Monetary Authority. 2024. Hong Kong Taxonomy for Sustainable Finance;
Ministry of Environment of Korea. 2021. The Korean Green Taxonomy;
Ministry of Finance and Public Credit Mexico. 2023. Sustainable Taxonomy of Mexico;
Monetary Authority of Singapore. 2023. Singapore-Asia Taxonomy for Sustainable Finance;
Mongolian Sustainable Finance Association. Mongolia’s Sustainable Finance Journey & SDG Taxonomy;
National Treasury; People’s Bank of China. 2021. China Green Bond Endorsed Projects Catalogue;
Republic of South Africa. 2022. South African Green Finance Taxonomy 1st Edition.
Securities and Exchange Commission of the Philippines. 2024. Guidelines on the Philippine Sustainable Finance
Taxonomy;
Securities Commission Malaysia. 2022. Principles-Based Sustainable and Responsible Investment Taxonomy.
Developing countries may also need to address internal social vulnerabilities. Taking the Mexico
Sustainable Taxonomy as an example, social objectives were introduced with the intention of
addressing social gaps by defining activities that would promote social improvement within the
country. Social aspects can also be incorporated as additional criteria in taxonomies. The EU
Taxonomy addresses this through a Minimum Safeguards test. In the ASEAN Taxonomy, social
aspects were introduced as a safeguard as part of the “essential criteria” that needs to be fulfilled
together without causing harm to other environmental objectives, in addition to contributing
significantly to an environmental objective. This reflects the ASEAN Taxonomy’s nature as a
Sustainability taxonomy rather than a Green taxonomy. This approach can also be seen in the
Republic of Korea, Malaysia (CCPT and SRI), Indonesia, and the Philippines.
16
III. THE RISE OF SUSTAINABLE FINANCE TAXONOMIES IN DEVELOPING ASIA
Developing Asia has seen a mushrooming of taxonomies. The growth in taxonomies has been
underpinned by the need and desire to cater to jurisdictional specificities and serve specific
objectives, including national priorities, strategies, and agendas. An increase in the number of
taxonomies also increases the risk of fragmentation. However, there are several design building
blocks for taxonomies, and the way those building blocks are used will determine a taxonomy’s
eventual design and interoperability. The more commonality there is in the building blocks used
to construct taxonomies, the more interoperable the taxonomies will be. The taxonomy building
blocks is illustrated in Figure 4.
Figure 4: Taxonomy Building Blocks
Source: Author.
The following review of selected taxonomies compares how key building blocks have been used
in their development. It is important to note that most taxonomies are developed in stages. Certain
elements may not be included in the current iteration of a taxonomy but may be planned for
inclusion in future versions. In the analysis, where information has been made publicly available
at the time of writing regarding the future inclusion of a taxonomy element (e.g., environmental
objectives, sector coverage), that element will be considered as included.
17
A.
Comparison of Key Design Elements
1.
Taxonomy Objectives
Every taxonomy will have its own objectives that support its national priorities and external
commitments, such as the Paris Agreement. Globally, taxonomy objectives may be described
differently but refer to the same thing. The taxonomies reviewed in Table 2 all cover only
environmental objectives as taxonomy objectives at present, except for the Malaysia SRI
Taxonomy that also includes social objectives, the Mongolia SDG Taxonomy that encompasses
the SDGs, and the Mexico Taxonomy that covers social objectives.
Table 2: Comparison of Environmental Objectives
Environmental Objectives
Resource
Resilience
and
Transition
to Circular
Economy
Pollution
Prevention
and
Control
Sustainable
Protection of
Water
and Marine
Resources
ASEAN Taxonomy
for Sustainable
Finance
*
*
Indonesia
Taxonomy for
Sustainable Finance
*
*
*
*
Malaysia
Sustainable and
Responsible
Investment
Taxonomy†
*
*
Philippine
Sustainable Finance
Taxonomy
*
*
Taxonomy
Malaysia Climate
Change and
Principle-Based
Taxonomy
Protection of
Climate
Climate
Healthy
Change
Change
Ecosystems and
Mitigation Adaptation
Biodiversity
*
*
Singapore-Asia
Taxonomy
*
Thailand Taxonomy
Phase 1
PRC Green Bond
Endorsed Projects
Catalogue 2021
Edition
Taxonomy objectives align with environmental objectives
18
Environmental Objectives
Taxonomy
Hong Kong
Taxonomy for
Sustainable Finance
Protection of
Climate
Climate
Healthy
Change
Change
Ecosystems and
Mitigation Adaptation
Biodiversity
Resource
Resilience
and
Transition
to Circular
Economy
Pollution
Prevention
and
Control
Sustainable
Protection of
Water
and Marine
Resources
**
Republic of Korea
Green Taxonomy
Mongolia Green
Taxonomy
Taxonomy objectives align with environmental objectives
Mongolia SDG
Taxonomy†
Taxonomy objectives align with environmental objectives
Bangladesh
Sustainable Finance
Policy
Kazakhstan Green
Taxonomy
Taxonomy objectives align with environmental objectives
European Union
Taxonomy
Sustainable
Taxonomy of
Mexico†
South African Green
Finance Taxonomy
* means environmental objective is not discretely identified, but has been subsumed under another relevant
environmental objective.
** means environmental objective is being considered for future inclusion. Currently, climate change mitigation is the
central environmental objective of the Hong Kong, China Taxonomy.
† means the taxonomy also covers objectives other than environmental objectives.
ASEAN=Association of Southeast Asian Nations.
Source: Author analysis of
ASEAN Taxonomy Board. 2024. ASEAN Taxonomy for Sustainable Finance Version 3;
Astana International Financial Center. 2021. Kazakhstan Green Taxonomy;
Bank Negara Malaysia. 2021. Climate Change and Principle-Based Taxonomy;
Bank of Thailand. 2023. Thailand Taxonomy Phase 1;
Bangladesh Bank. 2020. Sustainable Finance Policy for Banks and Financial Institutions;
European Commission. 2020. Taxonomy: Final Report of the Technical Expert Group on Sustainable Finance;
Financial Services Authority of Indonesia (OJK). 2022. Indonesia Green Taxonomy Edition 1.0;
Financial Services Authority of Indonesia (OJK). 2024. Indonesia Taxonomy for Sustainable Finance;
Hong Kong Monetary Authority. 2024. Hong Kong Taxonomy for Sustainable Finance;
Mongolian Sustainable Finance Association. Mongolia’s Sustainable Finance Journey & SDG Taxonomy;
Ministry of Environment of Korea. 2021. The Korean Green Taxonomy;
Ministry of Finance and Public Credit Mexico. 2023. Sustainable Taxonomy of Mexico;
Monetary Authority of Singapore. 2023. Singapore-Asia Taxonomy for Sustainable Finance;
Mongolian Sustainable Finance Association. 2019. Mongolia Green Taxonomy.
National Treasury, Republic of South Africa. 2022. South African Green Finance Taxonomy 1st Edition;
People’s Bank of China. 2021. Green Bond Endorsed Projects Catalogue;
Securities and Exchange Commission of the Philippines. 2024. Guidelines on the Philippine Sustainable Finance
Taxonomy;
Securities Commission Malaysia. 2022. Principles-Based Sustainable and Responsible Investment Taxonomy;
19
Almost all the 13 taxonomies reviewed have explicitly included climate change mitigation and
climate change adaptation as taxonomy objectives. This is followed by resource resilience and
transition to a circular economy, and protection of healthy ecosystems and biodiversity (11). Less
than half (7) have explicitly included pollution prevention and control, and sustainable protection
of water and marine resources (6). Nevertheless, the TSC-based and principles-based
taxonomies that have not distinctly identified these two environmental objectives have subsumed
them under one of the other four environmental objectives. Similarly, while some other
environmental objectives are not explicitly included in the reviewed taxonomies, they have been
subsumed under one of the environmental objectives as indicated above.
Although the Whitelist Asian taxonomies reviewed did not distinctly specify their objectives
according to these definitions, they still encapsulate these objectives. For instance, from the
mapping exercises conducted through the Common Ground Taxonomy (CGT),5 it can be seen
that the PRC Catalogue’s objectives can be mapped to all of the EU Taxonomy’s environmental
objectives.
The Malaysia SRI Taxonomy also incorporates the following social objectives: (i) enhanced
conduct toward workers, (ii) enhanced conduct toward consumers and end-users, and (iii)
enhanced conduct toward affected communities and wider society.
The Mongolia SDG Taxonomy on the other hand, aims to meet SDG goals instead. This taxonomy
extends the social objectives of taxonomies as seen in Figure 5.
Figure 5: Coverage of Mongolia SDG Taxonomy
GHG=greenhouse gas, SDG= Sustainable Development Goals.
Source: Mongolia Sustainable Finance Association. Presentation on Mongolia’s Sustainable Finance Journey & SDG
Taxonomy.
5
The CGT maps the PRC Catalogue and EU Taxonomy design elements, criteria, and thresholds to establish
interoperability between the two taxonomies.
20
2.
Sector Coverage
The sector coverage for taxonomies will vary based on national goals and the purpose and
objectives of the taxonomy. For instance, if a purpose of the taxonomy is to support
decarbonization, then the sectors covered would be those that contribute most to GHG emissions.
The sectors covered by the ASEAN Taxonomy contribute to over 85% of the region’s emissions.
The following economic sectors are covered by the taxonomies reviewed:
(i)
Electricity, gas, steam, and air conditioning supply (energy)
(ii)
Transportation and storage
(iii)
Construction and real estate
(iv)
Agriculture, forestry, and fishing
(v)
Manufacturing
(vi)
Water supply, sewerage, and waste management
(vii)
Mining
(viii)
Carbon capture, storage, and utilization
(ix)
Information and communication
(x)
Professional, scientific, and technical
A number of taxonomies, such as in ASEAN, the EU, the Republic of Korea, Mongolia (both), and
South Africa recognize the role of enabling sectors that have activities that improve or enable the
performance of other sectors but themselves do not contribute substantially to an environmental
objective and themselves do not risk harm to environmental objectives. However, such enabling
activities may be classified differently in different taxonomies. The common enabling sectors
recognized in the reviewed taxonomies are carbon capture, storage, and utilization; information
and communication; and professional, scientific, and technical. This has also been the approach
in various AMS national taxonomies (e.g., Indonesia, the Philippines, Singapore, Thailand).
Figure 6 shows the sector coverage of the taxonomies reviewed.
21
Figure 6: Comparison of Taxonomy Sectoral Coverage
Taxonomy
Sectors
ASEAN Taxonomy for Sustainable Finance
Indonesia Taxonomy for Sustainable Finance
Malaysia Climate Change and Principle-Based Taxonomy
Sector-agnostic
Malaysia Sustainable and Responsible Investment Taxonomy
Sector-agnostic
Philippine Sustainable Finance Taxonomy
Singapore-Asia Taxonomy
Thailand Taxonomy Phase 1
Hong Kong Taxonomy for Sustainable Finance
*
*
China Green Bond Endorsed Projects Catalogue 2015 Edition
Republic of Korea Green Taxonomy
Mongolia Sustainable Development Goals Taxonomy
Mongolia Green Taxonomy
Bangladesh Sustainable Finance Policy
Kazakhstan Green Taxonomy
European Union Taxonomy for Sustainable Activities
Sustainable Taxonomy of Mexico
South African Green Finance Taxonomy
ASEAN= Association of Southeast Asian Nations.
Note: The Hong Kong, China sector is being considered for inclusion in future iterations of the taxonomy.
Source: Author’s analysis
22
Fifteen taxonomies have prioritized the inclusion of the energy sector as well as water supply,
sewerage, and waste management as focus sectors. Energy is a common priority, as this sector
contributes to the bulk of emissions globally. Other focus sectors that are commonly covered
include agriculture, forestry, and fishing; transportation and storage; construction and real estate;
and manufacturing. At this point, however, the EU Taxonomy does not cover fisheries. In addition,
criteria for sectors may be developed gradually, with the priority sectors coming first. This can be
seen in the ASEAN Taxonomy (energy, followed by transportation and storage, and construction
and real estate); and Thailand Taxonomy (energy and transportation). The sectors covered, and
the priority in the deployment of the assessment criteria, reflect differing national or regional
priorities.
A taxonomy may also focus on sectors that are uniquely important to the jurisdiction’s economy.
For example, the mining sector is only included in the Indonesia and South Africa taxonomies.
While South Africa has yet to develop its criteria, Indonesia has included criteria for the sector to
support the extraction of critical minerals for the manufacturing and development of clean energy
technology (e.g., electric vehicles).
Purely principles-based taxonomies generally do not specify focus sectors and are therefore
sector-agnostic to allow flexible assessment. The Philippines taxonomy, while principles-based,
does focus its application on sectors covered by the Philippines nationally determined
contributions (NDCs).
A further point to note on sector coverage is how economic activities under each sector are
identified. This is a cornerstone for interoperability. Taxonomies of ASEAN, AMS national, the
Republic of Korea, and South Africa all use a classification system consistent with the
International Standard Industrial Classification of All Economic Activities (ISIC), while the EU
Taxonomy uses Nomenclature generale des Activities economiques dans, which is easily
reconcilable to ISIC. While there may be some differences in the activity classifications in
taxonomies, they are substantially consistent.
3.
Climate Ambitions and Decarbonization Pathways Referenced for Taxonomy
Assessments
Climate ambition and decarbonization pathways are important references and bases for TSCbased taxonomies in setting TSC but this aspect of taxonomy construction is often not given much
23
attention (OECD 2020). Various pathways reflecting different long-term ambitions and targets
relevant to each jurisdiction may be available. The Paris Agreement and NDCs are two of the
most common references for climate ambition and decarbonization pathways, respectively.
Notwithstanding design interoperability, when taxonomies reference different pathways to reflect
jurisdictional specificity, the approach to achieving the Paris Agreement ambition will vary.
Across the Developing Asia taxonomies reviewed, the climate ambition is commonly referenced
to a science-based 1.5°C pathway, aligning with the preference of the Paris Agreement and the
ambition of the EU Taxonomy. They also refer to the relevant NDCs, particularly for transition
activities. The Amber Tiers of the ASEAN Taxonomy’s Energy TSC are set in reference to the
International Energy Agency (IEA)’s Southeast Asia Sustainable Development Scenario (SDS)
pathway, augmented for additional rigor. The AMS national taxonomies may also choose to refer
to the SDS pathway in setting their own thresholds for consistency with the ASEAN Taxonomy or
use an alternative pathway, such as NDCs, and map the resulting thresholds against those of the
ASEAN Taxonomy. Such an approach will result in equivalences being established, resulting in
consistency and comparability.
Equivalence goes beyond interoperability and enables a classification in one taxonomy to be
mapped to the classification in a corresponding taxonomy. In the ASEAN region, for instance, the
thresholds in AMS national taxonomies can be mapped to a threshold in the ASEAN Taxonomy,
enabling conversion of any AMS national taxonomy threshold to one in the ASEAN Taxonomy. In
this way, the ASEAN Taxonomy is the common reference for all AMS national taxonomies,
becoming the universal reference point.
Principles-based taxonomies are intended to encourage activities that contribute to meeting the
NDCs; national policies; and/or the Paris Agreement (e.g., Malaysia CCPT and SRI, and
Philippines taxonomies) from a directional perspective. Similarly, Whitelist taxonomies may
include or exclude activities in line with decarbonization pathways (e.g., the PRC Catalogue
excluding coal in alignment with a 1.5°C pathway). Activities that contribute to meeting national
policies, NDCs, and/or Paris Agreement may also be identified in Whitelist taxonomies (e.g.,
Mongolia Green Taxonomy, including activities that support national policies in meeting the Paris
Agreement).
The application of references to decarbonization pathways in taxonomies is shown in Figure 7.
24
Figure 7: References to the Paris Agreement and Nationally Determined Contributions in
Taxonomy Application
ASEAN = Association of Southeast Asian Nations, NDCs = nationally determined contributions.
Source: Author’s analysis.
4.
Other Eligibility Criteria and Perspective on Technology
A third building block of taxonomies is other eligibility criteria applied, namely, DNSH, social
aspects, remedial measures to transition, and technology neutrality (Table 3).
The first of these criteria, DNSH, refers to not causing harm to another taxonomy objective while
substantially contributing to an objective. All the TSC-based taxonomies reviewed apply the
DNSH criterion, while the Whitelist Bangladesh Taxonomy also adopts this concept. DNSH is
important in ensuring that an economic activity that substantially contributes to a taxonomy
objective does not create negative effects elsewhere.
25
Table 3: Additional Taxonomy Characteristics
Technology
Neutrality
Social
Aspects
ASEAN Taxonomy for Sustainable Finance
Yes
Yes
Yes
Yes
Indonesia Taxonomy for Sustainable Finance
Partial
Yes
Yes
Yes
Malaysia Climate Change and Principle-Based
Taxonomy
Yes
No
Yes
Yes
Malaysia Sustainable and Responsible Investment
Taxonomy
Yes
Yes
Yes
Yes
Philippine Sustainable Finance Taxonomy
Yes
Yes
Yes
Yes
Singapore-Asia Taxonomy
Yes
Yes
Yes#
No
Thailand Taxonomy Phase 1
Yes
Yes
Yes
Yes †
Hong Kong Taxonomy for Sustainable Finance
Yes
**
Yes
No
China Green Bond Endorsed Projects Catalogue 2015 No
Edition
***
No
No
Republic of Korea Green Taxonomy
Partial
Yes
Yes
No
Mongolia Green Taxonomy
No
Yes
No
No
Mongolia Sustainable Development Goals Taxonomy
No
*
No
No
Bangladesh Sustainable Finance Policy
No
Yes
Yes
No
Kazakhstan Green Taxonomy
No
No
No
No
European Union Taxonomy for Sustainable Activities
Yes
Yes
Yes
No
Taxonomy
DNSH
RMT
ASEAN = Association of Southeast Asian Nations, DNSH = do no significant harm. Goals, RMT = is remedial measures to
transition.
* means addresses Sustainable Development Goals.
** means feature being considered for future inclusion.
*** means requirement to consider safety, environmental, and quality regulations.
† means taxonomy allows for activities, projects, or companies that do not comply with the DNSH criteria but satisfy the
relevant technical screening criteria; metrics will be considered compliant for the corresponding Green or Amber category
if the operating company submits an additional plan indicating how it will correct the deficiencies within 3 years after the
assessment.
# Currently best practice disclosure but may be incorporated as a component of eligibility criteria in the future.
Sources: Author’s analysis of
ASEAN Taxonomy Board. 2024. ASEAN Taxonomy for Sustainable Finance Version 3;
Astana International Financial Center. 2021. Kazakhstan Green Taxonomy;
Bank Negara Malaysia. 2021. Climate Change and Principle-Based Taxonomy;
Bank of Thailand. 2023. Thailand Taxonomy Phase 1;
Bangladesh Bank. 2020. Sustainable Finance Policy for Banks and Financial Institutions;
European Commission. 2020. Taxonomy: Final Report of the Technical Expert Group on Sustainable Finance;
Financial Services Authority of Indonesia (OJK). 2022. Indonesia Green Taxonomy Edition 1.0;
Financial Services Authority of Indonesia (OJK). 2024. Indonesia Taxonomy for Sustainable Finance;
Hong Kong Monetary Authority. 2024. Hong Kong Taxonomy for Sustainable Finance;
Mongolian Sustainable Finance Association. Mongolia’s Sustainable Finance Journey & SDG Taxonomy;
Ministry of Environment of Korea. 2021. The Korean Green Taxonomy;
Ministry of Finance and Public Credit Mexico. 2023. Sustainable Taxonomy of Mexico;
Monetary Authority of Singapore. 2023. Singapore-Asia Taxonomy for Sustainable Finance;
Mongolian Sustainable Finance Association. 2019. Mongolia Green Taxonomy.
National Treasury, Republic of South Africa. 2022. South African Green Finance Taxonomy 1st Edition;
People’s Bank of China. 2021. Green Bond Endorsed Projects Catalogue;
Securities and Exchange Commission of the Philippines. 2024. Guidelines on the Philippine Sustainable Finance Taxonomy;
Securities Commission Malaysia. 2022. Principles-Based Sustainable and Responsible Investment Taxonomy.
26
The purpose of sustainability and climate taxonomies is ultimately to benefit the planet and its
inhabitants. As such, it is only natural that social aspects are considered. All the TSC-based
taxonomies reviewed consider social aspects. Variations may exist in the extent the social
aspects are considered, but they are considered as an essential element that needs to be met to
be taxonomy-eligible. The Singapore Taxonomy and the EU Taxonomy consider the OECD
Guidelines on Multinational Enterprises (OECD MNE Guidelines) and the UN Guiding Principles
on Business and Human Rights (UNGPs), with specific reference to the International Labour
Organization (ILO) Core Labour Conventions. The EU Taxonomy additionally considers the
International Bill of Human Rights.
The ASEAN Taxonomy takes into account the following:
(i) promotion and protection of human rights, with reference to the ASEAN Human Rights
Declaration (AHRD) and the Phnom Penh Statement on the Adoption of the AHRD;
(ii) prevention of forced labor and protection of children’s rights, in line with the ASEAN
Declaration on the Protection of the Rights of Migrant Workers and the ASEAN Consensus
on the Protection and Promotion of Rights of Migrant Workers; and
(iii) impact of taxonomy on people living close to investments, in line with the ASEAN
Declaration on Strengthening Social Protection.
Among the Whitelist taxonomies, the Mongolian Taxonomies (Green and SDG) and the
Bangladesh Sustainable Finance Policy also address social aspects, while the PRC Catalogue
requires safety, environmental, and quality regulations to be complied with. On the other hand,
the Malaysia SRI Taxonomy incorporates social aspects as a taxonomy objective.
The third eligibility criterion is remedial measures to transition to facilitate transition. In some
situations, an activity that contributes substantially to a taxonomy objective is causing or may
cause significant harm at the same time to an environmental objective. To still benefit from the
activity’s ability to make a substantial contribution, a realistic and comprehensive plan must be
put in place to mitigate the harm to a level at which it is no longer significant. This plan must
demonstrate that there will no longer be any significant harm occurring within a period after
assessment of the activity. In the ASEAN, Indonesia, and Philippines taxonomies, this period is 5
years. Complying with this criterion allows an activity with such characteristics to be classified as
27
a Transition activity. The Philippines Taxonomy also allows remediation to extend up to 10 years
with the support of an independent verification. On the other hand, the Thailand Taxonomy allows
activities that do not meet DNSH to be taxonomy-eligible if the user provides a plan on how the
harm will be remediated within 3 years. The inclusion of this facilitative criterion demonstrates the
need for slightly different approaches for jurisdictions to account for different staring points and
capabilities. The Singapore Taxonomy however, does not include provisions for RMT. The DNSH
criteria is included there as a best practice and not as a requirement for an activity to be taxonomyeligible.
Taxonomies can also be distinguished by whether the type of technology that is used is
considered as part of the taxonomy criteria. Technology type is a cornerstone of the Japan Sector
Roadmap. It can be noted from this review that TSC-based taxonomies are mostly technologically
neutral while Whitelist taxonomies are generally technology-specific.
B.
Assessments
Of the taxonomies reviewed, all the taxonomies that are principles-based or incorporate
principles-based components are from ASEAN—Indonesia, Malaysia, and the Philippines. Since
principles-based taxonomies, like any other framework premised on principles, can produce
inconsistent outcomes, the taxonomies reviewed have mitigated this by providing decision trees,
detailed guiding questions, and use cases.
The EU Taxonomy has been used as the ambition benchmark for most TSC-based taxonomies
reviewed, including that of ASEAN; Hong Kong, China; Indonesia; the Republic of Korea;
Singapore; and Thailand. For example, the upper limit for the threshold for ISIC 351 - Electricity
Generation, Transmission and Distribution, Storage, is 100 grams carbon dioxide equivalent per
kilowatt-hour across the TSC-based AMS national taxonomies and the ASEAN Taxonomy. The
ASEAN Taxonomy’s Amber Tier 2 and 3 provide alternative pathways to meeting the IEA SDS
goal for users that are not capable of meeting the Tier 1 climate ambition immediately yet wish to
begin their sustainable journey. As the ASEAN Taxonomy Board also includes ASEAN national
taxonomy developers, careful consultation and considerable effort has been put in to ensure that
the thresholds for the Amber Tier in the AMS national taxonomies and the ASEAN Taxonomy’s
Amber Tiers are compatible. However, while the EU Taxonomy does not have a Transition tier, it
28
does contain transition elements, such as a conditionally higher threshold limit for energy
generation. For further details, please refer to Table 4.
Table 4: ISIC 351 (Electric Power Generation, Transmission, and Distribution) Thresholds
Indonesia*
Singapore
Thailand
Hong Kong,
China
European Union
Taxonomy
Green
<100 g
<100 g
(lifecycle
CO2e/kWh CO2e/kWh
emissions) Green Tier Equivalent to
Green in the
ASEAN
Taxonomy
≤100 g
CO2e/kWh
Equivalent to
Green in the
ASEAN
Taxonomy
100 g
CO2e/kWh
Equivalent to
Green in the
ASEAN
Taxonomy
<100 g
CO2e/kWh
Equivalent to
Green in the
ASEAN
Taxonomy
<100 g CO2e/kWh
Equivalent to
Green in the
ASEAN
Taxonomy
Category
ASEAN
or
<270 g
CO2e/kWh***
Equivalent to
Amber Tier 2 in
the ASEAN
Taxonomy
Transition ≥100 and
<510 g
220 g
(lifecycle
<425 g
CO2e/kWh
CO2e/kWh**
emissions) CO2e/kWh Equivalent to Equivalent to
Amber Tier Amber Tier 3 in Amber Tier 2 in
2
the ASEAN
the ASEAN
Taxonomy
Taxonomy
381 g
N/A
CO2e/kWh
Equivalent to
Amber Tier 2 in
the ASEAN
Taxonomy
N/A
≥425 and
<510 g
CO2e/kWh
Amber Tier
3
ASEAN = Association of Southeast Asian Nations, CO2e = carbon dioxide equivalent, g = gram, kWh = kilowatt-hour,
N/A = not applicable.
* means the Indonesia Taxonomy allows emissions measurement using direct emissions until 2028 for users that are
not able to measure lifecycle emissions.
**
means the Singapore Taxonomy refers to direct emissions for its Amber threshold.
*** means only applicable when the facility’s construction permit is granted before 2031.
Sources:
ASEAN Taxonomy Board. 2024. ASEAN Taxonomy for Sustainable Finance Version 3;
Bank of Thailand. 2023. Thailand Taxonomy Phase 1;
European Commission. 2020. Taxonomy: Final Report of the Technical Expert Group on Sustainable Finance;
Financial Services Authority of Indonesia (OJK). 2024. Indonesia Taxonomy for Sustainable Finance;
Hong Kong Monetary Authority. 2024. Hong Kong Taxonomy for Sustainable Finance;
Monetary Authority of Singapore. 2023. Singapore-Asia Taxonomy for Sustainable Finance.
In the assessment of coal phase-out, it is estimated that coal power plants produced a fifth of all
global greenhouse gas emissions in 2021(IEA 2021). Reducing the usage of coal would therefore
have a significant impact on curbing the rise of global temperatures.
Southeast Asia is highly reliant on coal for its energy generation needs. In 2020, it was estimated
that coal supplied 7.5 exajoules (EJ) of energy to the region, approximately a quarter of the total
29
demand of 29.1 EJ (IEA 2022). Therefore, the reduction of coal usage is an imperative and a
mechanism is needed to facilitate this.
The Glasgow Financial Alliance for Net Zero (GFANZ) published Managed Phaseouts of Highemitting Assets in June 2022, while the CBI, Climate Policy Initiative (CPI), and Rocky Mountain
Institute (RMI) jointly published the Guidelines for Financing a Credible Coal Transition (GFANZ
2023; CBI, Climate Policy Initiative and RMI 2022). These were among the first guidelines
outlining recommendations on how a phase-out of coal could be managed successfully.
Significant programs have also been announced to encourage CPO, such as the Just Energy
Transition Partnership (JETP)6 and the Energy Transition Mechanism (ETM),7 signaling interest
in channeling finance to such projects.
To encourage early action to reduce the region’s reliance on coal as a major energy source, in a
global first, the ASEAN Taxonomy Version 2 that was issued in March 2023 included CPO criteria
as part of its Energy sector TSC. Stakeholder feedback affirmed that this was a useful first step
in driving the phase-out of coal in the region. Following this, the Indonesia Taxonomy for
Sustainable Finance, which was issued in February 2024, also included criteria for CPO that are
closely aligned with that of the ASEAN Taxonomy. The Singapore Taxonomy also included
guidance on CPO but categorized and assessed it separately from other activities. The Singapore
approach assesses CPO at the facility, entity and system levels, differing from the usual activitylevel assessment.
The CPO criteria under the different frameworks above have the following similarities: (i)
Reference to the IEA Net Zero Emissions pathway; (ii) the need for a duration cap on the
operation of coal power plants; (iii) a set phase-out date; and (iv) demonstrable emissions
savings.
A comparison of requirements for eligible CPO under different frameworks is provided in Figure
8.
6
7
United Nations Development Programme. Indonesia Just Energy Transition Partnership (JETP).
ADB launched the ETM program in partnership with developing member countries (DMCs) that will leverage a
market-based approach to accelerate the transition from fossil fuels to clean energy.
30
Figure 8: Comparison of Coal Phase-Out Criteria
CBI = Climate Bonds Initiative, CPI = Climate Policy Initiative, IEA NZE= International Energy Agency Net Zero
Emissions Pathway, FI = Financial Institution, gCO2 = grams of carbon dioxide equivalent per gram, kWh = kilowatthour, RMI= Rocky Mountain Institute, OECD = Organisation for Economic Co-operation and Development.
Sources: Author analysis of
ASEAN Taxonomy Board. 2024. ASEAN Taxonomy for Sustainable Finance Version 2;
CBI, CPI and RMI. 2022. Working Paper: Guidelines for Financing a Credible Coal Transition—A Framework for
Assessing the Climate and Social Outcomes of Coal Transition Mechanisms;
Financial Services Authority of Indonesia (OJK). 2024. Indonesia Taxonomy for Sustainable Finance;
Glasgow Financial Alliance for Net Zero. 2023. Financing the Managed Phaseout of Coal-Fired Power Plants in Asia
Pacific.
Monetary Authority of Singapore. 2023. Singapore-Asia Taxonomy for Sustainable Finance.
31
IV. TAXONOMY GOVERNANCE
A taxonomy may also be shaped by the institutions governing it. In most cases, financial
regulators are involved in the development of sustainable finance taxonomies as those
taxonomies may be intended to form part of a larger policy effort to channel sustainable finance.
The environmental ministry of a country may also lead the development of a taxonomy to promote
green activities (e.g., Korean Green Taxonomy). A mix of stakeholders may be engaged
throughout the development, implementation, and review of a taxonomy. A summary of the
governance structures of a few of the taxonomies reviewed8 can be found in Appendix A.
As taxonomies are living documents, it can be observed that taxonomy maintenance is critical,
and having a body mandated to review and adjust a taxonomy as needed over time to play its
role is important. It is imperative that a taxonomy be periodically reviewed to ensure it remains
relevant. Additionally, a variety of stakeholders may be engaged throughout the development of
a taxonomy, whether as part of a taxonomy’s governance structure (e.g., Singapore Taxonomy)
or through structured external engagements (e.g., ASEAN Taxonomy). Because there will always
be divergent views among stakeholders, a robust governance mechanism will help ensure that
decisions on a taxonomy are made effectively.
V. ADDRESSING AND NAVIGATING THE INFLUENCE OF MULTIPLE TAXONOMIES
A.
One Activity, Multiple Taxonomies
As discussed earlier, there has been a plethora of taxonomies—both official and proprietary
market—being issued or under development. Global capital flows can result in the extraterritorial
application of a taxonomy. Take for example a situation where a German bank’s Singapore
subsidiary provides a loan for a project in Indonesia. Equity is provided by an Indonesian investor
and a Japanese private equity firm. Suddenly, a number of taxonomies become potentially
relevant:
(i)
the EU Taxonomy, as the bank is German;
(ii)
the Singapore Taxonomy, as the loan is booked at the Singapore subsidiary;
(iii)
the Indonesia Taxonomy, as there is an Indonesian investor;
8 Taxonomy governance structures for ASEAN, the EU, Indonesia, Malaysia, and Singapore.
32
(iv)
the ASEAN Taxonomy, as the project is in ASEAN; and because the Japanese private
equity firm has used the ASEAN Taxonomy as the internally approved benchmark for
its ASEAN portfolio given that it uses the ASEAN Taxonomy rather than assessing
investments on a country-by-country taxonomy basis; and
(v)
the German bank’s in-house taxonomy.
A frequently asked question is which taxonomy will take precedence or be applied. Clearly,
taxonomies that are mandatory and have the force of the law will need to be complied with. In this
case, for the German bank, that would be the EU Taxonomy. The Singapore subsidiary would
report under the Singapore Taxonomy and the Indonesian investor would report under the
Indonesia Taxonomy. In the meantime, the Japanese private equity firm would use the ASEAN
Taxonomy in assessing its investment criteria. This means everyone can and will use a different
taxonomy to meet their needs, and the taxonomy used should be that which each of the parties
voluntarily applies or is required to comply with on an individual basis.
So where will a problem arise when multiple taxonomies are involved? The challenge arises when
the project fits into some taxonomies and not others. It also creates additional work for all the
parties involved as each party would need to evaluate every transaction individually and distinctly,
without being able to rely on a standardized classification. It also means the project owner, in
configuring the project, would need to take into consideration all the different capital providers’
needs, a task made more difficult in situations where the funders have yet to be determined. In
many situations, the project financing structure may be less complex but cross border finance
flows means there will also be the reality of multiple taxonomies, which while surmountable, adds
to cost, time, and decreases the ease of raising finance. This situation can lead to a disincentive
to finance as well as confusion.
Interoperability has been put forth as a potential solution to making the process more efficient and
effective. However, effective interoperability requires taxonomy designs to be compatible. The
International Platform for Sustainable Finance published the Common Ground Taxonomy (CGT),
which sought to compare and map commonalities between the EU Taxonomy against the PRC
Catalogue in 2021(with an update in 2022). The Hong Kong, China Taxonomy builds upon this
mapping and intends to be interoperable with the ASEAN Taxonomy as a regional taxonomy, and
the CBI Taxonomy as a market-based taxonomy (Hong Kong Monetary Authority 2024a). The
International Platform for Sustainable Finance had noted in an FAQ that the CGT’s comparison
33
and mapping provided its own set of challenges and required further analysis to complete, due to
the inherent differences between the two taxonomies’ designs and approaches. HKMA had also
noted that incorporating the entire CGT into the Hong Kong Taxonomy without any modification
was not possible as the CGT included jurisdiction specific elements (HKMA 2024b). This
highlights interoperability challenges between taxonomies of different designs.
Even if taxonomies are interoperable from a design perspective, with compatible metrics, there is
still a usability gap as different TSC and assessment thresholds would lead to different
assessment outcomes. This means that an activity eligible under one taxonomy would have to be
reassessed under another, and activities structured to be eligible under one taxonomy may not
be under a different taxonomy. This makes global capital flows inefficient and cross border
assessments inconvenient. There is also the possibility of disruptions to the intermediation of
capital as financial institutions that raise capital from a jurisdiction using a taxonomy different from
the jurisdiction they provide finance in, may find the asymmetry inhibiting their ability to
intermediate capital when the jurisdictions they raise capital from have higher ambitions than the
jurisdictions they provide finance in.
As such, taxonomies need to move beyond interoperability toward equivalence.
Equivalence means eligibility under one taxonomy can also be recognized under another
taxonomy.
This allows all stakeholders to understand clearly where specific pools of capital can flow to and
for the capital users to respond appropriately. It is important to note that equivalence does not
mean simply mapping two asymmetric TSC as equivalent as a matter of convenience. Such an
approach would cause disruption and destroy the credibility of the more ambitious taxonomy.
Ideally, taxonomies should share common design elements such as environmental objectives,
activity classification, essential criteria such as DNSH and social aspects, as well as assessment
frameworks that use the same metrics. It is equally important that taxonomy developers share the
same guiding principles, such as adopting a science-based approach. Only by having common
guiding principles and design elements can taxonomies be comparable and interoperable and
eventually have equivalence.
Significant work has been carried out by the ASEAN Taxonomy Board to enable alignment
between the ASEAN Taxonomy with AMS national taxonomies and other widely used
34
international taxonomies such as the EU Taxonomy. A comparison of the key design elements,
including thresholds for comparable activities, of the ASEAN Taxonomy and ASEAN national
taxonomy classifications shows that the thresholds of the AMS national taxonomies can be
mapped to a tier of the ASEAN Taxonomy and equivalence can be established. It should be
pointed out that the ASEAN Taxonomy was designed to be the taxonomy of equivalence for the
ASEAN region. The ASEAN Taxonomy and AMS national taxonomies are interoperable and
comparable as they have similar design elements and metrics. AMS national taxonomies are
either principles-based or TSC-based and the ASEAN Taxonomy applies to both frames. In some
AMS national taxonomies, ASEAN Taxonomy TSC have also been adopted. The participation of
AMS national taxonomy developers in the development of the ASEAN Taxonomy further fosters
collaboration in ensuring interoperability, equivalence, and applicability across the region. This
level of interoperability and equivalence allows the user to place reliance on the ASEAN
Taxonomy. For example, where an activity is not covered under an AMS national taxonomy, the
ASEAN Taxonomy can serve as a reference for activity assessment.
The Green Tier of the ASEAN Taxonomy’s Plus Standard is referenced to the EU Taxonomy,
ensuring that its Green Tier is the main equivalent and therefore, credible as a Green
classification.
Divergences from the EU Taxonomy made to accommodate regional
circumstances have been catalogued by the ASEAN Taxonomy Board to ensure that variances
can be justified. While differences still exist between the two taxonomies in areas such as RMT
and the coverage of social safeguards, they are broadly interoperable, and equivalence can be
established. Equivalence reduces the amount of assessment to be conducted and reduces friction
to users in applying a taxonomy across the region or globally.
B.
Challenges in Developing and Implementing Taxonomies and Policy Approaches
Challenges exist in creating a taxonomy, as well as in implementing it. Setting the North Star for
a taxonomy is the first challenge. It is important to identify the primary purpose of the taxonomy
and select the right taxonomy objectives. While this may sound easy, it is more complex in
practice. They may also reflect national ambitions, not just in environmental goals but also
economic and social goals. Balancing these goals can result in complications that may impact a
taxonomy’s usefulness. The primary purpose of a taxonomy will influence its objectives.
Taxonomies are a link between the financial sector and the real economy and need to be able to
35
engender a “whole of economy” approach. As such, there is a need to incorporate the input of all
relevant stakeholders.
Where a taxonomy has sectoral coverage, the views of the sectoral stakeholders need to be
reflected to avoid misalignment. The level of granularity resulting from this reflection will need to
be at the economic activity level as this is where the real economy is at work. Again, the
stakeholders of each economic activity will vary—from the real economy participants, to providers
of capital, to governments and civil society. Different stakeholders would have different goals and
targets. This leads to the need for a significant amount of coordination, data gathering, and
consensus building. Setting credible and robust science-based targets and pathways is not a
straightforward task. Taxonomy development requires resources and political will.
To make decisions on the taxonomy design, data is needed. Data is also needed for assessments
under a taxonomy. Challenges exist on data availability, transparency, and verification (OECD
Green Finance and Investment 2022). A taxonomy cannot be constructed without the right data,
including relevant national data such as emissions data. In addressing sectoral assessments,
sectoral data and economic activity data will be needed. However, as data challenges may take
time to address, some jurisdictions have turned to using principles-based taxonomies as a starting
point. The use of principles-based taxonomies has the benefit of preparing stakeholders to use a
more sophisticated TSC-based taxonomy in the future, including in collecting data, while guiding
economic activities into more alignment with the taxonomy objectives. However, as noted earlier,
TSC-based taxonomies are needed to achieve specific targets, such as emissions reduction.
Verification of data and assessments is also required to strengthen the value of taxonomy outputs.
Capacity is another major challenge. This affects all taxonomy users—both capital providers and
capital users. Organizational capacity needs to be strengthened for taxonomy use. This includes,
again, collecting and interpreting data and taxonomy-related information.
Navigating a taxonomy requires the right skills. It goes beyond looking at benchmarks but also
making judgments about decision points such as DNSH and social aspects. Principles-based
taxonomies require users to have the right skill sets to arrive at meaningful conclusions that are
consistent and credible. Taxonomy reporting also requires systems and resources. Additionally,
the capacity of the ecosystem, such as verifiers and assessors, as well as information providers,
needs to be strengthened.
36
It is important to remember that taxonomies are only one part of the sustainable finance
ecosystem. Applying the ASEAN approach to building a sustainable finance ecosystem, for a
taxonomy to succeed, the other pillars of Transition Finance Frameworks and Disclosure also
need to be strengthened. Taxonomies need to dovetail with the other ecosystem pillars for optimal
impact. The lack of general infrastructure nationally to support the deployment of a taxonomy has
resulted in most jurisdictions not making taxonomies mandatory. However, the adoption of
voluntary taxonomies may be slower. When it comes to global capital flows, it is natural that a
mandatory taxonomy will take precedence over a voluntary taxonomy. While the development
and implementation of taxonomies face challenges today, these challenges will be overcome with
time and experience.
There are six key dimensions that are critical for a taxonomy’s success. These dimensions and
the policy approaches that can support them are discussed below.
(i)
Dimension 1: Relevance. Taxonomies need to be relevant. For this to happen, they
must clearly address a purpose and meet a need. As such, taxonomies need to tie
into national goals and policies. These include decarbonization goals and pathways
such as NDCs. Finance policymakers and regulators, while not the only official sector
group capable of doing so, are well placed to lead the development and
implementation of official taxonomies, as taxonomies deal with the orientation of
capital. However, “whole of government” input and support is necessary given the
pervasive impact of taxonomies. This means that the finance sector can form the
nucleus for a taxonomy, but other parts of government, real economy participants,
and other stakeholders need to be adequately involved. A strong signal from the
official sector on the adoption of a taxonomy, even though not mandatory, is vital.
Financial supervisors can ask for reporting based on taxonomy classifications for
monitoring purposes and governments can use taxonomies to classify fiscal budget
items and for incentives, which will encourage the market to follow suit. A robust
taxonomy development governance process can help in ensuring a taxonomy’s
relevance.
37
Financial institutions and other market participants can also develop taxonomies that
are relevant to their areas of interest, leveraging on market discipline.9
(ii)
Dimension 2: Comprehensiveness. Comprehensiveness refers to the coverage of
the taxonomy. The more standalone and complete a taxonomy is, the more useful it
is. A taxonomy also needs to include all the economic sectors that have significant
impact and cover all the relevant the economic activities within those sectors. The
TSC and the metrics used for screening must also be sufficiently comprehensive and
granular to achieve the desired outcomes. For example, this requires a careful look
where emissions intensity is used as opposed to absolute emissions, and direct
emissions instead of lifecycle emissions.
A taxonomy that looks at outcomes using TSC can deal with more situations than a
Whitelist taxonomy, although a Whitelist taxonomy is straightforward to apply.
Governments can help populate a taxonomy to ensure well-rounded coverage at a
sufficiently granular level. This would involve ensuring support and cooperation from
various parts of government to the taxonomy developers.
(iii)
Dimension 3: Usability. The success of a taxonomy hinges on it being adopted and
used by stakeholders. A taxonomy needs to be credible yet simple enough to use.
Taxonomy definitions need to be clear. This means that it is often better to specify
criteria rather than to leave it open to interpretation. The inputs for assessment need
to be readily available. A taxonomy is not usable if the inputs are difficult to acquire or
are not reliable.
At the same time, a taxonomy must be usable by its intended audience. Usability
needs to take into consideration the readiness of the jurisdiction. The criteria set out
in a widely used taxonomy may not be realistic under local conditions. In designing a
taxonomy, this divergence needs to be taken into consideration with local nuances
captured (e.g., importance of CPO in ASEAN) without undermining international
credibility. In instances where there are divergences, it is important to demonstrate
9
The Climate Bonds Initiative Taxonomy is an example.
38
the science-based reasons for these divergences. An internationally interoperable
taxonomy design will help facilitate interoperability. Mapping for equivalence, using a
science-based approach, will further enhance the ability for capital to flow globally.
From a policy perspective, taxonomies should be designed as far as possible to be
globally interoperable and enable equivalence. As noted earlier, the ASEAN
Taxonomy was designed to be a taxonomy of equivalence for AMS national
taxonomies, and the current AMS national taxonomies are all able to achieve
equivalence with the ASEAN Taxonomy. The ASEAN Taxonomy was designed to
take into consideration the need for it to be able to be a conduit of equivalence for the
taxonomies of the diverse AMS, resulting in its multitiered approach.
(iv)
Dimension 4: Robustness of ambition. The robustness of a taxonomy’s ambition is
imperative for its credibility. Robustness refers to the ability of a taxonomy to meet its
own, as well as global goals. Robustness is sometimes conflated with rigor. Rigor
refers to the strictness of a taxonomy e.g., how stringent performance levels are set
under a taxonomy. However, having more liberal performance levels does not
necessarily mean that a taxonomy’s ambition is not robust. Taxonomies can start at,
or allow for, lower performance levels and scale up ambition over time in line with the
readiness of the jurisdiction. Here, it is critical that backloading and lock-ins of GHG
emissions be avoided during the step-up period, and the scale-up should be sciencebased to enable the taxonomy goal to be achieved. The Transition taxonomies are an
example of this.
Taxonomy developers should ensure that taxonomies reflect the right level of
ambition. For this, as a matter of policy, reference needs to be made to the global
ambition, national goals and policies, and science-based pathways.
(v)
Dimension 5: Interoperability and equivalence. The need for interoperability was
previously discussed. As noted, it is critical to pursue interoperability and equivalence.
Most of the TSC-based taxonomies reviewed in this paper have referenced the EU
Taxonomy.
However,
to
contextualize
for
jurisdictional
needs,
additional
classifications or different assessment criteria have been applied.
39
To increase interoperability, taxonomies should be as similar in design as possible.
Selection of common assessment criteria will help enable equivalence. However,
more official and proactive efforts to link taxonomies are needed. The International
Platform for Sustainable Finance is an excellent platform for promoting
interoperability. However, more bilateral and multilateral efforts should be
encouraged. For example, the ASEAN Taxonomy has been recognized as an
accepted taxonomy under the Abu Dhabi Global Market’s Sustainable Finance
Regulatory Framework. It is also referenced in various taxonomies such as that of the
Indonesia and the Philippines in setting assessment criteria and overall design.
Interoperability and equivalence can be further promoted when taxonomy developers
take an “adopt, adapt,10 or innovate” approach where taxonomies are developed
based on other (widely used) taxonomies. Those widely used taxonomies can be
adopted virtually wholesale or adapted to suit the jurisdiction’s needs (e.g., the South
Africa and EU taxonomies). If adapting is not sufficient to achieve relevance and
usability, then a taxonomy can be innovatively developed while referencing a widely
used taxonomy (e.g., ASEAN Taxonomy and EU Taxonomy).
(vi)
Dimension 6: Future-proofed. As noted earlier, taxonomies must be able stand the
test of time as sustainability journeys span over an extended period. However, during
that period, there will be changes in the environment, technology, economic, and
social conditions. As such, taxonomies need to be living documents that are
maintained and reviewed throughout their lives. Engagement with stakeholders during
the development of taxonomies and throughout their application, with relevant input
being incorporated, is required.
As taxonomies need to be designed to be future-proofed, from the start, it should build in
mechanisms for effective reviews that also do not disrupt the market and stakeholders. For
instance, as part of its taxonomy design, the ASEAN Taxonomy will have a Technical Review
Board that will be responsible for reviewing and proposing enhancements to its Technical
Screening Criteria.
10 The adopt and adapt concepts are not new. For instance, the International Financial Reporting Standards have been
wholly adopted by various jurisdictions. The ASEAN Green Bond Standards are an adaptation of the Green Bond
Principles of the International Capital Market Association.
40
VI. CONCLUSION
Taxonomies play a key role in helping orient capital to advance the sustainability agenda,
including for urgent climate change action. Taxonomies need to be useful but credible at the same
time. There are different taxonomy approaches and taxonomies also incorporate jurisdictional
conditions. This results in diversity in taxonomies. However, it is important for taxonomies to be
interoperable and have equivalence to facilitate cross-border capital flows. Having common
design characteristics helps interoperability, while adopting mappable TSC allows for
equivalence.
Taxonomies must be relevant, comprehensive, usable, have robustness in ambition, be
interoperable and allow for equivalence, and be futureproofed. Taxonomies should be sciencebased where it is possible for credibility. The present challenges to the development and
implementation of taxonomies include capacity, availability of data, and jurisdictional readiness.
However, these should not stop the introduction of taxonomies as these challenges can be
overcome with time and experience.
41
APPENDIX: ILLUSTRATION OF THE GOVERNANCE STRUCTURE OF FIVE TAXONOMIES
ANALYZED
Figure A1: ASEAN Taxonomy and European Taxonomy Development Governance
Structures
ASEAN = Association of Southeast Asian Nations, ATB= ASEAN Taxonomy Board, EU = European Union, DG FISMA
= Directorate‑General for Financial Stability, Financial Services and Capital Markets Union, PSF = Platform on
Sustainable Finance, TEG = Technical Expert Group, JRC = Joint Research Centre, CLIMA = Directorate-General for
Climate Action, ENV = Directorate-General for Environment.
Source: Institute for Sustainable Finance Canada. 2022. Taxonomy Governance: A Stocktake of International
Examples.
42
Figure A2: Singapore Taxonomy and Malaysia Climate Change and Principle-Based
Taxonomy Governance Structures
CCPT-IG = Climate Change and Principle-based Taxonomy Implementation Group, FAQs = Frequently Asked
Questions, MAS = Monetary Authority Singapore,
Source: Green Finance Industry Taskforce. 2023. Cultivating Singapore’s Sustainable Finance Ecosystem to Support
Asia’s Transition to Net-Zero.
Figure A3: Indonesia Taxonomy Governance Structure
BI = Bank Indonesia, MOF = Ministry of Finance, NDC = nationally determined contribution, OJK = Otoritas Jasa
Keuangan (Financial Services Authority of Indonesia), TKBI = Taksonomi untuk Keuangan Berkelanjutan Indonesia
(Indonesia Taxonomy for Sustainable Finance), TSC=Technical Screening Criteria.
Source: Financial Services Authority of Indonesia (OJK).
43
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