ASEAN Taxonomy V2: Enabling a Just Transition Towards Sustainable Finance Adoption by ASEAN

The ASEAN Taxonomy for Sustainable Finance Version 2 (“ASEAN Taxonomy V2“) was released on 27 March 2023 by the ASEAN Taxonomy Board. The release follows extensive stakeholder consultations upon the earlier released ASEAN Taxonomy for Sustainable Finance Version 1. A crucial addition to the ASEAN Taxonomy V2 is the inclusion of social aspects as the third essential criteria, adding a holistic dimension to the taxonomy principles. Other additions include the completion of the Foundation Framework, building upon the broad framework laid out previously, and also finalisation of the details in the initial Plus Standard.

The ASEAN Taxonomy seeks to enable a just transition towards sustainable finance adoption by ASEAN Member States (“AMS“) by providing a common and credible framework for AMS and their stakeholders to assess and classify sustainable economic activities.  Having an ASEAN Taxonomy will attract more capital flow into the region to help AMS and their stakeholders to transition to a low carbon economy and achieve AMS’ climate change goals.

While designed to be interoperable with other international taxonomies, there are unique aspects of the ASEAN Taxonomy V2, such as the following:

1. The adoption of a multi-tiered approach with two main elements:

• A Foundation Framework that uses principles-based guiding questions and a decision tree to assess and classify sustainable activities; and
• A Plus Standard which is developed as an advanced form of assessment approach that uses both threshold-based (quantitative) and process-based or practice-based (qualitative) technical screening criteria to assess and classify sustainable activities.

2. A global first for a regional taxonomy, the ASEAN Taxonomy V2 introduces coal phase-out as an activity eligible for classification as a sustainable activity. The novel inclusion of coal phase-out provides an avenue to expedite energy transition efforts within ASEAN.

The ASEAN Taxonomy also details how it can be applied by different users. For example:

1. AMS governments and regulators can be guided by the ASEAN Taxonomy when setting sustainability reporting requirements.
2. A company or banking institution may apply the ASEAN Taxonomy in issuing corporate “green” bonds and reporting on bond sustainability credentials.
3. Asset managers may use the ASEAN Taxonomy as a reference for green bond credentials to guide their investment decisions.
4. Rating agencies may apply the ASEAN Taxonomy to derive environmental, social and governance (ESG) ratings of bonds and the issuers.

The ASEAN Taxonomy strives to be an interoperable and inclusive guide that can be utilised by all AMS as they move forward in their sustainability journey. Following the release of the ASEAN Taxonomy V2, the ASEAN Taxonomy Board (“ATB“) will engage in further targeted consultations with key stakeholders. The ATB aims to release further updates to the ASEAN Taxonomy in early 2024 and 2025.