The ASEAN Taxonomy and Its Alignment with Global ESG Standards

Introduction to Certified ASEAN Taxonomy ESG Training

Since the concept of sustainability has become a major concern of financial markets all around the world, Southeast Asia is making significant strides in developing a single framework of green and sustainable finance. The taxonomy of sustainable finance in ASEAN, created during the ASEAN Finance Ministers and central bank Governors, Meeting (AFMGM) is the standardized language in the region to define sustainable economic activities.

The structure will help in guiding investors, financial institutions and corporations in determining environmentally sustainable projects and foster consistency and comparability across the region. To professionals finding their way through the changing world of ESG it is important to be informed of how the ASEAN Taxonomy is comparable to other internationally recognized standards such as the EU Taxonomy, IFRS S2 and the Task Force on Climate-related Financial Disclosures (TCFD) to effectively invest and report internationally.

The Origin and Development of the ASEAN Taxonomy.

The ASEAN Taxonomy was launched with an aim of developing a unified strategy in terms of sustainable finance in a region that is characterised by a wide range of economic systems and development priorities. The ASEAN Taxonomy appreciates the fact that there should be flexibility, unlike most Western systems which hold to strict rules of exclusion, especially where developing economies are in the process of changing to low-carbon routes.

It has four major environmental goals that define environmentally sustainable activities:

• Climate change mitigation
• Climate change adaptation
• Conservation of good ecosystems and biodiversity.
• Resource resilience and transition to a circular economy.

In order to be inclusive, the Taxonomy uses a “traffic light” approach, that is, categorizing activities as green, amber, or red, based on how they correspond to the goals of sustainability. This level strategy will enable a gradual shift towards sustainability instead of enforcing compliance.

The Two-Tier Structure Foundation and Plus Standards.

The ASEAN Taxonomy has two levels of assessment:

1. Foundation Framework: A principles-based model applicable to all the member states of ASEAN, particularly those that are at the initial phases of ESG integration. It offers qualitative guidance, which is represented on the principles of Do No Significant Harm (DNSH) and Remedial Measures to Transition.
2. Plus Standard A more developed, quantitative system which complies with international taxonomies. It proposes technical screening criteria (TSC) which are comparable to the EU Taxonomy, which put a focus on measurable environmental performance.

This bilateral arrangement will make sure that ASEAN states are able to implement the Taxonomy according to their schedule and that they will be coherent with the best practices at the international level.

Global ESG Standards Alignment.

The design of the ASEAN Taxonomy is an indication of global integration into uniform sustainability models. It has common principles with such dominant systems as:

• EU Taxonomy: both of them give priority to science-based thresholds and activity-based assessments.
• IFRS S1 and S2: The ASEAN framework is a supplement to these disclosure standards as it provides a clear understanding of what was considered a sustainable activity whereas IFRS is concerned with the reporting of such activities.
• Recommendations of TCFD: The Taxonomy promotes the identification of climate risks and disclosure, which help investors and markets to be confident and transparent.

Such conformity eases the ability of the multinational companies and the local financial institutions to standardize ESG disclosures in different jurisdictions minimizing redundancy and compliance requirements.

Furthering Sustainable Finance in ASEAN.

The ASEAN Taxonomy helps the region to shift to a low-carbon economy by offering a common framework that will enable better access to sustainable finance. It assists investors in recognizing viable green projects, assists regulators in establishing uniform standards, and assists banks to organize environmental risks in a better way.

The Taxonomy can be used by financial institutions to:

1. Create sustainable financial products including green loans, sustainability-linked bonds, and ESG funds.
2. Evaluate environmental performance of corporate investors and portfolios.
3. Publicize their sustainability reporting to the stakeholders and regulators.

This will assist in avoiding greenwashing since only those projects which are really sustainable will be considered to be green.

The Capacity Building and Training Role.

In a bid to apply the ASEAN Taxonomy, stakeholders within the finance ecosystem such as bankers, asset managers and sustainability officers need to know its logic of classification as well as its technical requirements. Capacity-building initiatives such as asean taxonomy sustainable finance and esg alignment training program play a crucial role in bridging knowledge gaps and building institutional readiness.

The programs assist the professionals:

• Collaborate on the objectives of the Taxonomy on the environment and the screening criteria.
• Bring in Taxonomy classifications to lending, investment and risk management practices.
• The mapping of ASEAN classifications to the world ESG standards such as the EU Taxonomy or ISSB standards.
• Establish internal governance frameworks which are in line with sustainability reporting provisions.

With national taxonomies being still refined in ASEAN countries, this training guarantees that the implementation will be consistent across the borders.

Real-world implementations in the Finance Industry.

The Taxonomy is gradually becoming incorporated into the operations of the financial sector. Banks are relying on it to determine credit risks associated with environmental effects, and investors are using it to vet portfolio of sustainable assets. Central banks and regulators (e.g. Monetary Authority of Singapore (MAS) and Bank Negara Malaysia (BNM) are also considering how they can integrate the ASEAN Taxonomy into their supervisory practices.

Workshops such as regional esg taxonomy and classification workshop for finance professionals provide practical guidance on integrating Taxonomy principles into day-to-day financial decision-making. Participants are taught how to categorize economic activities, how to analyze transition plans and how to make the sustainability claims credible and verifiable through the case studies and scenario analysis.

The workshops also encourage the cooperation of regulators and industry participants, establishing a unified regional ecosystem to the extent to which there is sustainable finance.

Implementation Problems.

Although it has a great potential, the ASEAN Taxonomy is characterized with a number of challenges in performance:

• Data Availability: Environmental data is not consistently available and reliable in many companies.
• Inequality in National Regulations: ASEAN countries have different policy preparedness and economic framework, which leads to difficulties in implementation.
• Capacity Gaps: The financial institutions still need some extra technical training on how to use sophisticated classification systems.
• Consistency with Global Taxonomies: Although one of the objectives is harmonization, it is still in development to have complete interoperability with global systems, such as the EU Taxonomy.

To tackle such challenges, there will be a need to work together between regulators, financial institutions, and international partners to have a viable, transparent, and credible sustainability finance ecosystem.

The Future of Sustainable Finance and ASEAN Taxonomy.

The ASEAN Taxonomy is not only a regional model but it is an interface between development aspirations of Southeast Asia and the objectives of global sustainability. It supports the commitment of the region towards the Paris Agreement and the UN Sustainable Development Goals (SDGs), and gives the financial tools to make it a reality.

With the continuous development of the Taxonomy, it is also likely to grow and incorporate other aspects of social and governance concerns to encourage a comprehensive ESG framework. The ASEAN Taxonomy is also a contributor to the possibility of ASEAN becoming an influencer of the global sustainable finance narrative because of the regional harmonization.

Conclusion

The ASEAN Taxonomy is a very important move towards the alignment of financial markets in Southeast Asia and the global requirements of sustainability. It provides the ability to mobilize all capital into truly sustainable activities by providing a structured, flexible and inclusive classification system to both the public and the private sectors.

Organizations can develop the skills required to implement the Taxonomy effectively by such projects as asean taxonomy sustainable finance and esg alignment training program and regional esg taxonomy and classification workshop to finance professionals so that they can develop credibility, transparency, and consistency in ESG reporting and sustainable finance practices throughout the region.