The second version of the ASEAN Taxonomy for Sustainable Finance, which includes a framework for phasing out coal, demonstrates how emerging markets can move towards their climate goals by adapting global sustainability standards to fit the local context.
The inclusion of coal phase-out as a supported activity within the taxonomy is a world first.
Sustainable Fitch, in its newly released report dubbed ‘Revised ASEAN Taxonomy Paves Way for More Transition Financing’ expects this localised approach to promote more regional environmental, social and governance (ESG)-labelled debt issuances and support the funding needs for a scalable energy transition.
Coal accounts for about half of southeast Asia’s energy mix, but the region faces pressure to reduce reliance on the carbon-intensive fossil fuel. The updated taxonomy, released in March 2023, allows coal phase-out activities to be classified under either green or amber categories. The taxonomy states that coal plants are eligible for green financing as long as they adhere to a dedicated timeline for early retirement, capped at a maximum of 35 years.
This serves as a powerful signalling tool that transition efforts are high on the region’s list of sustainability priorities and helps to define transition activities and finance in the region. Investors have typically been cautious of transition financing, due to the lack of a universal definition, uncertainty around corporate transition targets and the absence of recognised standards. A clearer understanding of what constitutes a transition activity provides investors with a framework against which to better assess entities’ transition plans.
The added guidance will also address greenwashing issues by encouraging issuers who seek to voluntarily align with the taxonomy to demonstrate that their projects meet the criteria set out before seeking investment. As a result, we expect these to encourage more transition financing via a combination of green, sustainability and sustainability-linked bonds and loans in the short to medium term.
