In recent years, Asia’s economic development has been spurred by government and private sector action in sustainable development. With COP26 in Glasgow paving the way for stronger leadership to mobilise capital for the net zero transition, 2022’s G20 summit is widely expected to lay the roadmap for greater alignment of the financial markets.
Asia’s sustainable economy – set to reach US$5 trillion by 2030, according to McKinsey – is a wealth of opportunity. But that value requires assurance by governments and financial markets that sustainability is more than a label, or just a concept.
Enter taxonomies – a tool that can translate commitments into action.
A sustainable finance taxonomy assesses the contribution from different parts of the economy to sustainability goals. These frameworks provide criteria, at different levels of granularity, that activities, assets and products must meet to qualify as sustainable.
This clarity brings extra rigour and credibility to ESG claims as well as sustainability goals.
Globally, national and regional taxonomies for sustainable finance are relatively new but fast-changing.
How is the landscape for taxonomies unfolding in Asia? And what can improve the usability of these systems to help Asian economies on the path to climate resilience?
This report – compiled through research and engagement with policy observers and practitioners – aims to provide a clearer picture of taxonomies in Asia, including the local nuances that are influencing new ideas and development, with an eye on the road ahead.
A snapshot of Asia's taxonomies
China, Bangladesh and Mongolia were among the first countries in Asia to publish green taxonomies, releasing their first lists of eligible products and activities between 2015 and 2019.
Since then, five more Asian countries – Indonesia, Kazakhstan, Malaysia, South Korea and Sri Lanka – have unveiled their own definitions and frameworks.
More taxonomies are on the way, especially in developing markets in the region tapping on green opportunities in the region's energy transition.
A region-wide taxonomy for ASEAN launched in November 2021 to align development in Southeast Asia, where the Philippines, Singapore, Thailand and Vietnam are also working on their first national versions.
South Asian markets are staking their claims too. India and Pakistan are also working on their own taxonomies, following Bangladesh and Sri Lanka.
Have taxonomies accelerated green finance in Asia?
Over the long term, taxonomies would need to build up greater reach and depth, supporting financial products with different risk profiles across the equity markets as well as the debt markets, to help generate the money Asia needs.
Even in China, a pioneer in green classifications, most sustainable financing still takes place within low-risk products, such as bonds and loans, notes Wenhong Xie, head of China Programme at Climate Bonds Initiative, an international not-for-profit focused on capital mobilisation for climate goals.
Chinese banks use government-approved whitelists to monitor their own lending, following government quotas on support for green projects.
But policies differ by province, while multiple classification systems – varying from one bank to another – are not easy to monitor and verify.
Sustainable finance’s uptake in China largely rests on government mandates so far. For further progress, local banks need to have more meaningful incentives, ideally based on greater alignment between industry and finance. Improved transparency and disclosure can also encourage investors to commit.
“Having a taxonomy alone wouldn't do the trick, partly because the Chinese economy and financial system is quite top-down,” Xie says.
“When there is a taxonomy, everybody will follow, but are they really putting money in?” Xie asks. “A taxonomy provides a very important basic framework and underlying definition, but you need other incentives for asset owners to meaningfully allocate more capital into this space.”
To facilitate more cross-border investment, China is working with the EU on a shared framework, called the Common Ground Taxonomy (CGT). The first version was published in November 2021.
Since then, the CGT has already been cited in four green bonds, collectively raising about US$2.1 billion between them, as well as two green loans totaling about US$275 million, from Chinese banks and institutions. There is little information on use by European lenders, however.