How taxonomies can boost the sustainable finance market

A flurry of regulatory activity has seen several new green taxonomies in Asia. Victoria Robson looks at how these can help boost the sustainable finance market.

Across Asia-Pacific, from Australia to Vietnam, including in international finance hubs Hong Kong and Singapore, governments are either drafting green taxonomies or building on progress already made.

“Green taxonomies have rapidly become a priority for Asian financial regulators interested in managing ESG-related financial risks and directing more long-term investments towards sustainable economic activities and projects,” says Farah Imrana Hussain, head of sustainable finance and ESG advisory at the World Bank Treasury.

Sustainable finance in Asia-Pacific already has momentum, growing from a modest base. According to the latest ESG Global Survey published by BNP Paribas, 43 percent of investors in APAC have set portfolio net-zero targets, lagging only 2 percent behind European investors.

Meanwhile, in the first half of 2023, APAC-originated ESG bond issuance totalled almost $140 billion, led by Chinese issuers that accounted for more than a third of the total value, according to BNP Paribas. The majority – two thirds – were labelled ‘green’, followed by 20 percent designated ‘social’, which included the first South Korean gender-themed social bond.

“There is an urgent need to unlock global transition finance”

Yuki Yasui,

However, in a region dependent on fossil fuels, particularly coal-fired power, the transition to renewable energy sources remains critically underfunded. According to the International Energy Agency’s 2022 Southeast Asia Energy Outlook, the region requires about $130 billion in clean energy investment a year until 2030 to achieve stated policy objectives, increasing to $190 billion to secure a long-term sustainable future.

“There is an urgent need to unlock global transition finance, especially from advanced economies to emerging markets, including APAC, and also domestically,” says Yuki Yasui, managing director of the Asia-Pacific Network at Glasgow Financial Alliance for Net Zero.

By spelling out permitted economic activities, using science-based definitions, and establishing eligibility thresholds, green taxonomies are intended to combat greenwashing, protect investor credibility and lower transaction costs. The ultimate aim is to encourage sustainable capital flows.

But given that investors need clarity and certainty, there is a risk that the number and variety of taxonomies in APAC fragments the market for green finance instead of aligning it. For investors, interoperability between local taxonomies and with international classifications is critical.


Matteo Bigoni, head of taxonomies at the Climate Bonds Initiative, which has consulted on many taxonomy projects across APAC, notes that the way to ensure “all these taxonomies speak to each other and are as interoperable as possible” is to incorporate a common set of principles into the design and adopt similar technical screening criteria and metrics.

Taxonomy owners, keen to attract cross-border investment, have been receptive to that advice, he says. “By explaining that this is what international investors want, you have a lot of leverage.”

The incentive holds within the region too. The Thai government, cognisant of its export market in China, seeks to ensure its green taxonomy aligns with its neighbour’s classification scheme, the Green Bond Endorsed Project Catalogue, China’s de facto taxonomy, he adds.

Like many APAC taxonomies, the Thai framework is also intended to be compatible with the ASEAN Taxonomy for Sustainable Finance. This taxonomy, one of the very few regional taxonomies globally, was conceived as an overarching framework that states can build on with their own taxonomies. An updated second version of the ASEAN taxonomy was published in March.

Countries must balance consideration of green definitions, national regulations, environmental goals and cross-border comparability, says Hussain, who worked with Malaysian regulators to develop central bank and capital markets taxonomies based on the ASEAN taxonomy. “Where possible, common definitions should be pursued,” she says. “But of course, there are challenges due to differences in resources, transition plans and pathways, so thresholds and criteria will differ between countries.”

Among member states, “there is a good amount of alignment with the ASEAN taxonomy, but inevitably there will be differences as each market develops its own classification framework, which reflects characteristics and nuances unique to each jurisdiction”, says Chaoni Huang, APAC head of sustainable capital markets at BNP Paribas.

Which taxonomy an issuer references will depend on its strategy and the underlying use of proceeds. “A local taxonomy will support local-currency bond issuance and become the baseline for local investors’ decision-making,” says Huang. “But a euro or dollar issue, that’s a different discussion as international investors require alignment with international best practice, guidance and standards.”

Transition finance

Huang sees many commonalities within Asian taxonomies, particularly around Paris-aligned activities marked ‘dark green’. “Across the board, the definition of renewable energy, for instance, is widely aligned from China to Australia to the EU. The discrepancy appears in how each jurisdiction defines transition,” she notes.

Some have yet to clarify their take on a segment of the sustainable finance market that will fuel decarbonisation of the region’s economy. “Singapore’s traffic light system describes a dynamic transition journey,” Huang says. “We are eager to hear how China will define transition, and how Hong Kong will, given it’s an international capital market.”

“The objectives of developing green taxonomies may not be clear or consistent across markets”

Christina Ng,
Energy Shift Institute

In May, the Hong Kong Monetary Authority published a discussion paper on a prototype green classification framework that seeks to operationalise the Common Ground Taxonomy. Developed by the International Platform on Sustainable Finance, the CGT seeks to align Chinese and European taxonomies. CBI is assisting with Hong Kong’s prototype, which does not currently address the concept of transition, although it is expected to in its next iteration, says Bigoni.

Similarly, in Singapore, where the monetary authority is working with IPSF and ASEAN, its taxonomy is intended to be highly interoperable with EU green classifications. “It’s one of the main objectives,” says Bigoni. While its ‘traffic light’ classification framework is innovative, the definition of what constitutes ‘green’ is interoperable with the EU taxonomy, he notes.

Japan is the major outlier in the region, with its government continuing to resist the idea of a green taxonomy. However, the Ministry of Economy, Trade and Industry has issued a series of sector-specific roadmaps that are intended to help companies raise finance for activities that can be labelled ‘transitional’. The PRI said in a March 2023 report that these roadmaps include “some taxonomy-like features”. Meanwhile, in a survey conducted for the report, over two-thirds of respondents described the absence of a taxonomy as a potential risk for investors.

Coal controversy 

The fourth and final public consultation on the Singapore-Asia Taxonomy closed in late July. Notably, this version sought feedback on thresholds and criteria for the phasing out of coal-fired power plants. While the emission-reduction impact of retiring coal plants is obvious, whether it should be included in a green taxonomy and how the process is managed provokes debate.

“We need to think very carefully about how coal phase-out is included in taxonomies,” cautions Bigoni. “[To include] coal phase-out you need to have screening criteria that looks at the entity to ensure the entire company and its operations are transitioning away from coal, which is not something taxonomies generally do. Taxonomies look at activities, projects and assets, not companies. A taxonomy can say there needs to be a transition plan in place, but it doesn’t define what it looks like.”

Yasui echoes the point: “We want to see the entity’s transition plan, not just the asset targeted for phase-out. While taxonomies focus on activities and provide very specific thresholds around the managed phase-out of assets, there is more that financial institutions need to consider,” she says. “Managed phase-out should be part of this broader plan. It’s a wider issue than a technical assessment of the asset.”

“Green classification tools may not be enough to scale up green financial instruments”

Farah Imrana Hussain,
World Bank Treasury

In the summer of 2023, to the dismay of green finance market participants, the Indonesian government indicated that it is considering going further and including new coal-fired plants in its green taxonomy.

“The first version of the Indonesian taxonomy was impressive and kept the green label pristine, reserved for truly renewable, low carbon energy sources that protect the environment,” says Christina Ng, managing director at Energy Shift Institute. “Now they are thinking about adding, of all things, coal?”

When building a taxonomy, there can be no ambiguity about the use of green and transition labels, Ng warns. “I’m concerned that the objectives of developing green taxonomies may not be clear or consistent across markets and that creates uncertainty for investors who have their own green commitments and standards. If we don’t have a clear-cut taxonomy, it will further confuse the market in a region where there is already an issue of transparency.”

While promoting greater awareness of climate finance among investors, issuers and regulators, evolving a green taxonomy is only one pillar in a raft of changes required to spur growth in the Asian sustainable finance market.

“Green classification tools may not be enough to scale up green financial instruments,” notes Hussain. “Regulators need to link green financing with regulatory interventions such as reporting and disclosure requirements and incentives. We also need to remember that many countries in Asia have underdeveloped or nascent domestic capital markets and lack the financial market infrastructure needed to scale up bond issuance. In such markets, green taxonomies may be more useful to scale up green lending, while regulatory authorities develop domestic capital markets.”

India’s green bond launch

As APAC green taxonomies evolve, sovereign issuers are playing their part to develop the regional green bond market. 

India launched its first green sovereign bond in January 2023, raising the equivalent of almost $1 billion. A second green bond sale in February scooped up a similar amount.

In the same month, the Securities and Exchange Board of India revised its green debt framework to strengthen disclosure requirements, while introducing the concept of blue bonds to finance sustainable water management and yellow bonds to fund solar, as well as transition bonds. It also published guidance on avoiding greenwashing. India’s Ministry of Finance’s Taskforce on Sustainable Finance has developed a draft taxonomy that has yet to be finalised.