Investors welcome coal phase-out addition to ASEAN taxonomy

Investors have tentatively welcomed last week’s updates to the ASEAN green taxonomy, which doubles down on the framework’s focus on regional inclusion and transition activities.

The new release fleshes out the eligibility criteria for the energy sector and introduces coal phase-out as a supported activity in what is being described as a “global first”. It is the first time the Southeast Asian taxonomy has been revised since its initial draft was published in 2021.

Unlike the EU taxonomy, which makes exiting coal a prerequisite to access financing, the ASEAN equivalent considers active coal plants and those currently being built eligible for green financing, so long as they adhere to a strict timeline for early retirement.

This is capped at a maximum of 35 years.

According to the taxonomy document, the use of lifecycle age to gauge coal phase-out was chosen as a simpler measure than emissions-based calculations, which it described as complex and lacking “ease of usability”.

A number of investment strategies to decommission coal plants have been tabled in recent years in response to Asia’s continued reliance on the commodity. Coal currently makes up just over half of Southeast Asia’s energy mix.

The most prominent of these include a buyout fund managed by the Asian Development Bank (ADB) to speed up the closure of coal plants, and guidance being developed by the APAC chapter of the Glasgow Financial Alliance for Net Zero for investors to implement a managed phaseout for their coal holdings.

Lazeena Rahman, deputy team leader for ADB’s coal buyout mechanism, welcomed the taxonomy’s recognition of the need to address the early retirement of the region’s “relatively young” coal-fired power fleet, as well as the incorporation of social factors into the framework.

“Learnings from ADB’s transactions can help refine and inform further iterations of the technical criteria and methodologies proposed by ASEAN,” Rahman added.

GFANZ APAC have been contacted for comment.

Asset managers in the region were broadly positive on the taxonomy update, but flagged further areas for improvement. “The inclusion of coal phase-outs and early phase-outs is critical,” said Ninety One’s emerging markets sustainable equities portfolio manager, Juliana Hansveden. “But ideally no new coal-fired generating capacity should be constructed and that capital should be used to invest in renewable alternatives.”

She also called for expansion of the taxonomy’s focus. “Although countries like Indonesia don’t have an acute water shortage problem, I would consider adding water as a taxonomy goal.

“In addition, I do think that, given the level of underdevelopment of social areas including financial, digital, education and healthcare inclusion, the taxonomy should ideally aim to include these goals.”

Ronnie Lim, who heads active ownership and sustainable investment for Robeco Asia Pacific, said the creation of an ASEAN-specific taxonomy would likely become an important reference for regional policy-making.

At the same time, he noted, it would be in competition with established taxonomies. “This gives ASEAN-listed sustainable funds a choice of which taxonomy to use. But obviously the vast majority of funds bought are still UCITS [complies with the EU fund regulatory framework] and these aim to be aligned with the EU taxonomy.”

The technical screening criteria for the energy sector, included in the update, will now be put to a targeted consultation with stakeholders before being finalised early next year. Screening criteria for other sectors will be released in phases by 2025.

A multi-tiered approach

The taxonomy has a multi-tier structure designed to be interoperable with existing taxonomies in the region, including Malaysia’s principles-based framework and Singapore’s colour coded “traffic light” system, and to allow for “different levels of adoption depending on individual member state readiness”.

ASEAN’s 10 member states can choose to adopt a so-called “starter” taxonomy route for some activities, called the Foundation Framework, which uses a principles-based assessment to determine eligibility without explicit technical screening criteria.

Under the Foundation Framework, activities are classified as green or red based on qualitative guiding questions – for example, on how an activity reduces GHG emissions under the climate mitigation objective.

The more advanced Plus Standard uses threshold-based technical criteria to define green activities.

The taxonomy is aligned to most of the EU taxonomy’s environmental objectives, and incorporates similar requirements to do no significant harm (DNSH) to other objectives and social safeguards.

Unlike the EU, the ASEAN taxonomy provides an exception for DNSH in cases where remediation action is introduced that will effectively remove all significant harm within five years. At that point, the activity will be reclassified as red, or ineligible, if unsuccessful.

In both the Foundation Framework and the Plus Standard, activities that cause significant harm will be downgraded to amber pending effective remediation. It is expected that the amber category will be phased out in future versions.

The taxonomy recommends the use of the Plus Standard where feasible, but notes that the Foundation Framework would suit activities with data availability and accessibility challenges.