Updated ASEAN Taxonomy for Sustainable Finance Version 2 Improves Clarity and Usability, Effective from 19 February 2024

On 19 February 2024, the ASEAN Taxonomy Board shared the updated ASEAN Taxonomy for Sustainable Finance Version 2 (“ASEAN Taxonomy v2“) (link here), effective from even date. This update enhances the ASEAN Taxonomy v2 earlier released in March 2023 (refer here for our earlier Legal Update) by improving clarity in definitions and usability of the Taxonomy. The update also incorporates, where relevant, feedback received from targeted consultation exercises (which concluded in November 2023). For a summary of the consultation exercises/feedback, refer to our article in the December 2023-January 2024 issue of Newsbytes here

Overview of Taxonomy Design and Classification of Activities

The ASEAN Taxonomy v2 offers two assessment approaches: (i) a Foundation Framework (“FF“) which uses principles-based guiding questions and a decision tree to assess and classify sustainable activities; and (ii) a Plus Standard (“PS“) which is developed as an advanced form of assessment approach that uses both threshold-based (quantitative) and process-based or practice-based (qualitative) technical screening criteria (“TSC“) to assess and classify sustainable activities.

To be classified under the ASEAN Taxonomy with reference to either the FF or the PS, an activity must contribute to at least one of the four environmental objectives (“EOs“) and fulfil all three essential criteria (“ECs“).

The four EOs are:

(a)  Climate Change Mitigation, encompassing contributions to decarbonisation pathways through greenhouse gas emissions avoidance or reduction activities as well as enabling activities;

(b)  Climate Change Adaptation, concerned with reducing the negative physical risks of climate change and increasing resilience through processes or actions;

(c)  Protection of Healthy Ecosystems and Biodiversity through conservation, restoration, and protection of natural resources; and

(d)  Resource Resilience and the Transition to a Circular Economy by adopting principles of circularity namely minimisation of resource use, optimising resource yield, and closing resource loops by effective waste management, through the lens of raw materials, energy, water and other natural resources, and/or by adapting products, production, technologies, and processes.

The three ECs are:

(a)  Do No Significant Harm (“DNSH“) which means that an activity that contributes to one EO does not cause significant harm to another EO;

(b)  Remedial Measures to Transition to ensure any significant harm is either removed or rendered insignificant; and

(c)  Social Aspects that address social aspects that could be harmed by an activity, primarily defined as respect for human rights, prevention of forced and child labour, and impact on people living close to investments.

Key Changes in the Updated ASEAN Taxonomy v2

(a)  Clarification of the definitions and criteria for EOs and ECs under the FF including updates to guiding principles for all EOs, finalised DNSH Guiding Principles, and streamlined DNSH criteria corresponding to three EOs (Climate Change Mitigation, Protection of Healthy Ecosystems and Biodiversity, and Resource Resilience and the Transition to a Circular Economy).

(b)    A catalogue of Red Activities, previously listed within Appendix J of ASEAN Taxonomy Version 1.

(c)    Finalised TSC for Coal Phase Out.

(d) Future TSCs for Electricity, Gas, Steam and Air Conditioning Supply (Energy) activities as indicative thresholds.

Grandfathering Rules covering green bonds and other green financial instruments, which consider practices in other markets and the evolving landscape of sustainable finance within ASEAN to encourage the flow of capital to support decarbonisation of the region.

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