APAC Sustainable Financial Taxonomy is coming in 2021: An analysis on HK, SG and Korea Regulations

Executive summary

127 governments – responsible for more than 60% of global emissions – are considering or already implementing commitments to net zero. Countries like South Korea and in the EU has vowed to a net-zero-by-2050 emissions target. While Singapore sets its target date to be “as soon as viable in the second half of the century”. Hong Kong has also announced its 2050 carbon neutrality goal.

Following the Net-Zero Commitments by governments around the world, the building block of Taxonomies is a signal for a global movement towards environmental performance reporting standardization. It is an ongoing dialogue for the upcoming years as it grows and coordinates among different taxonomies.

Financial market participants are the main actors in the act but not the only ones who should be concerned about the legal requirement in alignments and disclosures. When first being proposed by the EU Commission back in 2018, the taxonomy seeks to identify business activities that are aligned with the EU’s environmental objectives, with a focus on climate change. According to Responsible Investors, the new regulation will require large companies and investors in the EU to disclosure how they align with the taxonomy, and it is the basis for an EU Green Bond Standard and a number of other financial products and potential regulatory interventions in the coming years.

The Steering Group formed in Hong Kong will aim to adopt the "Common Ground Taxonomy" under development by the International Platform on Sustainable Finance. China and the European Union are leading these development efforts and, according to the HKMA, the group will develop the Common Ground Taxonomy by mid-2021. China recently took steps to align its Green Bond Endorsed Catalogue with global standards by removing clean coal from the list of "green" investment projects. The Common Ground Taxonomy should provide an additional layer of international alignment in the world's second-largest economy. In contrast to the EU Taxonomy, the HKGFA is proposing a taxonomy of climate transition finance that emphasise the real economy actor and acknowledges the unique constraints faced by each real economy actor independent from industry factors.

In Singapore, compared to other taxonomies, a key feature of the proposed taxonomy is that it encompasses transition activities that allow for a progressive shift towards greater sustainability while taking into account starting positions and supporting inclusive economic and social development,” as the MAS (Monetary Authority of Singapore) described. Last year, the IPSF (the International Platform on Sustainable Finance) said it has set up a working group – led by the EU and China – to explore the “common ground” in their approaches to classifying green economic activities. The Taxonomy is expected to be facilitating the sustainable growth of Green Finance in Singapore and the broader ASEAN region.

In the Republic of Korea, the FSC (Financial Services Commission) intends to gradually strengthen corporate disclosures of environmental factors and to require all KOSPI-listed firms to disclose their environment data from 2030. Larger KOSPI companies will have to mandatorily make these disclosures from 2025. The FSC has also announced its key policy agenda in developing K-taxonomy to clearly distinguish between green and non-green industries and activities (H1 2021) and seek improvements to the system (H2 2021).

A common design approach between international taxonomies would enable mutual recognition of Taxonomy frameworks and support market understanding of the environmental performance of economic activities and investments across markets. The far-reaching impact of a multilateral taxonomy action or framework is likely to be revealed in the future. That said, the taxonomy is never a sole business for one nation but a group effort in making a sustainable future. International harmonisation is expected to achieve Net-Zero.

It is always easy, as the first step, to define the extremes. But the issue now is how to define the middle. Without professional consultancy and support, complexity and rapid evolution are posing challenges for businesses in realizing their full potential in going sustainable.

As suspected by many, the COVID-19 pandemic is likely to accelerate the development of a social and governance focused taxonomy as well. As at the moment, most Taxonomy Regulations are limited to environmental objectives. A forward vision is required to seize the competitive advantages the taxonomy has brought and to season the risk it has embedded at the same time. Act ahead to turn these regulatory opportunities in your favour before they are risks.

Green Finance in Asia Pacific

As reported by HKGFA, existing green finance tools and definitions have received market consensus with an increased adoption rate. However, new tools are needed to unlock and mobilise more capital, more sectors with more participants. For climate transition finance, transparency and contextualisation is key to robustness.

What qualifies as the “best available, partially satisfactory” may differ among geographies and entities, due to the unique constraints. As the definition of transitional activities is not as straightforward as green activities, we should rely on rigorous, evidence-based, professional judgement to safeguard the robustness of transition finance.

Moreover, the New Climate Economy states that the next 10–15 years are a critical moment in economic history, where globally US$90 trillion is expected to be invested in infrastructure before 2030, more than the total current stock. The sustainability of these infrastructure investments will be a crucial determinant of future growth and prosperity. The multi-trillion-dollar Belt and Road Initiative is expected to have a significant impact on the speed of growth in 60+ countries across Asia, Africa, and Europe. All of these new investments should ideally be green or at least transition-related. While these large-scale transformative changes are necessary, the New Climate Economy also found that bold action and swift transitions could yield a direct economic gain of US$26 trillion, conservatively estimated, through 2030.

What’s next for investors?

(written by Yitong Yuan)

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