Sustainable finance taxonomies light up Asia’s net-zero path

Natural ecosystems can be restored and prosper, and bustling cities can be powered entirely by clean energy. Sound utopian? In a rapidly decarbonizing world, more guidance and frameworks are emerging that can help make this a reality.

Sustainable finance taxonomies are one example. They serve as a compass, directing investments toward truly sustainable projects that can fuel the transition toward a zero-carbon future. By clearly defining and classifying what qualifies as “green,” taxonomies help investors channel funds to where they are most needed, transforming industries, cutting emissions, restoring nature and supporting the path to resilience.

Asia is home to many of the world’s sustainable taxonomies — though Japan has not developed its own. Most are at the country level, like those in China and Bangladesh, which serve as strategic tools to meet local needs. Others are regional, like the one issued by the Association of Southeast Asian Nations or the newer Singapore-Asia taxonomy.

The latter has been designed to be more compatible, or interoperable, with other taxonomies around the world, like the European Union’s. At their core, these tools serve as an anchor for capital to flow toward climate solutions: Interoperability is therefore crucial in encouraging more finance streams and maximizing taxonomies’ contribution to cutting emissions, making for a speedier transition.

Yet most of these structures are not interoperable and in many cases, the frameworks taxonomies provide are only a reference and not compulsory — with the exception of the EU, where this system is legally binding.

Asia is home to several burgeoning economies and a rapidly growing population to match — however, it relies on coal for 40% of its energy mix, well above the global average of 25%, with as many as 5,000 coal-fired power plants operating in Asia-Pacific. Globally, each day, plants like these spew thousands of tons of carbon dioxide into the atmosphere, contributing significantly to global temperature rise. Such plants have an average lifespan of 50 or more years, and collectively could add as much as 30 gigatons of carbon to the atmosphere by 2060.

This means that cutting emissions in Asia is key to decarbonizing the entire planet, though the region’s sustainable transition is in its infancy, with countries collectively facing a shortfall of at least $800 billion in climate finance. Identifying where these resources must go can be just as challenging as sourcing the finance itself. The need to act is clear, but the path forward is not.

Taxonomies, while not being a quick fix, provide invaluable guidance. They offer a roadmap for companies and investors to navigate the complexities of sustainable investments, especially important when considering that governments’ attention and resources are often directed at other socioeconomic needs.

The Singapore-Asia taxonomy, issued by the industry-led Green Finance Industry Taskforce, was launched in 2023: It defines green and transition activities across eight key sectors that collectively represent 90% of Asia's greenhouse gas emissions.

The framework introduces a unique traffic light system that earmarks sustainable activities. One example of a transition activity designated as “amber” are coal-fired power plants that are decommissioned early. To qualify for this category, the phaseout must take place by 2040 and clean energy sources must replace the lost capacity.

This approach not only prevents emissions, but accelerates the transition to sustainable energy.

Many companies and investors are eager to take action by making investments in projects like these, but struggle to turn their ambitions into reality. They often face knowledge gaps and funding limitations to navigate the technical complexities of how they should be investing. By relying on taxonomies, they can reduce reputational risks and prevent greenwashing, while channeling finance to the right projects and activities.

As taxonomies become more standardized globally, cross-border flows will become steadier, directing climate finance where it is most needed at a global scale. So far, in an effort to support the development and implementation of taxonomies, industry organizations such as the United Nations Environment Program Finance Initiative have come together to build consensus on definitions and concepts among standard setters, policymakers and users.

While we await further policy and regulatory support to fund and implement sustainable practices, businesses and investors can leverage existing taxonomies to make informed, sustainable choices. These will boost economies, generate green jobs and secure capital flows.

By bridging the gap between today’s reality and a future utopia, this approach can help create a pathway for long-term sustainability in Asia, and beyond.