Environmental Issues Take Precedence in ASEAN’s Sustainable Finance Taxonomy – The Diplomat

Pacific money | Economie | Southeast Asia

The first version of the block classification system would facilitate investment in environmentally sustainable activities, but human rights are not yet on the table.

Gardens by the Bay in Singapore has a giant artificial tree grove as a vertical garden.

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In November, a group of ASEAN sectoral bodies known as the ASEAN Rating Board (ATB) released its first version of the ASEAN Sustainable Finance Ranking, a preliminary proposal for a sustainability rating system intended to be implemented across the world’s fifth-largest economy. At a time when the concept of sustainability is rapidly evolving and ASEAN member countries develop their own national sustainability agendas, the ASEAN rating will help governments and investors identify sustainable economic activities in the Southeast Asian context and direct investments to fill a large regional green finance gap.

But while the initial proposal adopts international best practices on environmental topics such as climate change, it lacks a critical requirement found in other leading sustainability rankings: respect for human rights.

Rating systems such as the ASEAN rating are viewed by stakeholders in the public and private sectors alike as essential tools for achieving long-term sustainability agendas. These regulations set criteria for determining whether an activity supports a range of sustainability goals, from pollution control and deforestation to support for international labor standards. Clear metrics and thresholds, such as maximum greenhouse gas emissions per unit of production, are often used to define the point at which an activity can be considered sustainable. Globally, more than 25 jurisdictions and many NGOs are developing or already finalizing sustainability ratings.

For governments and regulators, ratings can help set goals for future policy initiatives, such as subsidies for clean energy projects or taxes on carbon-emitting activities. In the private sector, ratings can help guide companies’ sustainable business strategies and help investors direct capital toward sustainable projects. The potential for facilitating sustainable investment is of particular interest in ASEAN where, according to the Monetary Authority of Singapore, an estimated $200 billion in green investment will be required annually through 2030.

The ASEAN rating aims to bring these benefits to Southeast Asia within a framework that is broadly in line with the world’s most advanced and influential sustainability rating, the European Union’s rating regulation. Under the ASEAN framework, economic activity is sustainable if it contributes to at least one of four environmental objectives derived from the EU classification: mitigating climate change, adapting to climate change, protecting a healthy ecosystem and biodiversity, enhancing resource resilience and the transition to a circular economy.

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In addition, sustainable economic activities must not significantly harm these environmental objectives and Parties must minimize any negative impacts. As a “minimum protection”, sustainable economic activity may not breach domestic environmental laws established by ASEAN member states.

In the concept of minimum safeguards, the ASEAN rating differs significantly from that of the European Union. Where only ASEAN rating requires local compliance environmental laws, the EU classification instead acknowledges the “importance of international minimum rights and standards for human rights and labor” in the environmental context and concludes that social Safeguards must be “a condition for economic activities to qualify as environmentally sustainable.” Accordingly, Article 18 of the EU classification requires that all sustainable economic activities comply with international human rights standards including the United Nations Guiding Principles on Business and Human Rights and the International Bill of Human Rights.

The lack of human rights protection is particularly evident in Southeast Asia, where the risks of forced labor are greater than in many other regions of the world. ASEAN member countries, including Myanmar, Cambodia, the Philippines and Laos rank relatively high in terms of exposure to modern slavery, including forced labor, according to the 2018 Global Slavery Index. These risks may be increasing in the manufacturing and agricultural sectors, namely: Among the six that It has been identified by ATB for priority interest as the ASEAN classification evolves. Without minimal social safeguards that require respect for human rights and labor standards, ASEAN’s rating risks not only prioritizing environmental standards over human well-being but also incompatible with other leading systems, such as the EU rating, which may discourage international investment.

While the ATB could incorporate human rights protections into future iterations of the ASEAN rating, there are early indications that ASEAN member states will address the topic in their national sustainability ratings, which will sit alongside the ASEAN rating. Last year, Singapore proposed a national green finance classification that would require sustainable economic activities “to not exert any negative impact on the social and economic well-being of communities.” This proposal expressly refers to the United Nations Guiding Principles on Business and Human Rights and other international human rights standards.

In Malaysia, a climate change rating finalized in May “strongly encourages” financial institutions to assess, as part of their lending or investment activities, whether businesses are complying with Malaysian human rights and labor laws and UN guidelines. If ATB ultimately leaves human rights outside the ASEAN classification for ASEAN member states to address individually, these national systems, when read with the ASEAN Classification, could form a more complete sustainable financial classification system that addresses the full spectrum of sustainability challenges in Southeast Asia.


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