Asia’s plans to raise more funds through sustainable finance could be undermined if policymakers include heavy carbon emitting industries like natural gas production in regional taxonomies, according to analysis by the Institute for Energy Economics and Financial Analysis (IEEFA), an energy think tank.
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In an effort to meet climate goals and boost financing for green industries, politicians around the world are in the process of drawing up so-called taxonomies, frameworks that would standardise the rules governing sustainable finance.
China, the European Union (EU) and Malaysia have already published taxonomies while the Association of Southeast Asian Nations (ASEAN) is drafting its own green financial rulebook.
ASEAN, which makes policy frameworks for a region of 650 million people, is expected to be influenced by what is happening in Europe, where a deadlock over natural gas inclusion is testing its own taxonomy plans.
Southeast Asia, which relies heavily on coal power, is growing its renewable power base but it is also planning to use gas-powered electricity plants as a way of transitioning away from coal. Gas projects will need access to a large pool of financing which will be made easier if the industry falls within a framework designed to include environmental, social and governance (ESG) investments.
IEEFA, however, warns that including gas in a regional taxonomy could turn off investors who are concerned about being accused of pouring money into “greenwashing” exercises.
“Taxonomies that classify high emission activities as “sustainable” would taint the asset class and discredit the taxonomy,” IEEFA said in a report seen by Eco-Business.
“If Asian markets are hoping to meaningfully attract leading ESG investors and green the region’s economy, policymakers must rationalise the issues related to gas as a sustainable investment.”
Balancing the needs of countries that have different ambitions to cut carbon emissions will be a major test for ASEAN, a group of 10 member states in Southeast Asia. The bloc has said that its classification system for investors will also have to address the region’s specific needs, including the fact that it is still heavily reliant on coal.
Increasingly, asset owners and managers are placing emphasis on ESG considerations in their investment agendas. They are generally looking at how the businesses they invest in are going to insulate themselves against risks, such as excess carbon emissions.
Furthermore, they want greater ESG disclosures. However, the integration and reporting of ESG remains patchy, according to the IEEFA report authored by Christina Ng, fixed income research and stakeholder engagement leader. This could be to the detriment of Asian companies and countries looking for capital.
“Recognising that high carbon emitters are beginning to struggle to raise capital from banks and debt markets, some Asian policymakers are exploring whether gas-powered generation could be credibly labelled as “transitional” or “transitioning” activities,” according to Ng’s analysis. This could help facilitate the access to new pools of capital.
Asian emerging and developing markets remain reliant on fossil fuels with a smaller investment pool of green projects. This has led to energy policy planners pushing the merits of gas and LNG and its role as a ‘bridging’ fuel.
While burning gas produces half as much carbon dioxide as coal, the combustion of gas emits methane and other greenhouse gases (GHGs), significantly contributing to the long-term global warming effect. Using gas as a bridging fuel, “could end up locking Asia into a high-emitting future,” the analysis warns.
The inclusion of gas in the ASEAN, or country-level sustainable finance taxonomies, is therefore a “significant problem for ESG lenders” and could leave asset managers and issuers open to risk, the report said.
“Mechanisms in Asian taxonomies that could see funds directed to gas-fired power could be really problematic for ESG-focussed lenders and investors,” Ng told Eco-Business. “They would be faced with the risk of misrepresenting what the bonds are actually meant for.”
The inclusion of gas-fired power could create incompatibility with other green taxonomies and reduce international investment in projects and companies labelled under such a taxonomy.
Carbon capture technologies are being used to justify the addition of abated assets and projects in Asian taxonomies, much like the one proposed by Singapore’s green finance taskforce. This is problematic, according to IEEFA. Carbon capture is yet to be proven as economically and technically viable at scale, the report noted, which creates a credibility issue for labelling gas power plants as sustainable investments.
“The transformation needs to be credible. Betting on technology that is not proven yet, is really not helping the case,” Ng said.
Even if carbon capture and storage is successfully implemented, “serious green investors would likely continue to price in risks associated with these assets while seeking watertight regulation that goes beyond tokenism,” according to Ng’s note. This could lead to mandating the use of carbon credits and imposing material penalties in the event of non-compliance.
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Mechanisms in Asian taxonomies that could see funds directed to gas-fired power could be really problematic for ESG-focussed lenders and investors.
Christina Ng, fixed income research and stakeholder engagement leader, IEEFA
Proponents of the inclusion of gas projects in ASEAN’s sustainable finance taxonomy argue that Asia is starting from a much higher carbon intensity base and, unlike the EU, the region largely consists of emerging economies.
“It is argued by emerging market leaders that their developing status means they simply cannot afford to adopt developed nation policies. However, the science-based definition of ‘sustainable’ can’t be bent [or] based on economic conditions,” Ng said.
The EU’s attempts are the most advanced in terms of developing a robust tool to help define economic activities that are environmentally sustainable. The EU’s sustainable finance taxonomy will cover the economic activities of roughly 40 per cent of listed companies in sectors which are responsible for almost 80 per cent of direct GHG in Europe.
Settling on the terms of a sustainable finance blueprint and introducing the taxonomy in the EU “is by no means straightforward,” Iwona Piórko, the EU’s ambassador to Singapore, told delegates at the Unlocking capital for sustainable finance 2021 on 16 September, alluding to the treatment of nuclear and natural gas in taxonomies.
Since publishing its science-based taxonomy in June 2020, discussions around what should be included have been fraught with political lobbying and diverse commercial interests stemming from the energy industry, lenders, investors and regulators.
Pressure from fossil fuel interests is pushing for a broader set of additional assets including gas-related projects that may be considered sustainable and added to the taxonomy.
IEEFA’s analysis suggests that, “most markets are likely to have taxonomies that expand beyond truly sustainable green investments.” Controversial assets and investments such as gas-powered generation will most likely be recognised in the ‘transitional’ asset class.
