The recent consolidation of sustainability disclosure reporting rules under the International Sustainability and Standards Board (ISSB) may pave the way for a similar convergence or harmonization of the various environmental, social and governance (ESG) taxonomies that currently proliferate in Asia.
In Asia, there are currently nine ESG taxonomies in individual countries – Bangladesh, China, Indonesia, Japan, Kazakhstan, Malaysia, Mongolia, South Korea and Sri Lanka. There is also a regional taxonomy for Southeast Asia known as the Asean taxonomy for sustainable finance, as well as the China-European Union (EU) common ground taxonomy.
While each taxonomy is designed to meet the unique requirements of their particular country or region, there is also the need for their harmonization or convergence if Asia is to achieve the net-zero targets set under the Paris agreement, which aims to reduced global emissions by 45% by 2030 and reach net zero by 2050.
Although there are attempts at convergence and harmonization, such as the Asean taxonomy for sustainable finance, as well as the China-EU common ground taxonomy, there needs to be a wider blueprint for harmonizing so many taxonomies, while maintaining the unique features that meet individual country requirements.
“Harmonization is key,” says Laura Bosch, sustainable investing specialist at Robeco. “We’re still at the beginning of this journey since taxonomies have only been implemented in the last few years. It’s just a process where countries will be trying to look for that convergence between them.
“What’s important to highlight here is that the reason why taxonomies are slightly different is because they try to take into account local considerations that might be more relevant for certain countries. So that's why probably we won't have a standardized taxonomy that will be applicable across all jurisdictions.”
This is where the ISSB’s work on the consolidation of sustainability disclosure reporting rules can provide a possible blueprint for harmonization of the various Asian taxonomies.
Last month, the ISSB issued its first sustainability-related disclosure standards to take effect from January 2024. The ISSB is responsible for developing sustainability disclosure standards for the International Financial Reporting Standards (IFRS), the accounting standards that are widely used by most global businesses.
IFRS standards are also required or permitted in 132 jurisdictions across the world, while their counterpart, the Generally Accepted Accounting Principles, are only used in the US.
As part of its work to produce sustainability-related disclosure standards for the IFRS, the ISSB is incorporating and harmonizing disclosure standards from the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainable Accounting Standards Board (SASB).
The TCFD standards focus on disclosure of climate-related financial information, while the SASB standards focus industry-specific standards for disclosing sustainability risks and opportunities.
“The ISSB has looked at the TCFD and SASB, and sort of brought everything under the same roof,” Bosch explains. “And this probably is going to be the blueprint for corporate sustainability disclosures in the future. Something similar might happen with taxonomies, but still allow for that local flavour, and just look for convergence in the design features in the taxonomies themselves.
“What we will see in the next few years is that these taxonomies will start converging a bit further. We’ve already seen that at the regional level. All the different countries in Southeast Asia have been rolling out their local taxonomies that look for that alignment with the Asean [Association of Southeast Asian Nations] taxonomy. We’ve also seen something similar with the China-EU common ground taxonomy where they’re trying to merge the principles behind the taxonomies to make it more comparable.”
