Asean must ensure path is right after bold step on coal financing

THE Asean Taxonomy Board on Monday (Mar 27) finally gave the sustainable finance industry in South-east Asia what it has been seeking: A way to finance the phasing out of coal.

The move is a bold and necessary step in the right direction. But the Board must regularly assess whether it is working as intended and be ready to sunset the transition framework earlier if needed.

The vilification of thermal coal in the fight against climate change is understandable and appropriate. The fossil fuel supplies more than a third of global electricity generation, and its use has been growing despite the green movement's best efforts. Given the availability of renewable alternatives, the world needs to stop burning coal sooner rather than later if it is to avoid the worst of climate change.

But the movement against coal has perhaps worked too well. Any capital that touches coal now runs the risk of fierce naming and shaming. This has had the unfortunate result of frightening away even the type of financing that could be used to accelerate the shutting down of coal plants.

Many communities, especially in developing countries, are still highly dependent on coal-generated power. Coal supplied more than half of Vietnam's electricity in 2019, and more than a quarter in Indonesia and the Philippines. There is no morally and politically acceptable way to switch such large swathes of these societies to renewable alternatives overnight.

South-east Asia needs a managed and just transition away from coal, and the financing framework for this region must discern between capital that prolongs the lifespan of coal assets and capital that accelerates the phasing out of coal. The Asean Taxonomy has taken an important step towards a more nuanced approach. Its approach addresses key concerns in a few ways.

First, the pacing of coal's phase-out must be aligned with or faster than recognised science-based climate targets. Second, the accommodations made for transition financing must be temporary, because the surplus carbon budget that allows this transition middle ground to exist will eventually run out. Third, targets and outcomes must be independently verified. Finally, the framework must be adaptable enough to allow communities from different starting points to make progress and eventually become green.

While the Asean Taxonomy appears to tick many of the right boxes at this stage, the real test will come in the months and years to come. For instance, the desire to accommodate all the member states of Asean has led to the creation of a low-barrier Tier 3 classification that is not required to adhere to science-based targets or even to a firm phase-out deadline. While it is possible that projects under this category might struggle to attract most institutional capital -- which has been increasingly prioritising sustainability -- enabling even a few undesirable projects on the margins can be costly when stakes are so high.

There is also a fundamental risk with any transition framework that the promises made at the start are not kept, or that new data will show transition pathways need to be more aggressive than initially thought. It is therefore important that the Taxonomy's transition framework be constantly monitored, and its impact and appropriateness be constantly tested. If necessary, the Taxonomy should be adjusted to ensure that it remains a driver of positive change.