Global competitiveness of ASEAN firms increasingly rides on ESG readiness

In the year ahead, businesses in Singapore and Southeast Asia would be wise to tighten their climate, human rights, biodiversity, and nature-resource management as policies increasingly seek to eliminate corporate externalities.

Expectations of emissions’ rising costs mean that companies’ competitiveness will hinge on their readiness to stay ahead of environmental, social and governance (ESG) regulations, industry observers told The Business Times.
 

Calm before the storm

More carbon tariffs could follow in the footsteps of the European Union’s Carbon Border Adjustment Mechanism (CBAM), which imposes a tax on the carbon footprint of imports in high-emitting sectors.

Charlie Knaggs, Asia-Pacific regional partner for decarbonisation at sustainability consultancy ERM, noted that Australia is among countries considering similar measures, suggesting a global shift towards a more uniform approach to pricing carbon emissions.

Exporting countries or regions could turn to carbon pricing as a source of revenue, to help decarbonise their industries and keep their companies competitive in the face of such tariffs, said Joseph Chun, partner at Shook Lin & Bok.
 

Most exports from Southeast Asia into Europe are manufactured goods that fall outside of the categories currently covered under CBAM – iron, steel, cement, aluminium, fertiliser, electricity, and hydrogen imports. But Chun sees this as the calm before the storm.

A number of Southeast Asian countries are still coal-dependent, with most not having any carbon pricing mechanism, he said. Exporters trying to collect data on greenhouse gas emissions (GHG) may also incur additional costs.

Darian McBain, founder of Outsourced Chief Sustainability Officer Asia, said regional exporters to Europe are already feeling the heat.

“My experience working across the region highlights that companies exporting to the EU are concerned, and in some countries, sectors are working together with their governments on strategies to ensure their exports can remain competitive,” she said.

The coming EU supply chain due diligence requirements may be even more challenging to meet, said McBain.

For example, the EU’s Deforestation Regulation will require full supply chain traceability and visibility into product derivatives, including for palm oil, soy and rubber, and the added complexity of harvesting and production timings.

There are also social-dimension due diligence requirements on issues such as labour rights, recruitment fees, consent and corruption.

“Many of these supply chain due diligence risks, such as human rights, are not as easily measurable, calculable or additive as carbon dioxide emissions, which are already complex,” said McBain.
 

Carbon tax momentum

The adoption of carbon pricing remains slow in Southeast Asia compared to the rest of the world, with Singapore’s carbon tax and Indonesia’s trial coal-sector carbon pricing being the only national initiatives at the moment.

Knaggs said more widespread and decisive action is required. Without adequate carbon pricing, some technologies fundamental to Asia’s decarbonisation, such as carbon capture and storage, will not be competitive, he added.

Singapore’s carbon tax will be raised from S$5 to S$25 a tonne next year. That sharp rise will mark the point when the tax “begins to be commercially significant” in Singapore, incentivising companies to invest in emissions reduction on-site, he said.
 

Mark Jacobsen, partner at TSMP Law Corporation, believes CBAM could prompt Southeast Asian countries, including Singapore, to push carbon pricing policies in order to capture the tax revenue at home.

Nhan Quang, partner in Ernst & Young’s climate change and sustainability services, added that if EU importers can prove the carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted under CBAM.

Thus there could be more jurisdictions looking to introduce carbon pricing mechanisms in the future, he said, noting Vietnam’s interest in operating a carbon credit exchange mechanism.

Brian Ho, sustainability and climate leader at Deloitte Southeast Asia, said that for a start, Vietnam may need to rapidly develop stricter environmental regulations, given its high export volumes to the EU on a broad range of products.

CBAM is viewed by some as a “potential protectionist tool” that could shield EU companies from Southeast Asian competitors, he added.
 

Nature side of things

Allen & Gledhill’s ESG and public policy practice co-head Elsa Chen said ESG regulation could reach beyond climate and human rights concerns to cover biodiversity and natural resource management.

Biodiversity targets, due diligence and disclosures are being developed and incorporated into international standards, including the International Sustainability Standards Board’s, she said.

Singapore’s business regulators had said in July that they are aligning their proposed mandatory climate-related disclosure rules for listed and large non-listed companies to the international standard.

The Taskforce on Nature-related Financial Disclosures’ framework for nature-based disclosures was also finalised in September, noted Chen.

“Over time, we expect these to be applied in Singapore, in the same way that the recommendations by the Taskforce on Climate-related Financial Disclosures were mandated by the Singapore Exchange on a phased approach from FY2022,” she said.
 

Working with taxonomies

Singapore finalised its taxonomy to guide capital allocation into green and transition activities on December 3, after four rounds of public consultations over two years.

Defining features include explicit criteria for transition activities, and an extensive scope that covers sectors making up to 90 per cent of the region’s GHG emissions.

Tan Wooi Leong, managing director for energy and industrial at Surbana Jurong, said the taxonomy’s clarity opens the gates to coal phase-out transition projects. Labelled transition bonds may also take off, benefitting companies with properly detailed transition plans.

The ASEAN taxonomy is expected to complement the Singapore taxonomy, by providing a broader regional framework for sustainable finance, facilitating cross-border investments and strengthening the impact of sustainable finance initiatives in member countries, he said.

The ASEAN taxonomy is expected to finalise its technical screening criteria for the energy sector in early 2024.
 

When that happens, the energy industry is likely to witness increased deal activity around wind, hydro, and bioenergy power as well as in relation to geothermal energy and ocean energy, said Adrian Ang, who co-heads the ESG and public policy practice at Allen & Gledhill with Chen.

Surbana Jurong’s Tan similarly said: “Investors and businesses are anticipated to express heightened interest in projects aligned with the taxonomy’s sustainability criteria, particularly in renewable energy, energy efficiency and technologies supporting cleaner energy sources.”

Of particular significance are coal transition projects in the region. “Investors, increasingly mindful of ESG factors, are likely to prioritise projects that contribute to carbon emission reduction and align with the taxonomy’s criteria,” Tan said.

Chun from Shook Lin & Bok said thresholds for classifications currently vary between the ASEAN and Singapore taxonomies.

For example, electricity generation from fossil gas may in certain circumstances be considered a “green” or “amber” activity under either taxonomy, but the threshold for qualifying as an amber activity under the final Singapore taxonomy appears to be stricter.

He also pointed out that the criteria for credible early coal power phase-out under the Singapore taxonomy also appears to be more onerous than the requirements for green and amber coal power phase-out under the Plus Standard of the ASEAN taxonomy.

For example, for coal power phase-out to be considered credible under the Singapore taxonomy, the coal plant must have a just transition plan. The coal plant’s generation must also be replaced one-for-one with a portfolio of clean resources that provides equivalent electricity services within the electricity system.

The ASEAN taxonomy does not have such requirements for green and amber coal power phase-outs.

“Users will have a choice of taxonomy to take reference from, but financial institutions regulated by the MAS (Monetary Authority of Singapore) will want to be guided by MAS’ expectations on what counts as a credible transition plan for coal power phase-out,” he said.
 

Source: The Business Times © SPH Media Limited. Permission required for reproduction.