Sustainable finance in 2024 will be characterised by region-specific transition strategies, with the EU’s green taxonomy continuing to serve as a crucial model for emerging taxonomies in Asia, according to a report from Sustainable Fitch.

In the report Investor Questions Answered: 2024 Sustainable Finance Market Trends, Sustainable Fitch noted several markets and regions are publishing their own taxonomies, which is expected to cause some fragmentation and confuse investors further. However, many of these frameworks, especially in emerging markets, are voluntary with no indication of when they will become mandatory.

In Asia, the theme of transition finance expanded in 2023, largely due to the region’s economic reliance on carbon-intensive sectors. Asian countries are subsequently creating their own guidelines and frameworks to facilitate their individual efforts. This is expected to translate into more effort towards defining ‘transition’, including clearer guidance on transition activities and viable pathways.

The Monetary Authority of Singapore, for example, recently published the Singapore-Asia taxonomy, which covers activities across eight industries. The taxonomy offers what is considered by the report to be “the most comprehensive approach to transition financing guidance globally”.

The country’s international reputation as a finance hub and its good record of governance are likely to bolster trust in, and adoption of, these guidelines, with the expectation that this will position it as the ‘go-to’ standard of reference within south-east Asia.

Innovative labelled debt categories

The report also suggested landscape of labelled debt is diversifying beyond the traditional green, social and sustainable bonds to include innovative categories, such as orange, blue and transition bonds.

Blue bonds in particular are gaining traction as a financing tool for ocean-friendly projects in Asia-Pacific. In May 2023, Indonesia issued a $150m sovereign blue bond in the Japanese debt capital market, while the Philippines’ Securities and Exchange Commission published guidelines for blue bond issuances in September.

Transition bonds, meanwhile – used as a distinct label – form a small part of the market and are highly concentrated in Japanese issuers, who have more actively endorsed the label. Japan’s sovereign transition bond, a world first, will be “a test for investor appetite” and for clarifying the nuances of what would qualify as a transition activity or technology, in Japan at least.

Most investors are still cautious of greenwashing risks due to the lack of a universal definition of transition, asserts the report. In 2023, however, significant developments fostered a more advanced and informed environment for issuing these bonds. While the International Capital Market Association (ICMA) released the updated Climate Transition Finance Handbook, different regions and countries – especially those that are heavily reliant on fossil fuels and mining – have been adapting transition finance principles to their needs and context.

Asia is ahead of the game in this regard. Singapore has a comprehensive approach to transition finance via the Singapore-Asia taxonomy, which makes sector specific provisions on transition activities by major industries. Japan’s transition guidance also provides specific sectoral pathways.

Just transition dissuades anti-ESG sentiment

Answering a question on whether the anti-ESG sentiment in the US is likely to negatively affect ESG developments in other regions, Sustainable Fitch said that it had not observed a significant impact elsewhere.

There are several pressing ESG and sustainability issues unique to Asia, they said, that require a more localised approach, with the same being true for other regions such as Latin America, the Middle East and Africa. Part of the reason for this is that, in most regions, there is a focus on ensuring a just transition across economies. This requires dedicated and concerted efforts to achieve at both the governmental and corporate levels. In Asia, this is particularly the case regarding transition and decarbonisation efforts and financing. As existing global guidance is either lacking or absent, many governments and countries are working to develop applicable frameworks and applications.