Southeast Asia is highly vulnerable to climate change, with three of its member states among the 10 most vulnerable countries globally. This makes climate change a critical issue for the Association of Southeast Asian Nations (ASEAN), necessitating proactive measures at national and regional levels.
In addressing climate change, finance plays a crucial role. Delivering the transition to net zero that Southeast Asia needs will require enormous mobilization of capital and investment in low-carbon projects and transitioning companies. Several key elements to enable this sustainable finance have already been developed, notably the ASEAN Taxonomy for Sustainable Finance and the rising number of Southeast Asian financial institutions that have set targets to decarbonize their finance portfolios.
What is now needed is for businesses to commit to credible transition plans to decarbonize their activities. Finance providers can incentivize this by providing transition finance to companies developing such plans. We worked with the ASEAN Capital Markets Forum (ACMF) to craft the first version of its ASEAN Transition Finance Guidance, which addresses how entities may develop a credible transition plan to obtain financing from capital markets.
Key elements for a credible financing transition plan
A credible transition is defined by two main elements: one, a company’s ambition on cutting greenhouse gas (GHG) emissions, and two, the robustness of the entity’s ability to deliver on that ambition.
Climate ambition and setting GHG emission targets
Credible transition plans should start with a full current state assessment of an entity’s GHG emissions from all its environmentally material business activities, covering Scopes 1, 2, and 3 emissions, where relevant. Companies should justify which emissions metric(s) they measure, for instance absolute emissions or emissions intensity. Companies should disclose whether their metrics include the use of carbon credits and report the impact of the carbon credits, if applicable.
Companies need to create transition plans to decarbonize their operations that are aligned with the pledges made in the Paris Agreement on climate. Transition plans should therefore support curbing the Earth’s temperature increase to ideally 1.5 degrees Celsius, or at least well below 2 degrees Celsius above pre-industrial levels.
To ensure their transition plans support these temperature outcomes, companies should set decarbonization targets that are referenced to a transition pathway defined by a credible independent party. The reference pathway may be region-specific and should be science-based. Transition targets should cover all material business segments and stipulate near-term, medium-term, and long-term milestones.
Robustness of ability to deliver on climate targets
Credible transition plans should provide confidence that the company will follow through on its ambition. Best-practice plans will include an implementation strategy that specifies the near-term, mid-term, and long-term actions needed to achieve it.
Companies’ transition plans should provide an assessment of risks in the action plan and strategies the company will employ to mitigate them, along with a view on the finance required to accomplish the plan. Companies should outline the monitoring processes and governance structures that they will implement to oversee and support their transition plans, and commit to disclose their performance, targets, and progress at least annually.
Best-practice companies may seek third-party verification of their transition plans, as well as their progress against them. Companies should account for just transition considerations when setting their transition plans, including potential adverse environmental and social impacts, which could arise as part of their climate transitions, and outline provisions to mitigate these.
Three transition tiers for GHG emission reduction approaches
The ASEAN Transition Finance Guidance presents three tiers to reflect how approaches may differ for transitioning entities by climate ambition and robustness of their ability to deliver.
Next steps for companies and financial institutions in ASEAN
While many of the largest companies in ASEAN have begun to disclose their emissions and set targets, many still lack interim targets or specificity on their strategies to reach the targets they have set. Companies should therefore focus on developing credible transition plans that reflect the idiosyncrasies of their businesses and their emissions profiles, as this will be essential to gaining access to transition finance.
By considering finance providers’ climate targets and presenting their transition plans to clearly demonstrate how their transitions will align to the finance providers’ targets, companies can maximize their ability to access transition finance.
Financial institutions should reinforce their support of companies setting Paris-compliant transition plans, using their influence to push companies to higher levels of credibility. By adopting a common ASEAN definition for transition credibility, financial institutions can help standardize transition plan assessments and clarify corporate expectations in the region.
