As demands for climate finance increase with the tangible impacts of climate change, people increasingly look to the government and various regulators to establish and upgrade a more effective combination of rules, regulations and market-based mechanisms to spur investments at a scale that is commensurate to our needs.
Earlier in this space, I argued that the two fundamental challenges of climate finance in Thailand are that 1) the country's net zero goals remain extremely unambitious (and uncompetitive, given how fast climate and low-carbon energy policies are entering into terms of trade) and 2) the risk that "any new government initiatives designed to help us transition will be either captured or delayed by powerful incumbents in high-carbon industries".
There are three developments in the next 18 months that will attest to how well Thailand responds (or not) to these two challenges. First, the country's first National Energy Plan (NEP) will be announced in the fourth quarter of 2024. Second, the draft Climate Change Act is expected to enter deliberation processes in parliament in late 2024 or early 2025. Third and last, we can watch how the new government will adjust the country's net zero plans in the months leading up to the 30th Conference of the Parties (COP30), to be held in November 2025 in Brazil. This will be an important COP because countries are expected to raise their Nationally Determined Contribution (NDC) ambition.
While these developments lie in the domain of national policies, there are many developments in other domains that are no less important. One of the key developments is the launch of Thailand Taxonomy Phase 1, comprising activities in the energy and transport sector, in June 2023, and the ongoing development of Thailand Taxonomy Phase 2, which the Thailand Taxonomy Board plans to launch by the end of 2024.
Its official website explains that Thailand Taxonomy "is a classification system of economic activities deemed as environmentally sustainable". It claims to be "transparent, grounded in the latest climate science aligned with the goal of reaching net-zero emissions by 2050 as prescribed by the relevant Paris agreement that keeps warming below 1.5 [degrees Celsius]" and "employs a so-called traffic light system that distinguishes between green, amber (transitional), and red activities, and compliance with the Do No Significant Harm (DNSH) and Minimum Social Safeguards (MSS) [principles]".
Although Thailand Taxonomy Phase 1 is closely modelled after the EU Taxonomy, it covers only one out of six environmental objectives, namely climate mitigation. The Taxonomy Phase 1 document itself notes that "while this first version of the Thailand Taxonomy will only develop the screening criteria and thresholds for the climate change mitigation objective as a start, it incorporates the principles of Do Not Significant Harm (DNSH) to the other five objectives. Over time, it is expected that future versions of the Thailand Taxonomy will include screening criteria and thresholds of other environmental objectives …as well".
One worrying aspect of Thailand Taxonomy is that this standard allows for the owner of any activity, project or company that does not comply with DNSH or MSS criteria but "otherwise passes relevant technical screening criteria and metrics" to be considered "compliant for the corresponding green or amber category" if the operating company "submits an additional plan indicating how it will correct the deficiencies within three years after the assessment".
Since the Taxonomy mandates no international standard for such a "correction plan" and does not require the operating company to disclose such a plan to the public (the company is only "encouraged" to do so), this gives rise to a risk of "greenwashing" whereby the operating company claims that its project is "green" or "amber" only because it passes the technical criteria for climate mitigation (eg emitting less greenhouse gas emissions than the threshold) while significantly failing DNSH and MSS criteria for other environmental objectives that the Taxonomy does not cover. (For more information, see feedback to the Thailand Taxonomy Phase 1 that the Fair Finance Thailand coalition submitted to the Thailand Taxonomy Board in June 2023.)
The risk that the Taxonomy may be used to "greenwash" activities is perhaps foremost in the minds of Civil Society Organizations (CSOs), but financial institutions have a more basic concern: how to use the Taxonomy to classify the activities of its clients. Although the Bank of Thailand has yet to integrate Taxonomy criteria into its reporting regulations for the banking sector, not to mention disclosure requirements, the banks find the Taxonomy difficult to use in practice. In part, this is due to the confusion as to how or who can assess the client's compliance with DNSH and MSS criteria.
This concern is not only limited to Thailand; it is also present in the European Union (EU) which pioneered the use of Taxonomy. Starting in February 2023, the EU has integrated Taxonomy into its reporting and disclosure regulations for the financial sector, mainly the Sustainable Finance Disclosure Regulation (SFDR) which was launched in 2021.
In May 2024, the EU published a summary report of the public and targeted consultations on the implementation of the SFDR which gathered the opinion of 324 organisations and individuals, including 204 financial market participants and financial advisers.
This document reports that "some respondents stated that the underlying concepts (ie 'contribution to an environmental or social objective', 'DNSH', and 'good governance practices') are too broad and lead to a heterogenous implementation between FMPs [financial market participants]. When elaborating on their responses, many suggested the need for adjustments, particularly in establishing minimum criteria and providing additional guidance on their application …In particular, these respondents argued that the lack of a prescriptive methodology for the 'DNSH' concept is one of the primary issues of the SFDR framework".
Given that the Thailand Taxonomy faces the risk of greenwashing and significant implementation challenges, the Thailand Taxonomy Board should expand the development process to be more inclusive of local CSOs and other stakeholders, improve DNSH and MSS Criteria and "correction plan" procedure for activities with clearly material ESG risks such as large hydropower projects, and work more closely with Asean Taxonomy and EU Taxonomy on how to build and expand an ecosystem of green project assessors/evaluators.
Meanwhile, the Bank of Thailand should integrate Taxonomy into its reporting and disclosure regulations for the financial sector, as the EU has done, because the public scrutiny of activities in the banking sector can and should be part of the learning process on the journey toward greener finance.
Sarinee Achavanuntakul is Head of Research at Fair Finance Thailand, and Director of Climate Finance Network Thailand (CFNT).