Photo for illustrative purposes only. A man measures the topography of an Indonesian wind farm area in Sidenreng Rappang on Jan 23, 2020. Yermia Riezky Santiago

Islamic Finance

Planned ASEAN Taxonomy for Sustainable Finance would benefit from Islamic input, say international experts

Input from Islamic financial specialists will smooth the path to development of a region-wide taxonomy for financial services in Southeast Asia, Salaam Gateway understands from international experts.

On March 30, finance ministers and central bank governors from members of the Association of Southeast Asian Nations (ASEAN) announced their support for an ASEAN Taxonomy for Sustainable Finance.

It will serve as a common language for sustainable financial matters and complement the initiatives of individual ASEAN nations.

And with members of the board established to implement it representing the Bruneian and Malaysian financial systems, Islamic finance could weigh heavily in its development.

“The way we see it, faith-based finance is a subset of the broader ethical finance universe, which has recently become a top-two priority in the financial services world,” said Omar Shaikh, managing director of the Islamic Finance Council UK, which researches the role of Islamic finance in the global economy.

“There are underpinnings that are aligned in terms of the values and principles of Islamic finance with what we are seeing in this mainstream movement, but there are also peculiarities for Islamic finance that are not necessarily addressed in the broader sustainable universe. So, absolutely, it does need to be represented to give its way of thinking,” he told Salaam Gateway.

A low-key announcement of a regional taxonomy was buried in a joint statement by ASEAN finance ministers after a joint meeting with central bank governors on March 31.

It said: “The ASEAN taxonomy will be the overarching guide for all [member states], complementing their respective national sustainability initiatives and serving as ASEAN’s common language for sustainable finance.

“The ASEAN taxonomy board [will seek] to develop, maintain and promote a multi-tiered taxonomy that will take into account ASEAN’s needs, as well as international aspirations and goals. We believe that such a multi-tiered ASEAN taxonomy is inclusive and will be beneficial to all [member states], and facilitate an orderly and effective transition towards a sustainable ASEAN.”

The board comprises representatives from the Monetary Authority of Singapore (MAS), Bank Negara Malaysia, and Bank of Thailand. It is chaired by Noorrafidah Sulaiman, a deputy managing director at Brunei Monetary Authority, and MAS executive director Daniel Wang is vice-chairperson.

An update on their progress will be made towards the end of this year, it added.

Taxonomies in practice

Taxonomies assist investors in aligning their strategy with sustainability and environmental goals in the face of challenges in easily identifying and sourcing the appropriate funds.

“One of the things that investors struggle with is that there is a deluge of ESG information out there, and much of it is not high-quality or comparable. The ability for a company to point to a taxonomy and say we are sustainable under this taxonomy really cuts through that noise. It can quickly generate investor confidence in the information that companies communicate to the market,” said Mayer Brown’s Alex Burdulia.

“We think that tools that provide greater clarity and precision regarding  the sustainable features of an investment opportunity will help that,” said his colleague, Mark Uhrynuk.

“At the same time, if you are looking to attract investment for your business, having a clearer understanding of where your business sits on the spectrum of green, and what you are doing in support of your sustainability profile, will help you raise funds.

“It’s holistic in a sense that taxonomies should make it easier for investors to identify qualifying sustainable investments and at the same time help companies and businesses seeking to raise capital to align the deployment of that capital with their sustainability goals,” Uhrynuk added.



The goal of a taxonomy is to provide clear rules on the terminology of principles-based initiatives to encourage investments that are truly sustainable. Without such a bureaucratic framework, investment products and economic activities could be classified as “green” or “environmentally sustainable” without a clear and common definition of what these terms actually mean.

The European Union published the best known example of a regional taxonomy last year. It sets out overarching conditions that economic activity has to meet in order to qualify as environmentally sustainable with six environmental objectives: climate change mitigation and adaptation, marine sustainability, transition to a circular economy, pollution control, and protection of biodiversity and ecosystems.

The EU taxonomy benefited largely from the input of a so-called technical expert group of 35 individuals from the fields of academia, civil society, business and finance in its member states. A similar group that incorporates experts and scholars of Islamic finance would certainly help along the process of drawing up a document in tune with the needs of business and finance in Southeast Asia, said Alex Burdulia, a corporate lawyer who focuses on sustainability matters at Mayer Brown’s Hong Kong office.

“One of the biggest takeaways from the EU taxonomy is the importance of establishing a diverse expert advisory group. For the ASEAN taxonomy, I think the membership of this group should be similarly broad, and it should incorporate views from a wide range of stakeholders. From that standpoint, including Islamic perspectives would be particularly useful,” he told Salaam Gateway.

Blake Goud, chief executive of the Responsible Finance and Investment Foundation, a global non-profit that links responsible finance and Islamic financial markets, noted that taking a copy-paste approach to the ASEAN taxonomy would not serve to create a suitable framework for Southeast Asia. ASEAN has openly been partial to cribbing the work of other parties, particularly in its approach to harmonising regulatory standards.

“Different taxonomies have different things that they try to define. The EU defines whether a project is green or not green. An ASEAN taxonomy might instead aim to provide some unifying framework between member states,” he told Salaam Gateway.

“The real question with a taxonomy is what standards will be adopted. For example, there really aren’t rigorous standards yet in place that have been widely adopted about transition finance to sustainably-linked bonds,” he added.

This issue has been gathering some controversy in Europe recently, after high-yield Greek utility Public Power Corporation raised 650 million euros from such bonds that were not linked to the eventual use of the financing.

“It’s important that taxonomies cover more than green, but it’s not entirely clear how that will be done credibly, and any lead taken in that way will be definitely welcome,” said Goud.

Nevertheless, the EU taxonomy will provide a natural benchmark for its ASEAN counterpart not least because both will cover trade blocs of diverse member states. It would be only natural for the board drawing up the Southeast Asian taxonomy to draw influence from the European approach.

“We think it is important for the ASEAN taxonomy to incorporate or adopt the same or similar minimum standards as the EU. There will be some challenges there, given the diverse nature and situation across ASEAN, but that’s a critical underpinning of these taxonomies,” said Mark Uhrynuk, a corporate partner in Mayer Brown’s Hong Kong office and a member of the firm’s ESG leadership team.

“Trying to achieve a degree of alignment is going to be critical for dealing with the risks that exist today, and fragmentation across markets with different standards and approaches can lead to confusion. There’s a lot to be learned from looking at the EU taxonomy, although it will have to have some adjustments to deal with the particular challenges and situations across the ASEAN region.”

If implemented successfully, an ASEAN taxonomy would help to put capital to work in a way that helps principled businesses to raise capital.

“We believe there’s a trickle-down effect here in the sense that it’s not just the financial community that benefits from this, but the benefits also flow through to the real economy to the companies that are doing good things and their supply chains. It can have a positive impact on companies operating in many sectors and countries,” Uhrynuk added.

What ASEAN might learn from the EU taxonomy

“Regional regulators can use the EU taxonomy as a benchmark in setting up region-specific ESG disclosure standards and classification systems in line with the particularities of local markets,” Dr. Inna Amesheva of Arabesque S-Ray told Salaam Gateway.

“It is advisable that they do this with caution, so as not to introduce a multitude of disparate reporting standards, significantly increasing the non-financial reporting burden for companies and investors. Indeed, it is advisable that regulators exercise caution and work together in establishing a more harmonised ESG disclosure space.”

The director of ESG research and regulatory solutions at the global asset management firm’s sustainability research division also pointed out:

  • While the taxonomy is an EU-focused regulation, it applies to companies and investors that have a presence or footprint in the EU, thereby having a broad extra-territorial impact.
  • There is still uncertainty regarding the implications for non-EU domiciled companies which are requested by their investors to report on their Taxonomy-alignment.
  • Given the detailed data disclosure requirements, data availability and comparability represent a significant concern for reporting entities. Data modelling and estimations would have to be applied in the absence of available data, which in turn may lead to confusion and a lack of transparency.

“These legal reforms represent an important part of the EU’s ambitious legislative program to make ESG concerns a central plank of regulation in the financial services industry,” said Dr. Amesheva.



It will be interesting to see if or how a bloc-wide taxonomy will work with the taxonomies of individual member states.

Indonesia, Malaysia and Singapore, for example, have been drawing up their own frameworks at different degrees of progress.

Malaysia has its taxonomy under development as a climate change and principles-based taxonomy at quite an advanced stage.

Indonesian financial services regulator OJK announced recently in the second phase of its sustainable finance plan that it will have a taxonomy finalised by 2022.

“I don’t know how these would work under an ASEAN -wide taxonomy, but the language written around the ASEAN one seems to indicate that it will be from an imported framework, with the EU taxonomy providing a clear benchmark. But I don’t think it’s necessarily going to go in that direction,” said Goud.

According to the ASEAN roadmap released last year, the regional taxonomy will seek to be consistent with other taxonomies.

Nevertheless, part of the challenge will be finding some alignment in a region with countries that vary widely in their levels of economic development.

“They are also strongly supporting the need for a transitional taxonomy, which is much more similar to how the Malaysian taxonomy is being developed than the EU’s. The EU’s is entirely just green now, although they’ve just started work on a social and they are debating on a sustainable taxonomy,” said Goud.

“They will be mindful of the different economies that will be incorporated in the new taxonomy, and that’s why it will take a fair bit of time before we have something come out of ASEAN that is properly aligned with national economies there. They will also have an eye on what is going on in Europe and elsewhere. It’s not easy to answer that question for sure,” he added.


While taxonomies are not by nature conventional or otherwise, they can capture elements that are peculiar to Islamic finance, according to Shaikh, who leads the UKIFC’s government policy advisory activities.

Tobacco, for instance, not only has a huge influence on public health, but also on deforestation and is the single biggest plastic waste in oceans. Removing tobacco from a portfolio, in line with Islamic finance, would also have an impact on sustainability, although finding something that maintains returns in place of tobacco takes effort.

Shaikh suggests there should be better recognition for “consciously avoiding harmful activities” like this.

Another principle of Islamic finance is avoiding highly toxic, highly speculative and dangerous financial products such as certain derivatives that can drive pricing volatility. This tends to enhance alignment of the financial services sector with the real economy and enhance stability.

Interestingly, Shaikh said, this step was missed by the United Nations when it drew up its sustainable development goals (SDGs), calling on faith groups to provide input much later on in the process.

“The faith leaders were saying that we’ve been around a millennium before the SDGs and we will be around longer than 2030, the year it is hoped they will be achieved. Ensuring the faith groups have a voice can bring some interesting new thinking that could be beneficial to all,” Shaikh added.

Islamic finance, he continued, is probably a decade and a half ahead of conventional finance when it comes to additional governance and compliance requirements for social/ethical concerns through the development of Shariah governance frameworks.

“Financial markets are global, they are interconnected and if we agree on the principle of inclusivity; they must be open to everyone. So there should be a seat at the table for Islamic finance.”

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