Steps towards Thailand Taxonomy: Transition to low-carbon economy

The first phase of the Thailand Taxonomy is classified as a green taxonomy, covering only environmental objectives. In the draft of the first phase, the Taxonomy covers the objective of Climate Change Mitigation in 2 prioritized sectors: Energy and Transportation. It is expected that the official Thailand Taxonomy will be adopted in the 3rd quarter of this year. 

Standardized green activities will benefit Thai private companies in their business transition, and low-carbon products and services development through investments in green activities. In addition, The Taxonomy will facilitate the growth of green financing in Thailand, which will drive and incentivize the business sector to adjust their business for the upcoming low carbon transition. Businesses can utilize the Taxonomy in various ways, detailed as follows:

1. Adjust business and activities to align with Taxonomy

As businesses begin their internal decarbonization transition journey, the Taxonomy will play a key role as a trusted reference for selecting and prioritizing green activities for their investment. For example, companies have formulated their decarbonization plan, shifting from fossil fuel-based to renewable energy, increasing portion of electric vehicles in their fleet, and conducting feasibility studies of carbon capture technologies.

The financial sector is a key sector that will benefit from the Taxonomy, as it will guide the management of their investment portfolio and development of sustainable and green financial products. For example, the issuance of a Taxonomy-aligned green loan policy. Today, the value of green instruments is growing exponentially. Credit Agricole (2023) forecasts that in 2023, the value of global sustainable instruments will top at 880 billion Euros (a 30% increase from 2022). This is a result of its competitive interest rates and the ability to attract niche investors who focus on green investments. This will benefit companies who are seeking funding for their transition to becoming a low carbon organization. For this reason, companies investing in Taxonomy-aligned activities will have a higher chance to gain access to green funding.

2. Identification of activities and KPIs that are taxonomy-aligned

Business may set management approach for their transition to low carbon organization through setting targets and KPIs in alignment with Taxonomy reporting requirements. Drawing on the experience of the EU Taxonomy, the reporting requirements have influenced companies in their KPIs setting exercise for effective performance monitoring: 

• For European non-financial companies, they need report the percentage of taxonomy-aligned activities values as percentage in OpEx (operating expenditure), CapEx (capital expenditure), and turnover. The benefit of reporting these values is for investors and the financial sector to utilize the disclosed information in their financing and loan approval decisions, as well as in their risk assessment considerations. This influences non-financial companies to set their internal KPIs which results in an increased portion of taxonomy-aligned green investments.
• For European financial companies, the EU Taxonomy requires the companies to report Taxonomy-aligned Green Asset Ratio (GAR). This has influenced financial institutions to plan to increase investment in taxonomy-aligned activities and to raise their GAR. For example, a European Bank has set their target to increase GAR to 75% of its loan portfolio by 2030, focusing on renewable energy. The targets and strategy set by financial institutions in this light are important drivers in mobilizing green financing to enable accelerated low-carbon transition in other sectors. 

3. Taxonomy reporting requirements

Reporting and disclosing Taxonomy-aligned activities will ensure availability of data of green activities at the sectoral, economic, and national level, and help with tracking of the portion of taxonomy-aligned activities in the economy. This will facilitate decarbonization planning, as well as effective tracking at the national level. In addition, reporting in line with Taxonomy requirements will help attract investors, through increased transparency and trustworthiness of the company’s disclosures of their green activities. The Taxonomy-aligned reporting will also help in prohibiting green washing, and benefit companies through informing their current state of green investments for future plannings. The latter, especially in their risk management and opportunity identification, is crucial for businesses in maintaining their competitiveness among peers throughout their green transition.

In preparation for the Taxonomy, Thai businesses should start from understanding the activities identified in the Draft Taxonomy; to assess if the current activities or activities in their business plan are aligned with the net-zero pathway (green activities) or aligned as a transitional activity (yellow activities). This will help companies to assess the expected investment returns, prevent and mitigate investment risks from activities which are not aligned with the Taxonomy, and increase accessibility to green funding in the future. Along with this, companies should also monitor the trends of green financing and the development of incentives for green investments in the near future. These activities will help companies in managing their environmental risks and seize business opportunities with enhanced accessibility to sustainable financing, for their holistic preparation to transition to a low-carbon economy.

The article is written by Bordin Vongvitayapirom, Senior Manager, and contributed by Paranee Somjit, Analyst, Sustainability & Climate COE, Deloitte Thailand

Reference
SEC (2023). Taxonomy กับการพัฒนาการเงินเพื่อความยั่งยืน
Credit Agricole (2023). The Sustainable bond market: 2022 review and outlook for 2023.