ASEAN’s sustainability policy overhaul calls for updated strategies from Japanese firms but also offers growth opportunities

Fast moving changes to ASEAN’s sustainability policies are driving an overhaul of corporate strategies. The strengthening of sustainability regulations, the introduction of carbon pricing systems and the expansion of carbon credit markets are causing structural changes.

Japanese companies, more than others, need to not only respond to tighter regulation but also seize emerging investment opportunities utilizing carbon credits. They need to ride this wave of change and lock in new competitive advantages.

Key points

• The strengthening of environmental, social and governance (ESG) regulations in ASEAN is prompting a strategic reorganization of companies, with the adoption of International Sustainability Standards Board (ISSB) standards continuing ahead, particularly in Singapore. Responding to the mandatory reporting requirements for Scope 1 and 2 emissions has become urgent.
• The advancement of decarbonization policies is driving the rapid expansion of carbon pricing in ASEAN: Singapore is leading the way by raising its carbon tax, and is closely followed by the development of systems in other countries.
• The carbon credit market within ASEAN is experiencing rapid growth: arriving at unified standards is posing a challenge, alongside a growing business demand for strategic carbon management.
• Nature-based Solutions (NbS) are emerging as strategic investment opportunities, with the generation of carbon credits through tropical forest conservation, etc. enhancing both investment returns and sustainability assessments.

ASEAN's Sustainability Policies Drive Structural Changes: Challenges and Growth Opportunities for Japanese Companies

In recent years, the ASEAN region has increased its focus on sustainability. This momentum is driven by both vulnerability to the effects of climate change and rapid economic development. By 2050, it is estimated that over 35% of ASEAN GDP will be exposed to the risks of losses caused by climate change. Given these risks, ASEAN countries have set emission reduction targets under the Paris Agreement and have begun to aim for a transition to a decarbonized society. Changes in investor and consumer awareness have also contributed to the growing trend for ESG investment in ASEAN.

From 2017 to 2023, the sustainable bond market in ASEAN experienced rapid growth, increasing from USD3.36 billion (approximately JPY3.6 trillion) to USD72.69 billion (approximately JPY78.9 trillion), with a compound annual growth rate (CAGR) of approximately 67.5%. This robust growth reflects the expansion of sustainable finance in the region and rising interest from investors. This article provides an overview of the key trends in sustainability within ASEAN, with a particular focus on the latest developments in ESG regulations, decarbonization policies in respective countries, and new business opportunities utilizing carbon credits. It also analyzes future trends and the potential impact on business for Japanese companies.

Sustainability regulations and disclosure requirements

Corporate disclosures on ESG have advanced rapidly in ASEAN. This evolution has been driven by the increasing risks associated with climate change, heightened demands from investors, and the commitment of various governments to sustainability. As a result, countries are strengthening ESG regulations and expanding information disclosure obligations for companies.

For example, in Singapore, the reporting of Scope 1 and 2 greenhouse gas (GHG) emissions becomes mandatory from 2025 to comply with the IFRS Sustainability Disclosure Standards (ISSB Standards). In Malaysia, the National Sustainability Reporting Framework (NSRF) was introduced in 2024, with a phased implementation of ISSB Standards scheduled for 2025. Thailand is also considering the introduction of the ISSB Standards starting in 2026 while Indonesia and the Philippines are also preparing for future implementation.

The strengthening of ESG regulations in ASEAN is also having a significant impact on Japanese companies. For example, in Vietnam, companies that exceed certain emission levels are required to report their Scope 1 and 2 emissions, and some Japanese businesses are among those affected. Additionally, in Singapore and Malaysia, these requirements are expected to include non-listed companies from 2027, making it essential to closely monitor future regulatory developments.

With the Corporate Sustainability Reporting Directive (CSRD) postponed for two years and the introduction of Sustainability Disclosure Standards (SSBJ) scheduled for 2027 in Japan, it is essential to understand the regulations and their effect in each country (for example, if the parent company complies with SSBJ, ASEAN headquarters and subsidiaries may be exempt). This also requires action on data collection for the simultaneous disclosure of financial and non-financial data.

Decarbonization policies

ASEAN countries have set long-term goals for decarbonization, with Singapore, Malaysia and Vietnam stating their aim to achieve carbon neutrality by 2050. In contrast, Indonesia has set its target year for 2060 while Thailand aims for 2065. The adoption of renewable energy is also accelerating, with ASEAN as a whole targeting 23% of primary energy supply from renewable sources by 2025 in the ASEAN Plan of Action for Energy Cooperation (APAEC). Additionally, carbon pricing frameworks such as carbon taxes and emissions trading are coming into effect.

• Carbon Tax
  
  Singapore became the first ASEAN country to introduce a carbon tax in 2019, with a plan to increase the tax rate from the current SGD25 per tonne to between SGD50 and 80 per tonne by 2030. Indonesia initially planned to implement a carbon tax in 2022, but this was postponed as a result of rising energy prices and inflation: the timing for implementation is now being adjusted. Malaysia has announced its plan to introduce a carbon tax by 2026, taking account of the European Union's Carbon Border Adjustment Mechanism (CBAM). Thailand is developing a carbon tax with the aim to implement it by end 2025. The details of tax rates are drawing attention, as each country explores carbon pricing policies tailored to their own economic situation.

• Emissions Trading System (ETS)
  
  Indonesia launched its domestic "IDX Carbon” market in 2023 for emissions trading in the power and manufacturing sectors. Meanwhile, Vietnam intends to launch a pilot scheme in 2025 in preparation for full-fledged implementation by 2028. Thailand and Malaysia are also making progress to develop a system by leveraging their respective voluntary carbon credit markets (T-VER, BCX). Singapore has already implemented a carbon tax and is strengthening its voluntary credit market through Climate Impact X (CIX) to support corporate emissions’ offsets. With different degrees of progress achieved across ASEAN, the expansion of carbon markets and the establishment of unified standards for credit trading within ASEAN are likely to be future challenges.

• Carbon Credit Generation Investment Strategy

Nature-Based Solutions (NbS) for natural capital utilization

Across ASEAN, there is increased interest in NbS, an approach aimed at balancing environmental protection and economic value through forest restoration, mangrove conservation and sustainable agriculture. The region has about a quarter of the world's natural climate change mitigation potential, with an estimated 58% (approximately 114 million hectares) of threatened tropical forests being economically viable as carbon credit projects.

These initiatives help absorb and reduce CO2, while generating and selling carbon credits to meet corporate decarbonization needs. NbS is becoming increasingly attractive as a sustainable investment opportunity with environmental impact, with an expected internal rate of return (IRR) of 2 to 12%. Research institutions, including the National University of Singapore (NUS), are enhancing their research related to NbS, driving the development of investment strategies based on scientific knowledge. The growth of the carbon credit market is expected to accelerate the future expansion of NbS investments in ASEAN.

Dual Revenue Business Model (product sales × carbon credit revenue) There is also expansion of this business model which combines product sales with carbon credit revenue. For example, in Indonesia, in areas with limited access to safe drinking water many households need to boil water to make it safe to drink. However, local companies are selling household water filters, helping to reduce fuel usage and CO2 emissions. In Cambodia, companies are selling household biodigesters to families in rural areas. The equipment ferments food waste and agricultural residues to generate methane gas for cooking fuel. This reduces the use of firewood and charcoal, with mitigating effects on deforestation and air pollution. These initiatives not only contribute to reducing environmental impact but also establish a mechanism to certify and sell the emission reductions as carbon credits, generating revenue alongside product sales for companies.

Summary

Due to the spread of sustainability policies in ASEAN, Japanese companies are required to strengthen regulatory compliance and develop new business models. Dual revenue models utilizing carbon credits and NbS, both of which require local implementation, are key to sustainable growth. However, , it is effective business operations will be impacted without collaboration with government agencies such as Singapore's National Climate Change Secretariat and Indonesia's Ministry of Environment and Forestry (KLHK), as well as regional foundations like the Temasek Foundation and international NGOs like the World Wildlife Fund (WWF). If Japanese companies are to adapt to these changes and seize growth opportunities, they must not only to formulate their strategies but also leverage execution capabilities in local markets and partnerships through a global network. In a later article, we will focus on specific strategies for business development utilizing carbon credits, examining successful case studies and the latest market trends.

Learn how Japanese companies can unlock new growth opportunities in the ASEAN market.