Introduction to ESG budget tagging

Perusahaan Listrik Negara (PLN)

Thursday, 19 January 2023

Disclaimer
This publication has been funded by the Australian Government through the
Department of Foreign Affairs and Trade. Any third-party views or
recommendations included in this publication do not necessarily reflect the
views of the Australian Government or indicate its commitment to a particular
course of action. The Australian Government accepts no responsibility or
liability for any damage, loss or expense incurred as a result of the reliance on
information contained in this publication.

Capacity Building session | Introduction to TCFD 1

 Our team today

Gilles Pascual Arina Kok Russell Marsh

Partner, Power & Utilities, EY Singapore Partner, EY Malaysia Associate Partner, EY Singapore
Strategy and Transactions Climate Change and Sustainability Services Strategy and Transactions

Ika Merdekawati Tiffany Rimba Sheena Narula Nabila Sekartanti

Senior Manager, EY Indonesia Manager, EY Singapore Manager, EY Singapore Manager, EY Indonesia
Climate Change and Sustainability Strategy and Transactions Strategy and Transactions Climate Change and Sustainability
Services Services

2
 What’s on for today?

Date: 19 January 2023 Time: 9-11.30am, 2.5 hours Venue: Pusdiklat PLN Slipi

Topic Subtopic Speaker Duration

Introduction and opening Short introduction and recap Gilles, Partner (English) 5 mins

Introduction to thematic budget Definition and objectives of thematic budget tagging

Nabila,
Manager
Case study from the Republic of Indonesia’s climate budget tagging 15 mins
tagging (Bahasa)

The underlying taxonomy Global and national references

Building the environmental, social & governance (ESG) taxonomy that
Nabila,
Manager
is relevant to the entity’s objectives 40 mins
Gender equality, disability & social inclusion (GEDSI) responsive ESG
(Bahasa)
financing

Short break 10 mins

Designing the tagging system Understanding the entity’s existing budgeting system
Integration of the entity’s ESG taxonomy in the design of the ESG Ika,Senior Manager
(Bahasa) 40 mins
budget tagging

EY team
Q&A Session Oktarico Pradana 40 mins
(Bahasa)

3
Contents

Section Learning objectives

Understand the concept, objective, and implementation of thematic budget

1. Introduction to thematic budget tagging
tagging
Understand the concept, examples, and relevance of global and national
taxonomies in regard to thematic budget tagging
2. The underlying taxonomy
Understand how to incorporate GEDSI activities into ESG budget tagging
Understand the entity’s existing budget system as a basis for appropriately
designing the tagging system
3. Designing the tagging system
Understand high-level steps of integrating the entity’s ESG taxonomy in
the design of the ESG budget tagging
Question time

Are you familiar with the term budget tagging?

Please use the polling/Whiteboard/Menti to give your

answer

5
1. Introduction to thematic budget tagging
 Understand the concept, objective, and implementation of thematic budget
tagging

6
The case for thematic budget tagging

The green budgeting narrative

“Green budgeting is a practice which uses the tools of budgetary policy making to help achieve “green” objectives, i.e. those relating to the climate and
environmental dimensions such as biodiversity, air quality and water.”

• Green budget tagging: classifying budget measures according to their environmental and/or climate impact
• Environmental impact assessment requirement for new budget measures
Green budgeting tools • Carbon pricing or pricing for environmental externalities, such as greenhouse gas (GHG) emissions, through tax and emission
include: trading system (ETS) to achieve environmental goals
• Incorporating green perspective consideration in spending review
• Integrating performance objectives related to national environmental and climate goals

Green budget tagging allows countries or entities to integrate green objectives as well as to identify areas of expenditure and revenue that are helpful or
harmful to green objectives.
However, budget tagging practice is not exclusive to green objectives. There are other practices where countries or entities integrate other thematic
objectives (e.g. sustainable development goals (SDGs) or ESG objectives) into budget tagging mechanism.

Source: OECD, ‘Green Budget Tagging : Introductory Guidance & Principles’, OECD Publishing, 13 Feb 2021. 7
Thematic budget tagging and taxonomy

Thematic budget tagging is an activity to separate projects that contribute to the achievement of predetermined goals from the overall projects in
the company's budget, through tagging of the company’s budget.

In the case of thematic budget tagging (e.g., ESG or sustainability budget tagging), it is imperative to determine the definition of the ‘theme’ to be
able to classify budget that is relevant to the company’s goals.

A sustainability taxonomy is the supporting document for classifying the lists of economic activities that support company’s
sustainability targets. A taxonomy will help to categorize:
Sustainable activities Non sustainable activities

Energy Renewable Access to Environmental Workplace

essential contamination Oil drilling fatality
efficiency energy
services

“In general terms, a sustainability taxonomy establishes a framework for enhancing market transparency, reducing uncertainty and
incentivizing financing to a low-carbon and climate-resilient economy. The taxonomy helps entities to identify sustainable finance
opportunities and provide them with a transparent and credible list of prospective sustainable investments.”

Source: A Fuster, ‘Sustainable Finance Taxonomy’, Climate Change Action Plan, 14 October 2022. 8
Objectives of thematic budget tagging

Thematic budget tagging serves multitude of objectives and benefits for countries or entities.

Improved monitoring
Increasing awareness
and reporting of Mobilising resources
and knowledge of Additional benefits of
climate change or for climate change or
climate change and budget tagging
sustainability policy or sustainability goals
sustainability issues
goals

1. Expanding the awareness of 1. Providing evidence on 1. Supporting tool to mobilize 1. Providing data to help
sustainability and climate company’s existing spending additional resources measure the cost
change throughout the as the basis for estimating the effectiveness of sustainability
2. Accessing private sector
government bodies funding gap to investors actions
finances or alternative
2. Putting budget as a central 2. Strengthening financing 2. Help to enable a structure
policy data/information to track approach to addressing
sustainability goals sustainability issues
3. Providing a feedback
mechanism for the next 3. Delivering signal of
budget planning commitment from budget
tagging owner
4. Delivering transparency and
accountability to the public

Source: N Bain, L Nguyen and K Baboyan, ‘Knowing What You Spend: A guidance note for governments to track climate change finance in their budgets ’, United Nations 9
Development Programme, July 2019, p 57.
Examples of thematic budget tagging that support alternative sources of
financing

Information from thematic budget tagging can strengthen the implementation of the entity's alternative financing framework by providing upfront
information for tracking and reporting projects that fall within the alternative financing eligibility criteria.

Budget tagging
Countries Notes Taxonomy or framework Alternative financing issued
systems

Focused on mitigation and adaptation, Republic of Indonesia Green

Climate budget tagging Global Green Sukuk issued in from 2018
Indonesia conducted in budget allocation and expenditure Bond and Green Sukuk
(CBT) to 2021 by the Ministry of Finance
stage with binary tagging method Framework

Classified budget items using six different

EU Taxonomy and
categories defined in the EU Taxonomy, Green bond issuance in 2017 and 2021 as
France Green budget tagging Framework for the Green
conducted in budget allocation and expenditure well as inflation-linked green bond in 2022
OAT
stage with scaled tagging method

Conducted in both budget allocation and Irish Sovereign Green Bond Green bond issuance in 2018 by Irish
Ireland Green budget tagging
expenditure stage with binary tagging method (ISGB) Framework National Treasury Management Agency

Conducted in both budget allocation and Framework for the Issuance Green bond issuance in 2021 by The
Italy Green budget tagging
expenditure stage of Sovereign Green Bond Ministry of Economy and Finance

Tagged positive climate-relevant expenditures, Philippines has not yet issued alternative
National Climate Change
Philippines Green budget tagging conducted in both budget allocation and financing based on their national
Action Plan
expenditure stage with binary tagging method taxonomy or framework

The thematic budget tagging system serves as an initial identification of alternative financing. Further analysis based on the financing framework needs to be
carried out to ensure the eligibility of the underlying projects.

Source: OECD, ‘Green Budget Tagging : Introductory Guidance & Principles’, OECD Publishing, 13 February 2021. 10
Case study from the Republic of Indonesia’s Climate Budget Tagging (1/2)
Government of Indonesia (GoI) has successfully issued Green Sukuk since 2018 to 2021 with the assistance of climate budget tagging

The Indonesian Ministry of Finance (MoF) and the United Nations Development Programme (UNDP) has implemented climate budget tagging (CBT) since 2016
as a process for marking, tracking, identifying climate change outputs and budgets that contribute to nationally determined contributions (NDC) and other climate
change policies. CBT data is also used in the project selection phase of Green Sukuk issuance. Data from tagged projects that fall under the eligible project
categories of Green Sukuk are used by relevant ministries as the basis for the project selection process.

Prioritising climate change related investments through green budget tagging Legal basis
Why Minister of Finance Regulation No. 142/2018
CBT? Accountability and transparency of the government’s spending System
CBT is integrated into the National Planning and
Mainstreaming climate change actions in the national development programs Budgeting System (KRISNA)

Green Sukuk issuance milestones

State budget allocation and spending for
climate change 2016-2021 2016-17 2019 2021-22
Implementation of CBT 2ndGlobal Green Sukuk Piloting and advanced analysis of
mitigation and published Issuance and Green Sukuk sub-national CBT; 4th Global
Average climate budget report for 2016- Retail Issuance based on Green Sukuk and 3rd Green Sukuk
Action allocation Total spending 17 climate budget tagging data Retail issuance
per-year

Mitigation IDR59.9trillion IDR301.2trillion

2018 2020
Adaptation IDR49.7trillion IDR81.6trillion Implementing CBT Launching of the Public
adaptation and 1st Green Climate Finance Report
Co-benefit IDR5.6trillion IDR15.1trillion Sukuk Issuance based 2016-2018 and developing
on CBT data sub-national CBT

Source: N Syaifudin, ‘Climate Budget Tagging in Strengthening Accountability and Transparency’, Center for Climate Finance and Multilateral PolicyFiscal Policy Agency, 5 October 2022 11
Case study from the Republic of Indonesia’s Climate Budget Tagging (2/2)
Thematic tagging, budget structure, and budget tagging cycle

The KRISNA system enables line ministries to tag not only adaptation or The overall public budget structure and the level of tagging:
mitigation budget, but also six other thematic budgets as shown below:
Code Theme Code Theme Detailed output
Line ministries Detailed output
classification
001 Education 005 Infrastructure
South-South and Triangular Strategic
002 Health 006 Activity Budget component
Cooperation objectives
Climate change
003 007 Gender responsive budget
adaptation Program Program output Location
Climate change Convergence efforts to
004 008
mitigation tackle stunting : Budget tagging level

Budget tagging cycle

• Y-1 (Previous FY) tagging result is
Jan Feb Mar Apr May Jun Jul Aug validated, evaluated, and published by
MoF and line ministries since March
through August
RKP* draft Y-1 tagging result RKP* presidential Y-1 tagging result • Y+1 (Following FY tagging is socialised,
preparation validation regulation publication conducted, and reviewed since April
through July.
Y+1 evaluation Y+1 Tagging on Y-1 Realisation Y+1 Tagging
and socialisation KRISNA evaluation review

Source: Ministry of Finance of the Republic of Indonesia, ‘Pedoman Penandaan Anggaran Perubahan Iklim Edisi 2’, 2021
*Notes: RKP stands for Rencana Kerja Pemerintah or Government Work Plan 12
Brief case study from peer companies
Several of PLN’s peer companies have published financing frameworks, which act as a taxonomy or classification of projects that will
allow those companies to access alternative financing (e.g., green bonds, social bonds, sustainability-linked bonds).

These case studies outlined in the table below will help identify the type of underlying projects for alternative financing.

Types of projects

Company Scope Access to Employment Socioeconomic

Renewable Energy Climate change
Clean transport Green buildings essential generation (e.g., advancement &
energy efficiency adaptation
services SME support) empowerment
CLP1 Bonds and loans ✓ ✓ ✓
KEPCO Bonds ✓ ✓ ✓ ✓ ✓
TNB Genco Sukuk ✓
Duke Energy Bonds, loans and
other financing ✓ ✓ ✓ ✓ ✓ ✓
instruments
Enel2 Green bond
✓ ✓ ✓ ✓
framework
Sustainability-
linked financing ✓ ✓ ✓
framework

Source: EY Analysis

Notes: 1CLP’s Climate Action Framework also includes transition financing (i.e., construction of natural gas fired power plants, and associ ated infrastructure, where renewable energy opportunities
are limited; and conversion of coal fired power plants and the facilities and associated modifications). Both cases will resu lt in carbon emissions of no more than 450gCO2/kWh at baseload. 13
2 Enel also published the sustainability-linked financing framework.
Brief case study: CLP’s Climate Action Finance Framework (CAFF)

CLP Holdings Limited (CLP), also known as China Light & Power Company, is a vertically integrated power company based in Hong Kong with
investments in Mainland China, India, Southeast Asia, Taiwan, and Australia. The CAFF formalises and governs project evaluation, monitoring and
reporting the use of proceeds for Climate Action Finance Transactions (including bonds, loans and other forms of financing).

Energy Transition Finance Transactions New Energy Finance Transactions

• Support the transition from coal-fired to gas-fired power generation in • Renewable energy
markets with few renewable energy options by funding gas-fired – Wind, solar, waste-to-energy, tidal, hydro (< 25MW) and biomass
power plants and related infrastructure (using sustainable feedstock sources)
Use of Proceeds • Modify or convert existing coal-fired power plants such that carbon • Energy efficiency
emission is no more than 450gCO2/kWh2 at baseload – Smart grid and smart metering systems
• Low carbon transport infrastructure
– Dedicated electric vehicle charging infrastructure

Process for Project • CLP group business units that are majority owned by CLP (“CLP Group Business Units”) propose projects that may fulfill the criteria above
Evaluation and • CLP’s Climate Action Finance Committee (CAFC) reviews and approves the eligibility of proposed use of proceeds and deploys funds from the
Selection CLP’s Climate Action Finance Transaction (CAFT)

• Pending allocation to eligible projects, funds from the CAFT are placed in dedicated bank accounts/deposits which are normally used for
Management of
liquidity management purposes of the corresponding CLP Group Business Unit
Proceeds
• An internal register maintains a record of each transaction made and the remaining balance of the unallocated proceeds

• A Climate Action Finance Report will be issued annually with the following information:
– Identity of issuing business unit – Remaining balance of unallocated proceeds
Reporting – Type of Climate Finance Transaction(s) entered – Estimation of beneficial impact of the use of proceeds
– Aggregate amounts of proceeds allocated – Information on projects with allocation of proceeds

• The Climate Action Finance Report will be reviewed by the CAFC and published within CLP’s Sustainability Report

Source: CLP, CLP Climate Action Finance Framework, 2022 with adaptation from EY 14
 Brief case study: Enel’s Sustainability Linked Financing (SLF) Framework
Enel developed their SLF in accordance
with the Sustainability-Linked Principles
(SLBP) 2020 as administered by ICMA.
The following are five components that
form the basis of Enel’s SLF framework:
1. Selection of Key Performance
Indicators (KPIs)
2. Calibration of Sustainability
Performance Targets (SPTs)
3. Financial characteristics
4. Reporting on the above
5. Independent verification of the
components listed in points 1-4
Source: Enel Group. Sustainability-Linked Financing Framework – January 2022, 2022
Enel has selected the following two KPIs to measure the sustainability improvements of the Group.
Direct Greenhouse Gas Emissions Amount Renewable Installed Capacity Percentage
(Scope 1)
Definition/ Scope 1 GHG emissions (grams CO2e per Percentage of total installed energy capacity that
Methodology kWh), are GHG emissions that come from comes from renewable sources
assets than Enel owns or controls directly
Rationale Monitoring scope 1 emissions helps to keep Renewable energy sources are low carbon and is
track their progress towards net zero 2040 vital in achieving the zero emissions by 2040 goal
Intermediate and long- • Reaching 148gCO2eq of GHG scope 1 • Reach 66% renewable net efficient installed
term goals emissions per kWh or less by 2023 capacity by 2024
• 80% reduction of GHG Scope 1 emissions • Reach 100% renewable net efficient installed
by 2030 with respect to 2017 baseline capacity by 2040
Sustainability
Performance Targets
(SPTs)
Financial Failure to achieve the SPTs by the specified date will trigger a step-up margin, leading to an increase in
Characteristic the interest rate applicable to interest periods following such reference date. If the reasoning for the
failure is out of Enel’s direct control, the step-up might not be triggered if appropriate documentation was
provided. The timely achievement of SPT #1 or #2 might cause a decrease in interest rate for certain
loan transactions.
Reporting Reported on an annual basis in its website and in its Annual Report and/or Sustainability Report
Verification KPI #1 and KPI #2 performance will be verified by an External Verifier. (KPMG & DNV, GL)
15
Question time

Has PLN started implementing thematic budget tagging?

Please use the polling/Whiteboard/Menti to give your

answer

16
2. The underlying taxonomy
 Understandthe concept, examples, and relevance of global and national
taxonomies in regard to thematic budget tagging
 Understand how to incorporate GEDSI activities into ESG budget tagging

17
Global and national references that can be used in the development of a
corporate taxonomy

National references Global references

Indonesia Green Indonesia SDGs SDG Finance

EU Taxonomy ICMA Principles
Taxonomy Securities Framework Taxonomy China

Source: Ernst and Young 18

 Indonesia Green Taxonomy

Activities were categorized by

determining sector based
Nationally Determined
Contribution (NDC), including:
• Energy
• Forestry
• Agriculture
• Waste
OJK has developed the Indonesia • Industrial Processes &
Green Taxonomy to support the Products Use (IPPU)
National Determined Contribution • Other sectors
target and the development of
green finance The step for categorizing the
activity is then continued by
Three thresholds (green, yellow, red) were used to categorized each activity: determining Standards
• Green: Activities that contributes to protect, restore and improve the quality of environment Classification of Indonesian
• Yellow: Activities that does not contribute to any significant harm but has no substantial contribution to the environment Business Field (KBLI) level 1 –
• Red: Activities produced significant harm to the environment level 5

Source: Indonesia Financial Services Authority (OJK), ‘Taksonomi Hijau Indonesia Edisi 1.0’, 20 January 2022 19
Republic of Indonesia SDGs Government Securities Framework

Republic of Indonesia (RoI) SDGs

Government Securities Framework has the
following characteristics:
• Classification of which thematic areas
are related to green and social focus
• Classification of SDGs into each eligible
expenditures (e.g., Renewable energy
relates to SDG 7, 13 and 14)
• Alignment with ICMA’s Green Bond
Principles, Social Bond Principles, and
Sustainability Bond Guidelines

Indonesia’s CBT allows for multiple thematic

Republic of Indonesia (RoI)
tagging for each detailed output. This
SDGs Government Securities
approach allows activities related to multiple
Framework was aimed to set a
SDGs to be identified in the budget tagging
framework for financing of RoI’s
process and reduces bias from users’
SDGs related expenditures with
judgement during the tagging process in
green and social focus
selecting the thematic tagging.

20
Source: Ministry of Finance of the Republic of Indonesia, ‘SDGs Government Securities Framework’, 2021
The European Union (EU) Taxonomy

The EU taxonomy provides a clear definition of sustainable activities and with it, a clear distinction between
sustainable and un-sustainable activities. It aims to provide a clear definition of activities that could be
deemed substantially contributing to environmental objectives, namely:
• Climate change mitigation
• Climate change adaptation
• The sustainable use and protection of water and marine resources
• The transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystem

The EU Taxonomy is an
The EU taxonomy, however, has yet to include a clear guidelines related to the social and governance pillars.
implementation tool that can
enable capital markets to Thus, EU Taxonomy recommends to adopt other social and governance guidelines such as:
identify and respond to
• UN Guiding Principles on Business and human rights
investment opportunities that
contribute to environmental • OECD Guidelines for Multinational Enterprises
policy objectives.

Source: EU Technical Expert Group on Sustainable Finance, ‘Taxonomy Technical Report’, June 2019 21
 SDG Finance Taxonomy China (1/2)

The six thematic areas in SDG Finance

Taxonomy China are based on International
Capital Market Association (ICMA). In
addition to the environment pillar, SDG
Finance Taxonomy China provides
coverage on economic, social and
governance activities.

SDG Finance Taxonomy The taxonomy utilises standardized levels,

China was developed by which may facilitate the SBT process by
China International Center allowing the user to cluster similar activities
for Economic and Technical and simplify the tagging process.
Exchanges (CICETE) with
the assistance from UNDP

Source: United Nations Development Program, ‘Technical Report on SDG Finance Taxonomy (China)’, 2020. 22
SDG Finance Taxonomy China (2/2)

Thematic 28 sub-
areas of categorie concrete
all s of project
eligible eligible activities
projects projects

1.
Basic
infrastructure

Provide a clear impact that could be used as an

Provide clear leveling per Allow multiple SDG tagging per
indicator to judge whether a project could be
economic activity activity
considered sustainable or not
Source: United Nations Development Program, ‘Technical Report on SDG Finance Taxonomy (China)’, 2020. 23
The International Capital Market Association (ICMA) Principles
The Principles provide guidance on transparency and disclosure to the sustainability bond market

Considering the references above, a company can develop a robust taxonomy that considers its future application on the tagging of projects for financing
purpose in accordance with ICMA Principles. Ideally, the taxonomy should capture the principles of each relevant bond guidelines.

Green bonds for financing environmental related

projects

Social bonds for financing social related projects

Sustainability bonds for financing environmental and

social related projects

Sustainability-linked bonds linked to sustainability

performance for the public interest

Source: International Capital Market Association, ‘Sustainability Bond Guidelines (SBG)‘, June 2021, accessed 21 December 2022. 24
 The International Capital Market Association (ICMA) Principles
The Principles indicate several examples of eligible project categories as the “Use of Proceeds” of each bond standard

Green bond
Sustainable Water and Climate
Renewable Energy Pollution control Biodiversity Clean Eco-friendly Green
management of wastewater change
energy efficiency and prevention conservation transportation products building
natural resource management adaptation

Social bond
Affordable basic Access to essential Affordable Employment Food security Socioeconomic
infrastructure services housing generation advancement

Sustainability
Combination of both projects eligible for green bonds and social bonds
bond

Sustainability
Performance-based projects to achieve predefined KPIs or Sustainability Performance Targets (SPTs)
-linked bond

Sources: 1International Capital Market Association, ‘Green Bond Principles‘, June 2022, accessed 21 December 2022. 2International Capital Market Association, ‘Social Bond
Principles‘, June 2022, accessed 21 December 2022. 3 International Capital Market Association, ‘Sustainability Bond Guidelines‘, June 2021, accessed 21 December 2022. 25
4International Capital Market Association, ‘Sustainability-Linked Bond Principles‘, June 2020, accessed 21 December 2022.
Mapping national and international taxonomies – Environmental criteria

Sustainable
Energy Pollution Sustainable Sustainable
Renewable Waste Sustainable Green agriculture, Biodiversity Green
efficiency prevention building and production
energy management water transport farming and conservation services
(EE) and control construction and trade
aquaculture
Solar EE in industrial Preparation, Water collection, Air quality Public Sustainable Ecosystem Construction of Manufacturing Consultancy
facilities collection, treatment and agriculture and new buildings and trading of low
transport conservation and services
handling and distribution farming carbon and
storage energy efficient
technologies and
Hydropower EE in Recycle and Water Soil quality Private Fisheries and Forest Improvement of products Sustainable/
existing buildings
agriculture reuse monitoring transport aquaculture eco-tourism

Wind EE in Wastewater Water Freight and Acquisition of Eco-friendly/Bio

cargo transport buildings Products/Producti
buildings management management
on Technologies

Bio-energy Waste to Freight water

transport
Energy

Geothermal Passenger
water transport EU Green Taxonomy China SDG Taxonomy
ICMA Principles Indonesia SDGs Securities Framework

Transmission Infrastructure
& Distribution

Storage Smart transport

system

Source: National Bank of Georgia, ‘Sustainable Taxonomy for Georgia’, 2022 with adaptation from EY. 26
 Mapping national and international taxonomies – Social criteria
A comparison between national and international taxonomies on their corresponding criteria related to social activities

Affordable basic Healthcare and related Financing and financial Education, technology,
Food security
infrastructure social services services culture, fitness

Water including clean Medical care and Access to financial Agricultural production Education
drinking water sanitation services products and services and processing

Affordable, accessible Technology innovation and Finance for access to Agricultural product, Technology
transportation promotion of health care education logistics, trade and retail mainstreaming

Access to basic utility Manufacturing for medical Basic financial literacy Agricultural production Culture and sports
services and sanitation industries inputs and facilities industry

Affordable/social housing Healthcare logistics Agricultural education

services and skills training

Public health governance

and services

EU Green Taxonomy* China SDG Taxonomy

ICMA Principles Indonesia SDGs Securities Framework

Notes:
*Currently, the EU Green taxonomy has only published criteria for green activities. It has yet to finalise a taxonomy for social activities.

Source: National Bank of Georgia, ‘Sustainable Taxonomy for Georgia’, 2022 with adaptation from EY. 27
Mapping green criteria with SDGs 1-8
Activities under each environmental category contributes to achieving several SDGs.

Sustainable
Pollution Sustainable Sustainable
Renewable Energy Waste Sustainable Green agriculture, Biodiversity Green
prevention building and production
energy efficiency management water transport farming and conservation services
and control construction and trade
aquaculture

No poverty V V V

Zero hunger V V V V

Good health
and well- V V V V V
being

Quality
V
education

Gender
equality

Clean water
V V V V V V
and sanitation

Affordable
and clean V V V V
energy

Decent work
and economic V V V
growth

Source: National Bank of Georgia, ‘Sustainable Taxonomy for Georgia’, 2022 with adaptation from EY. 28
Mapping green criteria with SDGs 9-15
Activities under each environmental category contributes to achieving several SDGs.

Sustainable
Pollution Sustainable Sustainable
Renewable Energy Waste Sustainable Green agriculture, Biodiversity Green
prevention building and production
energy efficiency management water transport farming and conservation services
and control construction and trade
aquaculture

Industry,
innovation
V V V V V V
and
infrastructure

Reduced
V V V
inequalities

Sustainable
cities and V V V V V V V
communities

Responsible
consumption
V V V V V V V V
and
production

Climate
V V V V V V V
action

Life below
V V V
water

Life on land V V V

Source: National Bank of Georgia, ‘Sustainable Taxonomy for Georgia’, 2022 with adaptation from EY. 29
Mapping social criteria with SDGs 1-8
Activities under each social category contributes to achieving several SDGs.

Healthcare and Education,

Affordable basic Financing and
related social Food security technology,
infrastructure financial services
services culture, fitness

No poverty V V V V

Zero hunger V V V

Good health and well-

V V V V
being

Quality education V V V

Gender equality V V V V

Clean water and

V V
sanitation

Affordable and clean

V V
energy

Decent work and

V V V V V
economic growth

Source: National Bank of Georgia, ‘Sustainable Taxonomy for Georgia’, 2022 with adaptation from EY. 30
Mapping social criteria with SDGs 9-15
Activities under each social category contributes to achieving several SDGs.

Healthcare and Education,

Affordable basic Financing and
related social Food security technology,
infrastructure financial services
services culture, fitness

Industry, innovation
V V V V
and infrastructure

Reduced inequalities V V V V V

Sustainable cities and

V V V
communities

Responsible
consumption and V V V
production

Climate action V V V

Life below water V V

Life on land V V

Source: National Bank of Georgia, ‘Sustainable Taxonomy for Georgia’, 2022 with adaptation from EY. 31
Building an ESG taxonomy that is relevant to the entity’s objectives

There are 3 main principles in building a taxonomy:

Balancing simplicity Ensuring consistency in

Ensuring the participation
without sacrificing approach with international
of technical experts
granularity best practices

The following 6 steps are recommended to establish the contents of an ESG taxonomy:

1 2 3 4 5 6
Taxonomy users
Define the ESG objectives Sector Specific Reporting
and beneficiaries
strategic goal identification identification investments guideline outline
identification

Source: World Bank, ‘Developing a National Green Taxonomy: A World Bank Guide’, 2020. 32
Overall ESG taxonomy development approach (1/3)

1 2 3 4 5 Taxonomy users 6
Define the ESG objectives Sector Specific Reporting
and beneficiaries
strategic goal identification identification investments guideline outline
identification

National Grid’s Green Financing Framework2

The general strategic goal of an ESG The taxonomy should align with
taxonomy is to ensure an environmentally the national and/or company’s
and socially sustainable economy for the ESG objectives. It is
future1. recommended that these
objectives be translated into
However, a company should ask themselves specific, measurable targets.
if they have other strategic goals:
• Allow monitoring and reporting of Example of measurable targets
expenditures and investments of include:
sustainable activities • Reducing a percentage of
• Recognize underinvested or overinvested carbon emissions with
areas. respect to a baseline year
• Display the development being made • Reaching a specific level of
towards national and/or the company air quality by a given year
sustainability goals to the government and • Lowering rate of deforestation
financial markets by a given year In its Green Financing Framework, National Grid has presented its
rationale for the financing framework and established measurable
Sources: 1World Bank, ‘Developing a National Green Taxonomy: A World Bank Guide’, 2020.
2 National Grid, ‘Green Financing Framework’, July 2021.
sustainability targets. 33
Overall ESG taxonomy development approach (2/3)

1 2 3 4 5 Taxonomy users 6
Define the ESG objectives Sector Specific Reporting
and beneficiaries
strategic goal identification identification investments guideline outline
identification

Identify the relevant sectors that will be Developing the taxonomy involves selecting and assessing the investment with
associated in achieving the selected ESG the relevant sectors. The main criterion for choosing a specific type of investment
objectives. is how it can contribute to meet the national target or an accepted threshold.

Example: Example:
• An environmental objective to create • Qualifications for an energy sector investment may depend on its compliance
sustainable livelihoods in local communities on global or national energy standards, fulfilling the accepted threshold in
can be linked to the CSR division of the carbon intensity or whether it has reduced emissions with respect to a
holding and/or sub-holding company. baseline year.

Source: World Bank, ‘Developing a National Green Taxonomy: A World Bank Guide’, 2020. 34
Overall ESG taxonomy development approach (3/3)

1 2 3 4 5 Taxonomy users 6
Define the ESG objectives Sector Specific Reporting
and beneficiaries
strategic goal identification identification investments guideline outline
identification

National Grid’s Green Financing Framework2

The reporting It is mandatory that

Companies need to identify who are the target regular and
users of the taxonomy. In addition, the guideline outlines
the quantitative consistent reporting
expectations of how the users will utilise the is administered by all
taxonomy needs to be defined1. performance
indicators that users. This enables
should be ease of tracking of
Example: activities towards
• Banking and non-banking financial institutions consistently used
at the Eligible meeting its key
may use the taxonomy to discern the objectives.
eligibility for sustainable financial products, Category level
maintain a record of such products, and
publish the progress in achieving its
sustainability targets.

Sources: 1World Bank, ‘Developing a National Green Taxonomy: A World Bank Guide’, 2020.
2 National Grid, ‘Green Financing Framework’, July 2021. 35
Gender equality, disability & social inclusion (GEDSI) responsive ESG
financing

GEDSI refers to…

‘the equal rights, responsibilities and opportunities of all people, regardless of gender or sex, sexual orientation, ethnicity, age, ability, religion, and culture.’1

Focus on gender diversity could become the new normal in the market Reports have shown evidence of positive financial impacts a company can benefit

► Increasing awareness and acceptance of the benefits of gender from considering GEDSI into their organisation.
► Companies with high gender diversity are 15% more likely to have financial
diversity, especially within senior leadership level
returns above their respective industry medians.3 Additionally, more diverse
► Enable gender mainstreaming at the institutional and project cycle
companies experience lower return-on-equity volatility. 4
levels
► By advancing women’s equality, economies of the Asia Pacific could add
► Better availability of sex-disaggregated data and accountability
USD4.5trillion to annual GDP by 2025, or 12% above business as usual5
measures to create enabling environment ► Companies with at least 30% women executives are more likely to outperform
Furthermore, there is an emerging approach among investors that companies with lower women representation6
takes gender-based factors into account across the investment
► Venture and private equity funds with gender balanced teams have 20% higher
process to advance gender equality and improve investment
decision-making 2 returns7

Sources: 5J Woetzel et al., ‘The power of parity: Advancing women’s equality in Asia Pacific |
1 HIVOS, ‘Gender Equality, Diversity and Inclusion’, accessed December 2022. McKinsey’, 2018, McKinsey Global Institute, accessed December 2022.
2 GIIN, ‘Gender Lens Investing Initiative’, 2019, accessed December 2022. 6 S Fyle et al., ‘Diversity wins: how inclusion matters’, McKinsey & Company, 2020
3 Morgan Stanley, ‘Why Gender Diversity May Lead to Better Returns for Investors’, 7 IREI, ‘IFC Study: Funds with Gender-Balanced Leadership Generate up to 20%

February 2022, accessed December 2022. Higher Returns’, March 2019, accessed December 2022 36
4 McKinsey & Company, ‘Why diversity matters’, January 2015, accessed 2022
Incorporating GEDSI activities into ESG budget tagging

As part of thematic budget tagging, there are specific GEDSI considerations to be incorporated in the system. There are a few approaches that can be used to evaluate the
GEDSI dimensions of sustainability programs:

Gender bonds:
Assess whether the infrastructures developed to provide climate benefits Evaluate the extent of government interventions/programs in building the
First generation
also equally provides benefits and eliminate adverse impacts to the socio- resilience of the climate vulnerable groups and helping them achieve
1 2
economic group it serves. economic autonomy through adaptive social protection and livelihood
programs.

Examples of countries utilizing different tools to analyse their GEDSI dimension can be seen below:

Bangladesh Nepal Indonesia

• Implemented an Adaptive Social Protection
expenditure review to assess the degree that
climate programs enhances the resilience of the
climate vulnerable groups, and in particular women
• This is complemented by ethnographic research
to obtain micronarratives from climate vulnerable
groups in order to understand the effectiveness of
the programs
Source: N Bain, L Nguyen and K Baboyan, ‘Knowing What You Spend: A guidance note for governments to track climate change finance in their budgets ’, United Nations
Development Programme, July 2019.
• Implemented a Climate Change Poverty Impact
Assessment in the agriculture sector, with a focus
on gender
• The assessment provided insight on whether
vulnerable communities were taken into account
during planning and resource allocation and
provided recommendations on budget proposal
improvements
• Implemented a gender planning and budgeting
tools, namely the Gender Analysis Pathway
(GAP) and the Gender Budget Statement (GBS)
with the aim of making existing tagged climate
programs more GEDSI-responsive
• In 2019, the Government was planning to conduct a
gap analysis between national regulations and the
actual outcomes of gender-tagged programs on
vulnerable communities
37
Gender bonds
Gender-responsive thematic budget tagging could help entities in accessing gender bonds

Objective and key features

• Raise proceeds to finance/refinance projects to improve gender equality or projects with high gender performance
• A sub-category of social bonds to create awareness around gender inequality, addressing gender issues, and the need for female advancement
Applicable Standards
• There are no dedicated gender bond principles, but the Social Bond Principles by ICMA (2020) can be used for ‘use of proceeds’ gender bonds
Industries
• No dominant industries as gender equality and women empowerment is a cross-cutting sustainability theme

Gender bonds: Gender bonds:

First generation Next generation

Eligibility for the ‘first generation’ gender bonds were based on third party research Potential features of the next generation of gender bonds:
and focused mostly on workplace gender equality initiatives and/or development of
products and services that improve the quality of life for women. For example, • Gender performance going beyond workforce and include stakeholders
requirements to issue gender bonds could be the following1 : • Integrating gender performance into debt covenants
• Incentivize improvement in gender practices
• Issuer is listed in the Australian Workplace Gender Equality Agency’s (WGEA) • More focus on addressing the impact of climate change on women
Employers of Choice, or alternatively, issuer is in the top 200 rankings of • Ensure investors that their investments would truly beneficial impact on
Equileap, a gender equality advocacy group women and girls through concrete gender action plans in place
• Issuer is a signatory to the UN Women’s Empowerment Principles/Catalyst
Accord 2022
• Issuer has at least 40% female representation at the board level and/or at the
C-level
Sources:
Pendal Group, Green and social bonds popular as more advisers offer sustainable options, 2021 38
KPMG Global, Access. Leadership. Empowerment. Realized potential. Value creation.
Dechert LLP, The Growing Trend of Gender Bonds in 2022, 2022.
Examples of gender bonds

IIX’s Women’s Livelihood Bank OCBC NISP’s gender Bank of Ayudhya’s Women World Bank’s Sustainable
Bond 2 bond in Indonesia Entrepreneurs Bonds in Development Bond to raise
Gender lens: Gender lens: Lending to Thailand awareness for gender equality
Create sustainable livelihoods woman-owned small and Gender lens: Lending to woman- Gender lens: Women’s
for underserved women medium enterprises (SMEs) led SMEs empowerment in rural areas

QBE Insurance Group’s Gender
Equality bonds in Australia
Gender lens: Financing or re-
financing bonds of companies that
are rated high in gender equality
Canadian Imperial Bank of
Commerce’s Women in
Leadership Bond
Gender lens: Lending to
companies with leading practices
to promote gender diversity in
leadership positions
National Australia Bank’s Social
Bond (Gender Equality)
Gender lens: Provides financing or
re-financing for companies with
high gender equality ranking
Asian Development Bank’s Gender
Bonds as part of Theme Bonds
Gender lens: Promote women’s
economic empowerment, gender
equality in human development,
reduce time poverty, women’s
resilience against risks and shock

Sources: IIX, OCBC, Krungsi, The World Bank, QBE, CIBC, NAB, ADB 39
Short break
10 minutes

40
3. Designing the tagging system
 Understand the entity’s existing budget system as a basis for appropriately
designing the tagging system
 Understand high-level steps of integrating the entity’s ESG taxonomy in the
design of the ESG budget tagging

41
Understanding the entity’s existing budgeting system

Decide what budget Link taxonomy with Develop a weighing Determine

Define ESG activities
measures to tag tagging system system implementation modality

Consider emerging public Take decision in relation to • Linked to the definition of • Binary approach • Allocate organizational
and multilateral definitions what will be tagged: ESG • Scaled approach responsibilities
and identify scope: • Determine coverage • Clear definition of each • Design tagging
• Existing definitions • Type of budget items category procedures
• National ESG objectives • Accompanying guidance • Determine reporting
from taxonomy format

Source: OECD, ‘Green Budget Tagging : Introductory Guidance & Principles’, OECD Publishing, 13 February 2021 with adaptation from EY. 42
Understanding the entity’s existing budgeting system

Decide what budget Link taxonomy with tagging Determine implementation

Define ESG activities Develop a weighing system
measures to tag system modality

Companies can also draw on existing definitions

from different international bodies for international Sample definitions of “ESG” used by international
comparability. organization:
ICMA green bonds categorises ICMA social bonds categorises
green or environmental-related social investments that provide
The definition of “ESG” or “sustainability” will investments to the following and/or promote:
depend on: objectives: 1. Affordable basic infrastructure
1. The national country context such as its 1. Climate change mitigation 2. Access to essential services
sustainability/climate objectives 2. Climate change adaptation 3. Affordable housing
2. The company’s purpose and ambition to 3. Natural resource 4. Employment generation
implement budget tagging conservation 5. Food security and sustainable
4. Biodiversity conservation food systems
5. Pollution prevention and 6. Socioeconomic advancement
Different entities may have different definitions of control and empowerment
the term. However, in general, ESG/sustainable
budget items are those that have a positive
impact/contribution towards broad environmental,
social and governance objectives.

Source: OECD, ‘Green Budget Tagging : Introductory Guidance & Principles’, OECD Publishing, 13 February 2021 with adaptation from EY. 43
Understanding the entity’s existing budgeting system

Decide what budget Link taxonomy with tagging Determine implementation

Define ESG activities Develop a weighing system
measures to tag system modality

Determine coverage Type of budget items to select Important notes

Companies should define the breadth and depth of A company should decide if they want to Determining how the company’s budget will be
its budget coverage: tag both positive (sustainable) and identified in budget tagging system means:
1. Breadth of coverage: the number of negative (unsustainable) measures into
1. Identifying types of budget/expenditure in
division/units that will be covered in the budget their budget tagging.
company’s chart of accounts (COA)
tagging, and which division/units
2. Depth of coverage: the level of thoroughness of In general, it is more common to tag 2. Deciding to tag budget, expenditure, or both
the company’s sustainability relevance analysis positive measures/characteristics. 3. Entry point for tagging

As a minimum, companies should aim to cover However, tagging negative measures can 4. Coding the company’s COA
budgets in the most relevant units that contribute to help in comparing the company’s positive
their sustainability objectives. However, depending and negative measures, and the findings
on the available resources, ideally companies can be integrated for future improvements.
should cover all types of budgets.

Source: OECD, ‘Green Budget Tagging : Introductory Guidance & Principles’, OECD Publishing, 13 February 2021 with adaptation from EY. 44
Integration of the entity’s ESG taxonomy in the design of the ESG budget
tagging

Decide what budget Link taxonomy with Develop a weighting Determine implementation
Define ESG activities
measures to tag tagging system system modality

Linking the existing ESG taxonomy with Decide what weighing system to use
the tagging system will help users to tag
budget items correctly. Companies can decide to either implement:
• A binary approach
Ensure that the ESG taxonomy have: • A budget item can either be tagged or not tagged
• Clear definitions of the type of budget • This approach simplifies the budget and may not
items that qualify for each category provide a comprehensive and accurate picture
• Provide examples of budget • A scaled approach
items/activities that qualify for each • Tag only a proportion of its budget items that is
category specifically contributes to ESG objectives
• Complex approach, and may require a break down of
bulked budget items to ensure accuracy
• Example: a portion of expenditure on urban transport is
tagged due to its co-benefit with climate change
mitigation (reducing GHG emissions per unit
transported)
Source: OECD, ‘Green Budget Tagging : Introductory Guidance & Principles’, OECD Publishing, 13 February 2021 with adaptation from EY.
Methodology for scaled weighting the tagged budget/expenditure

For the scaled approach, weighting an Examples of budget tagging approaches in other countries
activity/programme/objective essentially
involves two steps: Country example Advantages Disadvantages

1. Categorizing its relevance Nepal – using climate The method is relatively There will be reliance on
relevance index assigned to a simple, and possible to be professional judgement
2. Determining a percentage weighting to apply to the program in proportion to the implemented within the short
budget/expenditure given that category program’s total budget and term
relevant activities

Two main technical approach for scaled weighting Bangladesh – using statistical Budget owner can link their There will be reliance on
methodology: method to calculate 44 projects to multiple programs review of the methodology
programs under national and weights under the and its results
1. Objective-based approach: weighting is determined climate change action plan BCCSAP
by an assessment of the relevance of a (BCCSAP)
program/activity’s stated objectives
The case of Nepal’s weighting in budget tagging
2. Benefits-based approach: applying benefit cost ratio, Each program is assessed for its “relevancy” to climate change:
where weight is determined by analyzing the benefits
when climate change related risk materialized compared Highly relevant; if 60 per cent or more of the allocation of the budget is related
to the situation without climate change to climate change

Relevant; if 20-60 per cent of the allocation of the budget is related to climate
change

Source: UNDP, ‘Nepal's Citizen Climate Budget Booklet’, 2017. N Bain, L Nguyen and K Baboyan, ‘Knowing What You Spend: A guidance note for governments to track
climate change finance in their budgets’, United Nations Development Programme, July 2019.
46
Integration of the entity’s ESG taxonomy in the design of the ESG budget
tagging

Decide what budget Link taxonomy with tagging Determine

Define ESG activities Develop a weighing system
measures to tag system implementation modality

Designing tagging procedure Allocate organisational responsibilities Determining reporting format

A company can ask these Allocating a team to be responsible for the How does the company want to publish the
procedural questions regarding the thematic budget tagging will be helpful for the findings and/or results from its thematic budget
budget tagging: process. tagging?
• When will tagging be conducted? • Within its annual report and/or non-financial
• How often will tagging be Options include: reporting (i.e., sustainability report)
conducted? • Sustainability division of holding company • As a separate document/report
• Should tagging be conducted • Finance division of holding company
manually (Excel) or through an
automated system (SAP)? If the company contains many sub-holding
companies, a person-in-charge (PIC) can be
allocated for each sub-holding to ensure
proper usage of thematic budget tagging in
their own sub-holding.

Source: OECD, ‘Green Budget Tagging : Introductory Guidance & Principles’, OECD Publishing, 13 February 2021 with adaptation from EY. 47
 Additional key elements of the budget tagging system

Options for determining the tagging procedures

1. Responsible unit for assigning budget 2. Options for budget tagging entry point

Options Advantages Disadvantages Options Advantages Disadvantages

Centrally Only one or few experts The unit might have During budget Can integrate sustainability The budget tagging needs to
located unit or need training, and it is limited understanding planning when considerations from the planning be updated after allocation
experts less challenging to ensure of the programmes activities are stage; can strengthen the link
(finance consistency in quality within each line developed by budget between the plan and the budget
function) at the ministry/budget owners
company owner
After initial budget Already incorporates reviewed Risk that budget owners don’t
budget and updated tagging factor in sustainability-related
impacts when developing their
projects and budgets
Budget owners Budget owners have This will require
better understanding of capacity building for
their own programs; the budget owners Tagging expenditure Can measure the actual level of There is an incomplete picture
involvement of the budget spending for each tag of budget execution as the
owners might help raise budget and expenditure
awareness of cannot be compared
sustainability issues
Combination of the Provides the most comprehensive This will require significant
above process/picture of the tagging and comprehensive effort to
create tag from the budgeting
to the expenditure stage
Source: N Bain, L Nguyen and K Baboyan, ‘Knowing What You Spend: A guidance note for governments to track climate change finance in their budgets ’, United Nations 48
Development Programme, July 2019.
Integration of ESG budget tagging with alternative financing

4 weeks 2 weeks 5 weeks Depending on issuance Duration varies At least annually

entity’s timeline

1.Identification of use 3.Development of 4.Pre-issuance 5.Sustainable bond 6.Management of 7.Reporting

of proceeds sustainable bond external review issuance proceeds
framework 8.Post-issuance
2.Selection of external review
sustainable bond
standard

• Budget tagging data will be the basis for evaluation to • The management of proceeds require earmarking and
determine the appropriate financing resources and the selection disbursement of proceeds for the nominated project.
of the underlying projects. • In this step, budget tagging will be useful in tracking the
selected or underlying projects.

49
Question time

What do you think will be the main challenge for PLN in developing the budget
tagging system?

Please use the polling/Whiteboard/Menti to give your

answer

50
Q&A

51
Summary

In today’s training, we have learnt

 The definition of thematic budget tagging and its implementation among countries and corporates
 National and global references for the development of a corporate taxonomy
 Mapping of environmental and social criteria across taxonomies and mapping of green and social criteria with SDGs
 Approach in developing an ESG taxonomy to support the entity's objectives
 Incorporation of gender equality, disability & social inclusion (GEDSI) activities into ESG budget tagging
 Integrating ESG taxonomy into the design of the ESG budget tagging

Next steps:
• Analysis of PLN’s existing budget system and preliminary planning for ESG budget tagging
• Development of taxonomy
• Development of budget tagging guidelines/framework

52
Feedback

53
Thank you