Growing Awareness of Key ESG Issues in Thailand

In Thailand, the public and private sector, including financial institutions, investors, and other stakeholders, are showing increasing commitment to the integration of environmental, social, and governance (ESG) principles into their fundamental values, visions, and business operations. The rapid growth behind ESG can be traced back to the 2030 Agenda for Global Sustainable Development Goals (SDGs), adopted by all UN member states in 2015, and the Paris Agreement to which Thailand is among the parties committing to achieve their targets for reducing greenhouse gas emissions.

ESG landscape in Thailand

The ESG legal framework in Thailand is dispersed across various laws and regulations. The stakeholders in relevant sectors are expected to observe a combination of mandatory legal measures and voluntary guidelines with respect to their business operation. The scope of Thailand’s ESG policy framework may encompass a wide array of aspects.

• Environmental – climate change, pollution, energy efficiency, deforestation, and natural resources utilisation.
• Social – human rights, labour standards, community relations, gender and diversity, health and safety measures, data protection, and privacy.
• Governance – corporate governance, anti-bribery and anti-corruption measures, and taxation approaches.

General laws and regulations with respect to each of the ESG pillars

As a basic requirement, private entities are obligated to adhere to laws and regulations governing the three pillars above, as they are often part of the criteria for business operators to maintain their operation, attain reputational benefits, retain employees, and secure trust from long-term investors and customers.

These fundamental laws include:

• the Constitution of Thailand;
• the Civil and Commercial Code;
• the Enhancement and Conservation of the National Environmental Quality Act, B.E. 2535 (1992) (as amended);
• the Factory Act, B.E. 2535 (1992) (as amended);
• the Hazardous Substance Act, B.E.2535 (1992) (as amended);
• the Occupational Safety, Health, and Environment Act, B.E. 2554 (2011);
• the Public Health Act, B.E. 2535 (1992) (as amended);
• the Labour Protection Act, B.E. 2541 (1998) (as amended);
• the Public Limited Company Act, B.E. 2535 (1992); and
• the Act Supplementing the Constitution Relating to the Prevention and Suppression of Corruption, B.E. 2561 (2018).

Recent developments in fundamental environmental law include the “Draft Climate Change Act” and “Draft Clean Air Act”.

The Draft Climate Change Act outlines the measures to tackle the issues of climate change at the policy, sectorial, and project levels, and imposes reporting and disclosure obligations on governmental authorities and the private sector in certain industries. Under the Draft Climate Change Act, the National Climate Change Policy Committee will be formed to suggest a master plan (with the approval of the cabinet) which includes policies and strategies to handle climate change, greenhouse gas mitigation action plans, and climate change adaptation plans. The National Climate Change Policy Committee will also monitor the development and implementation process. The Draft Climate Change Act is still under the revision process.

Several versions of the Draft Clean Air Act were proposed while a few versions remain for consideration. However, these versions of the Draft Clean Air Act share some core principles which are to protect the people’s rights to breathe clean air and to set forth measures for pollution reduction. Under the Draft Clean Air Act, a Clean Air for Basic Human Rights Committee shall be formed with the main authority and duty to propose clean air-related policies and action plans. The Air Pollution Committee, appointed by the Clean Air for Basic Human Rights Committee, shall also have the authority and duty to identify sources of pollution and air polluted areas as well as to suggest amendments to relevant laws and regulations.

Policies and guidelines development

Each pillar of ESG may not necessarily appear in a distinct policy or guideline existing independently from other pillars; instead the ESG principles as a whole are often integrated as part of policies or guidelines issued by Thailand’s governmental or regulatory authorities. Key regulatory bodies of Thailand supervising and promoting ESG on an institutional level include the Bank of Thailand (BOT) and the Securities and Exchange Commission (SEC).

The BOT regulates and supervises financial institutions, including commercial banks and finance companies. The SEC is the regulatory authority responsible for overseeing the capital markets as well as the activities of listed companies in Thailand.

Details of key developments in policies and guidelines from Thailand’s regulatory bodies are set out below.

Thailand Taxonomy

In alignment with the EU Taxonomy and ASEAN Taxonomy, the Thailand Taxonomy prepared by the Working Group on Sustainable Finance (led by the BOT and the SEC and joined by the Fiscal Policy Office, the Office of Insurance Commission, and the Stock Exchange of Thailand), marks a significant development in Thailand’s ESG landscape. The Thailand Taxonomy serves as a framework or guideline for the private sector, financial institutions, and investors in classifying business activities in accordance with sustainability objectives. It allows all stakeholders to evaluate investment risks while encouraging sustainable projects and investments. On 30 June 2023, the Thailand Taxonomy, Phase 1 was officially published on the BOT’s and the SEC’s websites.

Under the Thailand Taxonomy, Phase 1, economic activities will be disaggregated into sectors pursuant to their greenhouse gas emission profile and economic parameters and further categorised based on technical screening criteria referred to as the “traffic light system”:

• green for activities demonstrating near zero or zero carbon emission;
• amber for activities within the transitional period; and
• red for activities that are non-compatible with a net-zero path.

The pilot sectors of the Thailand Taxonomy, Phase 1 are the energy sector and transportation sector.

While the Thailand Taxonomy will not be legally binding and will be implemented on a voluntary basis as a market guideline, it represents an opportunity for the private sector to access better financing benefits. For instance, businesses engaged in projects labelled as green may receive more favourable terms for loans, including potentially favourable interest rates, as such projects could be perceived as less risky by financial institutions.

It is also plausible that the Thai government could take the Thailand Taxonomy into consideration when forming and proposing any relevant policy and regulation in the future. Therefore, it is important for companies and other stakeholders to observe the taxonomy, in order to foster harmonious collaboration with future applicable regulations.

BOT policy on adherence to environmental factors into financial institutions’ policies

In February 2023 the BOT introduced a policy on the business operations of financial institutions taking into consideration environmental perspectives and climate change (“BOT Policy”). This is one of its sustainable financing incentives. The BOT aims to encourage financial institutions to incorporate environmental considerations into their operations and develop internal policies that align with these principles.

The key aspects of the BOT Policy include recommendations for financial institutions to:

• elevate governance standards at the management level to incorporate environmental perspectives into their consideration and decision making processes;
• align financial institutions’ investment strategies with market standards (eg, the Thailand Taxonomy) or international norms (such as UN Principles for Responsible Banking and Equator Principles);
• integrate environmental factors into risk management practices; and
• ensure transparent sustainability disclosures in accordance with acceptable or international standards – eg, the Task Force on Climate-Related Financial Disclosures (TCFD) or International Sustainability Standards Board (ISSB).

Even though the BOT Policy is not mandatory, the BOT will monitor and assess the adoption of the BOT Policy from the year 2024 onwards. Proactive adherence to the BOT Policy can help financial institutions manage risks, attract investors, and ensure long-term viability in a sustainable landscape. The BOT may further introduce an industry book guiding the steps to implement this policy.

Green data ecosystem

Pursuant to the BOT’s Directional Paper on Transitioning towards Environmental Sustainability under the New Thai Financial Landscape, the BOT will, in collaboration with the relevant public and private sectors, develop a national platform for environment-related data (referred to as the green data platform), enabling various sectors to use the data for assessing their environment-related operation and risk management. This green data platform will consist of the key platforms that gather and store the following data:

• data on ESG certifications for companies and projects, along with the key certification indicators;
• data disclosed by companies and financial institutions in accordance with international disclosure standards – eg, TCFD;
• extensive environmental data for environmental analysis and policy-making; and
• information on financial products/services, including government and financial institution support for environmental initiatives.

Responsible lending practices

The BOT, Thai Bankers’ Association (TBA), and Thai commercial bank members have entered into a Memorandum of Understanding (MOU) on responsible lending which focuses on promoting responsible lending, encouraging banks to incorporate ESG risks into their lending strategies, and transferring the strategies into implementation.

The MOU is structured with four key components – ie, commitment from the top management to uphold responsible lending, engagement of stakeholders, internal implementation mechanisms, and transparent disclosure of responsible lending practices to the public.

To enhance the governance of responsible lending, the BOT also introduced a new draft notification on responsible lending (“Draft Responsible Lending Notification”) for a public hearing in September 2023. Under this Draft Responsible Lending Notification, the service providers (eg, financial institutions, credit card providers, personal loan providers, and nano loan providers) shall maintain responsible and fair lending throughout their debt cycle (ie, pre-debt period, during the debt period, during payment difficulties, and during debt enforcement or transfer) in addition to the BOT notification on market conduct and in accordance with the eight measures which have been outlined as:

• development of financial products;
• advertisement;
• sale process;
• assessment of affordability;
• financial discipline during the debt period;
• support for persistent debt;
• support for debtors facing payment difficulties, including debt restructuring for non-NPL; and
• legal proceeding and debt transfer to other creditors.

The Draft Responsible Lending Notification not only aims to provide sustainable solutions for addressing household debt issues but also encourages a good credit culture and promotes stronger financial discipline.

ESG-related reporting requirements

The SEC sets out the following guidelines with respect to ESG-related disclosures:

• disclosure guidelines for annual reports (Form 56-1 (One Report) by Thai listed companies) which includes the disclosure of ESG aspects; and
• disclosure guidelines for sustainable and responsible investing funds (“SRI Funds”) which are applicable to mutual funds which invest in sustainable and responsible projects.

SRI Funds are required to disclose information in accordance with internationally recognised standards on sustainability – eg, United Nations Sustainable Development Goals (UN SDG), TCFD, and Green Bond Principles (GBP) of the International Capital Market Association.

As of now, only listed companies and SRI Funds are required by the SET to submit sustainability reports and disclosures annually. However, private companies are voluntarily disclosing their compliance with ESG criteria, such as reduction of their carbon footprint, increased transparency in supply chains, and commitments to implementing good governance.

At the ASEAN level, the SEC and ASEAN Capital Markets Forum have jointly introduced ASEAN Sustainable and Responsible Fund Standards (ASEAN SRFS) in order to standardise the disclosure framework for sustainable funds and minimise the risk of greenwashing among ASEAN countries. The SEC released a draft notification on the disclosure standards of the ASEAN Sustainable and Responsible Fund for a public hearing in early 2023. This proposed notification can be adopted on a voluntary basis by SRI Funds seeking compliance with the ASEAN SRFS.

ESG-related bonds

The SEC also promotes the issuance and offer for sale of green bonds, social bonds, and sustainability bonds (collectively referred to as environment conservation bonds). The characteristics of environment conservation bonds are similar to other types of bonds, but a primary distinction lies in their fundamental purpose which is to finance sustainable projects. Consequently, the issuers must comply with the criteria and conditions of issuance of environmental conservation bonds and adhere to the SEC regulations on debt securities, at a minimum.

To ensure that environment conservation bonds will be used in accordance with their intended objectives, the SEC places emphasis on the additional disclosure obligations and their standards. Key information to be disclosed includes investment objectives, goals that the fund aims to achieve, types and characteristics of investment, the allocation of proceeds, as well as the evaluation and selection process of the investment projects.

To encourage market participation in sustainable finance, the SEC has waived the fees for ESG-related bond issuance and the establishment of SRI Funds (for applications submitted in 2023).

Other key developments

Equator Principles

Serving as a risk management framework, the Equator Principles provide financial institutions with a mechanism to assess and appraise the environmental and social risks linked to project finance. Financial institutions globally have the option to adopt the Equator Principles, while committing to refrain from financing projects that do not comply with the Equator Principles. As part of the Equator Principles Financial Institution’s (EPFI’s) internal due diligence and credit analysis, projects will have to be categorised based on the level of their environmental and social risks and impact. Measures for each project category will have to be subsequently implemented. EPFI will be subject to public disclosure and certain reporting obligations including details on numbers of project finance transactions mandated by such EPFI level as well as its category type. The Siam Commercial Bank Public Company Limited has marked a milestone by becoming the pilot bank in Thailand to join the Equator Principles. While it is plausible that additional financial institutions in Thailand may follow, alternatively some financial institutions may opt to apply similar principles when investing in projects, without becoming formal members of the Equator Principles.

Human Rights Due Diligence (HRDD)

HRDD is a process undertaken by companies to identify, prevent, mitigate, and manage the impacts of their activities, operations, and business relationships on human rights. The United Nations Development Programme (UNDP) has developed global guidance in the form of guidelines on HRDD. These guidelines offer a comprehensive framework for companies to uphold human rights and prevent any involvement in or contribution to human rights abuses. Note that the SEC and the Faculty of Laws, Chulalongkorn University, have published an HRDD guideline for listed companies.

Although the business and human rights guidelines do not have legal effect in Thailand and companies are expected to adhere to the general law as a minimum, companies are encouraged to evaluate the applicability of their human rights commitments within the context of the broader global supply chain. As HRDD is required in various jurisdictions with the aim to identify and mitigate risks across value chains, companies operating in Thailand may be contractually obligated by primary purchasers to conduct HRDD in specific instances.

With growing awareness of the link between business activities and human rights abuses, financial institutions, investors, and other stakeholders are likely to give more weight to HRDD as part of their risk assessment and decision-making processes.

Carbon credit market

The Thailand Greenhouse Gas Management Organisation (TGO) has developed and introduced the Thailand Voluntary Emission Reduction Programme (“T-VER Programme”) as a mechanism for generation, validation, and verification of carbon credits in Thailand. This programme allows projects to generate carbon credits, which can be utilised to offset their own greenhouse gas emissions or be traded with entities that are unable to reduce their emissions.

TGO has announced guidelines for the development of voluntary emission reduction projects in Thailand including qualifications criteria and the registration and verification process for the T-VER Programme. The types of projects that can be registered under the T-VER Programme includes renewable energy, energy efficiency, transportation, waste management, forestation, and agriculture.

Additionally, the TGO has introduced the premium T-VER Programme, which integrates elevated methodologies consistent with international standards. As such, Thai companies may be eligible to enroll projects for the premium T-VER Programme that align with the procedures and criteria outlined in Article 6 of the Paris Agreement, meet the eligibility standard of CORSIA, or comply with other applicable methodologies.

The trading of carbon credits in Thailand can be conducted through over-the-counter (OTC) transactions or via a designated platform, presently FTIX. Despite Thailand’s adherence to a voluntary carbon credit market approach, meaning that it is entirely voluntary for business operators to be part of an emission reduction programme, it is noteworthy to observe the country’s carbon credit market, which has experienced growing activity since 2022, with a trading volume exceeding 1 million tCO2e.

Impact of the Cross-Border Adjustment Mechanism (CBAM)

The CBAM is a pivotal tool in the EU’s mission to achieve net-zero emissions by 2050 in accordance with the European Green Deal. The CBAM’s primary objective is to recalibrate the prices of EU imported products that carry substantial carbon emissions, particularly from countries with more flexible carbon emission policies, ensuring that their prices accurately reflect their environmental impact. Another key objective of the CBAM is to prevent carbon leakage by EU producers attempting to relocate their facilities to countries with less stringent carbon emission policies. This measure is designed to safeguard the competitiveness of EU businesses, thus creating a level playing field among all business operators.

The transition period for the CBAM commenced on 1 October 2023, requiring EU importers to report carbon emissions for production of goods which initially cover six pilot products:

• iron/steel;
• cement;
• fertilisers;
• aluminium;
• hydrogen; and
• electricity generation.

Full implementation will take place in 2026 which requires EU importers to purchase CBAM certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules. However, if a non-EU producer has already paid a carbon price in a third country on the embedded emissions for the production of the imported goods, the corresponding cost can be fully deducted from the CBAM obligation.

While Thai exporters are not the main exporters of the above pilot products to the EU, it is crucial that business operators are keeping abreast of environmental policies and requirements in the relevant jurisdictions that they export to as it is anticipated that the list of products will soon be expanded. Exporters are expected to assess their own carbon footprint originating from production lines and explore strategies for emission reduction to enhance efficiency, thus ensuring competitiveness in the market.

The public hearing session on the impact of the CBAM on Thai exporters was held in September 2023 through collaboration among the TGO, Department of Trade Negotiations, Climate Action Academy, and the Federation of Thai Industries. The primary objective of this session was to gather practical concerns and comments on the implementation of CBAM from industrial sectors. Inputs from such session will be subsequently submitted for negotiation with the European Commission.

Greenwashing

While it is promising for corporates to strive to pursue ESG goals, a drawback to this trend is the potential for businesses to overclaim their ESG credentials to the public, without having such factors be authentically integrated into their operations. To counter this, The Stock Exchange of Thailand (SET) has introduced a three-fold approach for corporations’ disclosure obligations:

• availability;
• comparability; and
• reliability.

Such disclosures must also be made readily accessible to the public through a centralised platform, promoting transparency and building trust among stakeholders. On the public side, the SET has played a vital role in raising awareness of this greenwashing practice by sharing information, highlighting common tactics of greenwashing and urging investors to exercise due diligence and prudence when making investment decisions.

Key takeaways

ESG developments present a fundamental shift in corporate, financing, and investment landscapes which businesses must navigate to harness opportunities and mitigate risks. Businesses must maintain a comprehensive understanding of the continually evolving legal and regulatory frameworks encompassing ESG. As ESG awareness continues to grow, further ESG-related regulations and guidelines may be developed to ensure that companies and financial products accurately represent sustainability indications and minimise the risks of greenwashing.