Steps taken to finalising the Singapore-Asia Taxonomy

The Green Finance Industry Taskforce (GFIT) is a financial industry taskforce convened by the Monetary Authority of Singapore (MAS) to develop the Singapore-Asia Taxonomy (previously known as the Green and Transition Taxonomy), a green and transition taxonomy for Singapore based financial institutions (FIs). The taxonomy is aimed at providing a common framework for the classification of economic activities to enable stakeholders to (1) gather green financing, funding and investment related information, (2) better understand risk management, and (3) make investments that meet robust sustainability goals.

Building on two earlier rounds of consultations (which proposed thresholds and criteria for the energy, transport and real estate sectors), the GFIT published a third consultation paper on 15 February 2023, seeking views on the detailed thresholds and criteria for the remaining five sectors: (i) agriculture and forestry / land use, (ii) industrial, (iii) waste and water, (iv) information and communication technology, and (v) carbon capture and sequestration. The MAS has now published a fourth consultation paper on 28 June 2023, seeking views on the detailed threshold and criteria for financing the early phase-out of coal-fired power plants (CFPPs). This consultation aims to provide a credible standard under the Singapore-Asia Taxonomy to increase participation in projects for the early retirement of CFPPs that are aligned with a 1.5 degrees Celsius transition pathway.

We set out some key points discussed in the consultation papers below.

Third consultation on detailed thresholds and criteria for the remaining five sectors

Traffic Light Classification

The GFIT has adopted a traffic light classification system to differentiate an activity’s contribution to climate change mitigation. This is a key feature of the taxonomy, which allows for a progressive shift towards a net zero outcome across different sectors. In particular:

• Green classification: This represents activities that contribute substantially to climate change mitigation that is consistent with the net zero outcome, or on track to net zero by 2050. Generally, any new activities (e.g. new power plants, new buildings etc) would have to meet the green criteria.
• Amber classification: This represents transition activities, including those that are either transitioning towards green within a certain timeframe (the sunset date is set at 2030), or activities that enable significant emissions reductions in the short term. Generally, the amber category is relevant only for transitioning of existing infrastructure and activities, and does not apply to new projects.
• Red classification: This represents harmful activities that are not currently compatible with a net zero trajectory. Generally, such activities are not eligible for financing within the proposed taxonomy.

Thresholds and criteria for the Industrial Sector

The GFIT has proposed for the adoption of a “measures-based approach” for the industrial sector, given that technological solutions are either not yet certain or at a very early stage of commercial development. This makes it difficult to determine science-based metrics and thresholds for the “amber” category based on the emissions performance of the activity.

In line with the “measures-based approach”, the GFIT also does not intend to phase out (like coal) the majority of activities, but will instead require them to be decarbonised through the adoption of a range of emissions reduction measures (e.g. green steel and green cement).

“Do No Significant Harm (DNSH)” Criteria

The GFIT is also seeking views on the “Do No Significant Harm (DNSH)” criteria, which aims at ensuring that activities which contribute to climate change mitigation do not cause significant adverse impact to the other four environmental objectives of the taxonomy.

The DNSH assessment sets out specific activities across the eight sectors which the taxonomy covers, the corresponding DNSH assessment, and additional steps that firms have to take in order to mitigate the risks set out in the DNSH assessments.

However, the application of DNSH criteria is yet to be decided at this stage.

Fourth consultation on detailed thresholds and criteria for financing the early phase-out of CFPPs

Thresholds and criteria for financing the early phase-out of CFPPs

The MAS has proposed a hybrid approach to the early coal-phase out criteria both at the facility and entity level.

In order for a CFPP to be considered aligned with the facility level criteria it must meet the following requirements:

• possess a positive fair economic value remaining and demonstrate verifiable emissions savings;
• set to be phased out by 2040 or earlier, and not have a total operating duration of more than 25 years from the commercial operation date; and
• be replaced with a portfolio of clean resources that provides equivalent electricity services within the electricity system. If such replacement is not possible, it is still possible to demonstrate long-term emission savings if there are national or regional level energy grid decarbonisation plans and commitments that are aligned to the 1.5°C ambition levels.

In order for a CFPP to be considered aligned with the entity level criteria, CFPP owners must meet the following requirements:

• ensure no new development of CFPPs; and
• put in place a transition plan which will reach the full alignment of the 1.5°C commitment by 2030.

As the coal transition mechanisms (CTMs) and frameworks governing early coal phase out processes are in a nascent stage of development, the early coal-phase out criteria will need to be revised on a regular basis. The currently proposed facility and entity level criteria are only valid until 2025. After 2025, a new, revised criteria considering new developments in the field should replace the current document.

Given the importance of the phase-out of coal-fired power plants towards meeting decarbonisation targets in Asia and the critical need for transition finance to support such phase out, the setting of early coal phase-out criteria is a welcome development in providing guidance to FIs looking to participate in such financings.

Next Steps

Previously, the GFIT was aiming to publish the finalised taxonomy in the first half of 2023, however with the new developments on coal phase out, it is expected that the publication of the Singapore-Asia Taxonomy will be delayed