After four rounds of public consultation, on 3 December 2023, the Green Finance Industry Taskforce (GFIT), convened by the Monetary Authority of Singapore (MAS), launched the Singapore-Asia Taxonomy for Sustainable Finance (the Taxonomy).
The Taxonomy sets out detailed thresholds and criteria for defining “green” and “transition” activities that contribute to climate change mitigation across the following eight focus areas: energy; real estate; transportation; agriculture and forestry/land use; industrial; information and communication technology; waste/circular economy; and carbon capture and sequestration.
The Singapore-Asia Taxonomy is one of the first taxonomies globally to include the concept of a “transition” category – an important development in efforts to accelerate the flow of much-needed capital to transition activities in the region.
As stated in the MAS’ press release, defining “transition” is key for Asia where “the progressive shift towards a net zero economy is taking place alongside economic development, population growth, and rising energy demands”. As the MAS points out, greater clarity on what is meant by “sustainable and transition financing” will also help to reduce greenwashing or “transition washing” given that financial institutions will be able to identify and disclose how their financed activities and labelled products are aligned with the Taxonomy.
In this blog we provide a high-level overview of the key elements of the Taxonomy (for our commentary on the fourth consultation, see our previous blog post).
Purpose of the Taxonomy
The Taxonomy includes a list of economic activities and projects that are classified as “Green” (environmentally sustainable), “Amber” (transition) or “Ineligible” on the basis of their contribution to at least one of the Taxonomy’s five environmental objectives, whilst at the same time not causing any significant harm to the other four objectives.
The Taxonomy is not designed to be an exhaustive or mandatory list of activities or projects for investment, but – by clearly signaling the types of activities that are consistent with the low carbon transition, adaptation to climate change and other environmental objectives – it is intended to provide a common language for financiers, issuers, policymakers and regulators and reduce the risk of unintended greenwashing.
The Taxonomy is also intended to support more transparent and consistent disclosures by corporates allowing transparent and consistent classifications and disclosures for associated equity and debt investment, financing, and financial products. The whole aim being to support the growth in sustainable products and services by removing ambiguity and uncertainty around classifications and labels.
Five main environmental objectives
The Taxonomy intends to cover the following five environmental objectives:
- Climate change mitigation,
- Climate change adaptation,
- Protect healthy ecosystems and biodiversity,
- Promote resource resilience and circular economy, and
- Pollution prevention and control.
These five main environmental objectives are aligned with the EU Taxonomy, although currently the Taxonomy has only determined economic activities and technical screening criteria for the “climate change mitigation” objective. The other four environmental objectives will be added in future developments of the Taxonomy.
The focus of this Taxonomy is, therefore, on mitigating climate change through the reduction of the release of greenhouse gas emissions (GHG) into the atmosphere. An activity can be considered to have met this objective if it makes substantial contribution to:
- avoid GHG emissions - these are “green activities” which are already having very low or near-zero emissions.
- reduce GHG emissions - these are transition activities that are currently high carbon and critical to the functioning of the economy but are in transition to less carbon-intensive business models.
- enable activities that facilitate low-carbon performance or substantial emissions reduction.
- enable activities that are engaged in transiting to cleaner energy either through the renewable power generating sources or through decarbonisation technologies.
The publication explains that a set of Do No Significant Harm (DNSH) criteria will be proposed in a separate chapter (the DNSH assessment being that while the economic activities make substantial contribution to climate change mitigation, they do not cause significant harm to other environmental objectives of the Taxonomy). The publication states that the DNSH criteria is to be considered as “best practice disclosure” in its early implementation phase and, as the Taxonomy evolves, it could potentially be incorporated as a component of eligibility criteria in the future.
The traffic light system
One of the key features of the Taxonomy is the traffic light system, which defines green, transition and ineligible activities across the sectors. This is a key feature of the Taxonomy as it recognises that economic activities that enable the transition from fossil fuels to increase their carbon efficiency and/or to more sustainable energy sources are essential to mitigate climate change. The different categories are:
- Green activities - where the activity contributes substantially to climate change mitigation by operating at near-zero emissions or are on a 1.5 degree Celsius-aligned pathway.
- Amber (transition) activities - where the activity is not presently on a 1.5 degree Celsius-aligned pathway but are either (i) moving towards a green transition pathway within a defined time frame or (ii) facilitating significant emissions reductions in the short term with a prescribed sunset date (see below).
- Amber (measures) – decarbonisation measures that enable an activity to improve and align with “green/amber” over a defined time period (the aim of the “measures-based approach” being to encourage capital investments into decarbonisation measures or processes). This “measures” category is separate from amber "activities” category as it may be used for classifying capital expenditure or assets investments through, for example, debt instruments (such as green bonds or loans) or disclosure of green revenues.
- Ineligible activities - where the activity does not align with green or amber or are not yet assessed and beyond the scope of the Taxonomy.
The Taxonomy sets out further considerations in relation to the amber category which are interesting to note:
- a transition cannot last indefinitely – at some point in time the amber activity should be following a 1.5 degree Celsius pathway to net zero to ensure there is a real impact.
- transition requires change over time - to demonstrate the transition there needs to be change over time, although, the publication recognises that this is difficult to show with a binary taxonomy threshold that is static at a point in time.
To address these issues, the amber criteria has a defined sunset date. At the sunset date, there is no longer an amber category and either the activity is aligned with the 1.5 degree Celsius pathway (Green category) or it is downgraded to the “Ineligible activities” category. The sunset date is 2030 (with some industrial sectors having longer sunset dates) and all amber traffic lights will disappear after this time unless stated otherwise in the criteria.
The amber category is, unless otherwise stated, relevant only for transitioning of existing infrastructure and activities and it does not apply to new projects. The rationale being that activities under the amber category are, by definition, not aligned with a 1.5 degree Celsius trajectory and, therefore, building new activities with a lifespan beyond the sunset dates, would lock in assets longer into the future, resulting in stranded assets.
Examples of amber activities under the Taxonomy can include where there are existing industry targets, for example, the amber category applies to maritime vessels that are aligned with industry targets under the 2023 International Maritime Organisation Greenhouse Gas Strategy to reach net-zero emissions by or around 2050, which sets intermediate targets of reducing emissions by at least 20% and aiming for 30% by 2030 compared to 2008 levels. Under the energy sector, abated natural gas is included in certain specified circumstances, as is the use of hydrogen or its derivatives as a fuel to replace natural gas.
Early phase-out of coal-fired power plants
The Taxonomy also sets out a framework to phase-out coal-fired power plants (CFPPs). The Taxonomy sets out both entity and facility-level criteria that are aligned to a 1.5 degree Celsius scenario.
At a facility level, the CFPP can be considered aligned with the guidance and potentially suitable for a managed coal phase-out process, if it meets certain conditions, including:
- financial close or final investment decision of the coal plant has been made prior to December 2021.
- the fair value of the coal plant is positive at the time of the proposed coal transition.
- the early coal phase-out results in positive absolute emissions savings over the expected total lifetime of the coal plant compared with a case without it.
- the phase-out of unabated coal combustion at the coal plant is aligned with, or happens earlier than 1.5°C-aligned coal phase-out deadlines (e.g. in advanced economies, this means the coal plant retires at the latest by 2030, and in other countries by 2040). Should countries have a national coal phase-out target that is earlier, national targets should be adhered to instead.
- coal plant has to be retired at or before 25 years of operations at the latest.
- investments made as part of the early coal phase-out process do not extend the expected lifetime for coal combustion.
- coal plant’s generation is replaced 1-for-1 with a portfolio of clean resources that provides equivalent electricity services within the electricity system.
- the coal plant, at a facility level as a minimum, has a just transition plan to mitigate impacts on key stakeholders including workers, electricity customers, and the local community.
At an entity level, the CFPP can be considered aligned with the entity-level Taxonomy guidance if it meets certain requirements, including:
- no entity-level commitment to new abated and unabated coal power plant development or procurement globally.
- no entity-level commitment to establish new or extend existing fossil-fuel based Power Purchase Agreements (beyond those that have been signed by December 2023).
- the entity has a Paris Agreement-aligned transition plan that follow the principles of transition finance outlined by International Platform on Sustainable Finance.
Interoperability with global taxonomies
How the Taxonomy maps across to other global taxonomies is a key consideration for users.
The aim of the Taxonomy is to be interoperable with other international taxonomies, with a particular focus on the EU Taxonomy and the ASEAN Taxonomy, although recognising that there are differences – e.g. the EU Taxonomy focuses on “green” activities as opposed to adopting a traffic light system and, although the ASEAN Taxonomy has a traffic light system, it is a more complex structure with multiple tiers of amber to allow for different levels of adoption depending on the individual member state’s readiness.
MAS has started an exercise to map the Taxonomy to the International Platform for Sustainable Finance’s Common Ground Taxonomy (the Common Ground Taxonomy). MAS is also working with the People’s Bank of China (PBOC), through the Singapore-China Green Finance Taskforce, to promote the uptake of financial products that reference the China Green Bond Catalogue and the Singapore-Asia Taxonomy, and eventually the Common Ground Taxonomy.
Application of the Taxonomy
As stated in the publication, the Taxonomy is not mandatory or contained in any regulation at the time of publishing. It is intended to be voluntary for use in the first years as adoption grows.
Currently the application of the Taxonomy to financial markets, debt instruments (i.e. green bonds, loans), corporate disclosure regulations, and its voluntary or mandatory status have not yet been decided or publicly consulted on.
The publication sets out that further work will be done on the (i) mandatory / voluntary nature of the Taxonomy, (ii) use of the Taxonomy in disclosure guidance / regulation, (iii) use of the Taxonomy in debt financing, and (iv) expectations on the frequency of reporting and compliance.
The Taxonomy is intended to be a living document and will be revised over time – the timeline for such revision has not been finalised.
Future iterations of the Taxonomy and the maintenance of the Taxonomy will fall under the Singapore Sustainable Finance Association (SSFA).
What is the Singapore Sustainable Finance Association (SSFA)?
On 24 January 2024, the Singapore Sustainable Finance Association (SSFA) was launched with 150 representatives from the financial sector, corporates, industry bodies, non-governmental organisations, and government bodies. The SSFA’s aim is to collaborate across the financial and real economy sector with four strategic objectives – (i) galvanise the development of a sustainable finance ecosystem and promote best sustainable finance practices, (ii) facilitate collaboration between the financial and non-financial sectors for sustainable finance to support the low carbon transition and sustainable economic growth, (iii) bolster Singapore as an international thought leader in sustainable finance, and (iv) support the deepening of sustainable finance capabilities for the industry. For further information, see SSFA’s press release.