Monetary Authority of Singapore Launches Singapore-Asia Taxonomy for Sustainable Finance

Following four rounds of public consultation, the Monetary Authority of Singapore (MAS) formally launched the Singapore-Asia Taxonomy (the Taxonomy) at COP28 on 3 December 2023.

The Taxonomy is not designed to be an exhaustive or mandatory list of activities or projects for investment, but rather serves as an authoritative reference point for policymakers, to shape national policies; financiers, to clearly signal the types of activities that are consistent with the transition to a low-carbon future; and all stakeholders by providing definitional clarity and a common language.

The Taxonomy sets out detailed thresholds and criteria for defining green and transition activities that contribute to climate change mitigation across eight focus sectors, with a particular emphasis on transition finance. The Taxonomy includes a list of economic activities and projects that are classified as “green” (environmentally sustainable), “amber” (transition) or “red”/  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.

These five main environmental objectives are aligned with the EU Taxonomy, although at present

the Taxonomy has only determined economic activities and technical screening criteria for climate change mitigation, with the remaining four environmental objectives to be added in future iterations:

• Climate change mitigation
• Climate change adaptation
• Protect healthy ecosystems and biodiversity
• Promote resource resilience and circular economy
• Pollution prevention and control

The Taxonomy will also be updated over time to reflect further research and developments in transition activities and technologies similar to how, for example, the EU Taxonomy has periodically been updated to include new activities and technical screening criteria. Future iterations of the Taxonomy, as well as taxonomy maintenance, will be coordinated by the Singapore Sustainable Finance Association (SSFA), convened by MAS, the successor body to the Green Finance Industry Taskforce (GFIT) which originally developed the Taxonomy and conducted public consultations.

Benefits of the Taxonomy

The key stated benefits of the Taxonomy are:

• Provide clarity via a common language for financiers, issuers, policymakers and regulators
• Help translate commitments to the Paris Agreement and other sustainable investment goals for investors. 
• Provide clarity and consistency for financiers, companies and government agencies
• Support understanding of risk and opportunities based on environmental factors and support different investment styles and strategies for green and transition investment.
• Put environmental data in context and make it easier to understand how companies are working towards a low-carbon transition and building resilience to climate change
• Avoid reputational risks
• Incentivize companies

The Taxonomy is not legally binding at the moment, and so it will not be automatically applicable unless and to the extent that it is incorporated into implementing regulations, particularly around disclosure or reporting requirements (either on a voluntary or mandatory basis). In this context, therefore, its success will be measured by:

• The extent to which it is compatible and inter-operable with other regional and global taxonomies so as to avoid conflicting requirements
• The extent to which new products are developed that align with the Taxonomy which would facilitate the creation of a broader “ecosystem” of Taxonomy aligned products
• The extent to which regulators reference the Taxonomy when approving products, services or financial service providers within their jurisdictions
• The extent to which investors (including philanthropic capital and development finance providers) or the market generally require products or services to be aligned with the Taxonomy
• The extent to which other frameworks or standards reference the Taxonomy
• The extent to which the Taxonomy is embedded within regulatory disclosure or reporting requirements

Introducing the “transition” category

Green and sustainability-linked financing products have pioneered the development of a global sustainable finance market. However, transition finance is emerging as a “bridging” sector which accounts for the difficulty in applying such products in hard-to-abate sectors such as aviation, steel and cement which are high emitting but where stakeholders may still seek to reduce their emissions and thus contribute to the transition to a low-carbon future.

The Singapore-Asia Taxonomy is the first taxonomy globally to pioneer the concept of a “transition” category. This is in recognition of the need to properly contextualize “transition” for Asia, where the shift to a net zero economy must been seen in the context of the need to preserve economic development and sustainably manage population growth and sharply rising energy demands.

Transition activities are comprehensively defined in the Taxonomy through two new approaches:

• A traffic light system that defines green, transition and ineligible activities across the eight focus sectors. “Green” denotes activities that are aligned to a 1.5 degrees Celsius outcome. “Amber” or “Transition” refers to activities that do not meet the green thresholds now but are on a pathway to net zero or contributing to net zero outcomes. To signal the importance of progression towards a 1.5 degree Celsius (1.5°C) aligned outcome, transition thresholds do not last indefinitely and have an expiry date. Activities must meet strict thresholds and criteria to qualify as “amber”.
• A “measures-based approach” that seeks to encourage capital investments into decarbonization measures or processes that will help reduce emissions and enable the emitting activities to meet the green criteria over time.

Early phase-out of coal-fired power plants

Asia accounts for 50% of global greenhouse gas emissions, of which a third is from coal-fired power plants, and coal accounts for nearly 60% of power generation in Asia and is a key driver of economic development and urbanization. The Taxonomy defines criteria for the early and managed phase-out of coal-fired power plants, noting that it is necessary to devise facility-level criteria to determine the level of ambition for the phase-out process, and on top of that, the entity and system level criteria that provide necessary safeguards to protect against perverse outcomes.

Innovative climate finance tools, sometimes labelled coal transition mechanisms (CTMs), could help to accelerate the coal to green transition, and the main objective of the Taxonomy criteria is to support early coal phase-out deals under existing or planned CTMs by providing guidelines that help to ensure their credibility from the perspective of 1.5°C-oriented transition to a decarbonized economy.

In September 2023, MAS and McKinsey launched a working paper which sets out how high-integrity carbon credits may be utilized as a complementary financing instrument to accelerate and scale the early retirement of coal-fired power plants, in recognition of the need to mitigate the loss of revenues for plant owners and their financiers caused by early retirement. Further, in parallel to the publication of the Taxonomy, MAS launched a Transition Credits Coalition, or TRACTION, a  coalition of ecosystem players to help identify barriers and potential solutions to develop transition credits as a viable market solution.

Finally, at COP28 a consortium led by the Rockefeller Foundation and supported by MAS launched the Coal to Clean Credit Initiative to use carbon credits to retire a coal power plant in the Philippines owned by leading Philippines energy company ACEN, a decade ahead of its planned useful life. Indonesia and the Asian Development Bank have also recently agreed a provisional deal with the owners of a coal-fired power plant to close it early under the ADB’s Energy Transition Mechanism (ETM) program.

Interoperability with global taxonomies

To enhance interoperability with global taxonomies, MAS has commenced an exercise to map the Singapore-Asia Taxonomy to the International Platform for Sustainable Finance (IPSF)’s Common Ground Taxonomy (CGT), which currently covers the EU Taxonomy and People’s Bank of China’s (PBOC) Green Bond Endorsed Project Catalogue. When this mapping is complete, MAS’ goal is that financial institutions and market participants will be able to refer to a common set of definitions under the CGT, which would help facilitate sustainable finance development.

Conclusion

The Taxonomy is a detailed, sophisticated and heavily vetted document that serves as an excellent foundation for a world-class and user-friendly system of definitions and criteria that industry practitioners and other stakeholders can rely upon when making investment and project decisions. However, as with all taxonomies, its success will depend on its uptake in a competitive and somewhat fragmented environment for climate change-related legislation, guidance and standard-setting, and the extent to which it evolves to be viewed by markets as a “gold standard” not just in Asia but also globally. It is also important to recognize that this is the first iteration of a document that can and must be iterated and revised over time to respond to changing developments in the field, in particular to incorporate developments in technologies that are continually being applied to hard-to-abate sectors.