The Monetary Authority of Singapore (MAS) has launched the Singapore-Asia Taxonomy for Sustainable Finance (Singapore-Asia Taxonomy), which sets out detailed thresholds and criteria for defining green and transition activities that contribute to climate change mitigation across eight focus sectors.
Formerly referred to as the Singapore Taxonomy, the guidelines had been expected to be published in June. Instead, MAS decided to seek feedback on additional criteria, such as the phase-out of coal-fired power plants (CFPPs).
The Singapore-Asia Taxonomy is the world’s first taxonomy to pioneer the concept of a “transition” category, as MAS cites a need to properly contextualise “transition” for the Asian region.
Defining transition is particularly salient in Asia, says MAS on Dec 3. “The progressive shift towards a net-zero economy is taking place alongside economic development, population growth and rising energy demands. Providing clarity on what constitutes sustainable and transition financing will also help to reduce the risk of green or transition washing, as financial institutions will be able to identify and disclose how their financed activities and labelled products are aligned with the taxonomy.”
The traffic light system
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The Singapore-Asia Taxonomy adopts a “traffic light” classification system — “green” to denote activities that are aligned today with a 1.5°C outcome, and “amber” to denote activities that will move to “green” over a defined period of time, or facilitate significant emissions reductions in the short term.
“The activities that we put under amber must meet strict thresholds and criteria to qualify,” says MAS managing director Ravi Menon at the COP28 Singapore Pavilion on Dec 3, “and these thresholds have a sunset date, because eventually they must all get to net zero”.
Finally, an “ineligible” classification represents activities that are not currently eligible under the Taxonomy. That said, ineligible activities “may not always indicate significant harm”, according to the MAS.
The Taxonomy focuses on transition activities in eight sectors, namely: energy; real estate; transportation; agriculture, forestry and land use; industrial; information and communication technology; waste and circular economy; and carbon capture and sequestration. According to Menon, the Taxonomy will enable financing to flow to “climate-friendly transition activities” while minimising the risk of greenwashing.
Aside from the traffic light system, the Taxonomy boasts a “measures-based approach”, says MAS. This seeks to encourage capital investments into decarbonisation measures or processes that will help reduce the emissions intensity of activities and enable them to meet green criteria over time.
Defining credible transition thresholds is crucial, especially for certain sectors that find it “challenging” to reduce emissions and meet a 1.5°C-aligned outcome due to current technological constraints, says MAS. “For example, in the maritime sector, zero- or low-carbon fuels are still in a nascent stage and it is challenging for vessels to achieve the zero emissions required to meet ‘green’ thresholds.”
The introduction of “amber” thresholds caters to vessels that are aligned with industry targets under the 2023 International Maritime Organization Greenhouse Gas Strategy to reach net-zero emissions by or around 2050. The strategy includes intermediate targets of reducing emissions by at least 20% and striving for 30% by 2030 compared to 2008 levels.
Early phase-out of coal-fired power plants
The Singapore-Asia Taxonomy provides a credible framework to phase out CFPPs. This is a critical part of the energy transition in the Asia Pacific, says MAS, as coal accounts for almost 60% of power generation in the region.
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To ensure credibility, the Taxonomy sets out both entity and facility-level criteria that are aligned to a 1.5°C scenario. For example, CFPPs must be phased out by 2040 and operate for less than 25 years. CFPPs must also demonstrate “verifiable emissions savings”, says MAS.
In addition, electricity generated from the phased-out CFPP must be fully replaced with clean energy within the same electricity grid and the coal plant needs to have a just transition plan to mitigate any impact on stakeholders and the local community.
The Singapore-Asia Taxonomy builds upon extensive feedback received from the previous four rounds of public consultation. MAS leaders have spoken extensively about coal phase-out over the past five months, amid a national and regional push to follow the Asean Taxonomy Board’s announcement in March to allow coal phase-out projects access to transition financing, which marked a first for any regional taxonomy.
In June, Menon called this the “mother of all transitions”. Speaking at the opening session of the Glasgow Financial Alliance for Net Zero Asia-Pacific (GFANZ APAC) Summit, he called it the “single most important step we can take” to reach net zero by 2050.
A joint working paper released by the regulator and McKinsey & Company in September even suggested that “transition credits” be sold to incentivise owners of CFPPs to retire their assets early and replace them with renewable energy.
Without mandatory managed phase-out requirements, stakeholders of CFPPs have “little motivation” to shorten their existing power purchase agreements, said MAS at the launch of the paper. The paper posits that “high-integrity carbon credits” could plug an estimated US$70 million ($93.35 million) economic gap arising from retiring a CFPP with a 1-gigawatt (GW) capacity five years earlier.
Interoperability with global taxonomies
To enhance interoperability with global taxonomies, MAS has started mapping the Singapore-Asia Taxonomy to the International Platform for Sustainable Finance’s Common Ground Taxonomy (CGT), which currently covers the EU Taxonomy and People Bank of China’s (PBOC) Green Bond Endorsed Project Catalogue.
When this mapping is complete, financial institutions and market participants will be able to refer to a common set of definitions under the CGT, says MAS. This will help increase taxonomy-aligned financing solutions and facilitate sustainable development in markets covered by the CGT.
Through the Singapore-China Green Finance Taskforce established in April, MAS is also working with the PBOC to promote the uptake of financial products that reference the China Green Bond Catalogue and the Singapore-Asia Taxonomy. MAS says these efforts serve to facilitate cross-border financing flows.
Menon calls the Singapore-Asia Taxonomy “a significant milestone for several reasons”. “First, it is the first taxonomy globally that sets out credible definitions for transition activities. In most cases, we cannot go directly from brown to green. We need to go through a transition phase but we need to make sure this transition is credible.”
He adds: “Second, this taxonomy has extensive coverage — it covers sectors making up 90% of the region’s greenhouse gas emissions. It will serve as a guide to allocate capital into green and transition activities for the region. Third, this taxonomy is industry-led. It draws extensively on the experience of financial institutions and real economy players engaged in transition activities in the region. It has gone through four rounds of public consultations.”
The taxonomy was developed over four years by the Green Finance Industry Taskforce (GFIT), an industry-led initiative convened by MAS, whose mandate is to help accelerate the development of green finance.
GFIT chair and HSBC Singapore CEO Wong Kee Joo highlights the Taxonomy’s “Asian perspective”. “This framework aims to help financial institutions optimise their support for the transition of hard-to-abate sectors, particularly in Asia. Its impact has been felt with the adoption of the proposed traffic-light approach by the Asean Taxonomy and other taxonomies in the region, further strengthening Singapore's position as a leader in sustainable finance.”
Read more about the early retirement of coal-fired power plants:
- 'Transition credits' could sweeten deal for early retirement of coal-fired power plants: MAS, McKinsey paper (September)
- MAS panel discusses ways to phase out coal-fired power plants, adopt alternative fuels, attract private financing (September)
- MAS launches public consultations on coal phase-out, voluntary code of conduct for ESG rating agencies (June)
- Retiring coal-fired power plants is the 'mother of all transitions': MAS (June)
- GFANZ APAC Network launches public consultation on proposal to phase out coal-fired power plants (June)
- MAS to launch consultation on qualifying managed phase-out of coal-fired power plants (May)
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Infographics: Monetary Authority of Singapore
