[DUBAI] THE Monetary Authority of Singapore (MAS) has launched a key sustainable finance framework that defines eligible economic activities across eight sectors on Sunday (Dec 3).

Arriving after four rounds of public consultations over two years, the Singapore-Asia Taxonomy for Sustainable Finance sets criteria in the energy, real estate, transportation, agriculture and forestry or land use, industrial, information and communications technology, waste and circular economy, and carbon capture and sequestration sectors. These criteria determine whether an economic activity can qualify for sustainable or transition financing.

Announcing the launch of the final taxonomy on the sidelines of the United Nations climate change conference, Monetary Authority of Singapore managing director Ravi Menon said that the Singapore taxonomy is the first in the world to comprehensively define transition activities across eight sectors. 

“Most taxonomies define what is green and what is brown, leaving out the bulk of economic activities that are in-between,” said Menon, who was speaking at the Singapore pavilion at COP28.

In the sustainable finance industry, transition refers broadly to the decarbonisation of existing businesses and assets.

With a “traffic-light” approach where activities are either classified as green, amber or red, economic activities classified as green can qualify for green or sustainable financing, while those classified as amber can access transition financing. Those in the red category or deemed to pose significant harm would not be eligible for sustainable financing.

A NEWSLETTER FOR YOU

Friday, 12.30 pm

ESG Insights

An exclusive weekly report on the latest environmental, social and governance issues.

Sign Up

An amber classification refers to transition activities that do not meet the green thresholds currently, but are on a pathway to net zero or contributing to net-zero outcomes. The thresholds set for what activities constitute transition are not fixed in stone and have a sunset date as the Singapore economy gradually becomes less carbon-intensive over time.

Another method of defining transition is through a measures-based approach, which seeks to encourage capital investments into decarbonisation measures that will help reduce the emissions intensity of activities and enable the activities to meet the green criteria over time.

In a media release on Sunday, MAS said that defining transition is particularly important in Asia, as it is a region where 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,” MAS said.

The inclusion of specific criteria on financing the early retirement of coal-fired power plants is of particular interest, given that some financial institutions have been hesitant to participate in such activities given their prior public commitments to exit coal financing.

To ensure credibility of the early coal phase-out process, the taxonomy has set out requirements that these plants have to be closed by 2040 and the electricity generated from their closure be fully replaced with clean energy within the same electricity grid.

Singapore joins three other countries in South-east Asia – Indonesia, Malaysia and Thailand – that have also released their own finalised taxonomies for sustainable financing.

A regional taxonomy – known as the Asean Taxonomy for Sustainable Finance – is currently in its second version and is still being developed.

For the Singapore taxonomy to be interoperable with other taxonomies, MAS has started mapping it to the common ground taxonomy (CGT), which currently covers both the European Union taxonomy and a China taxonomy that catalogues projects eligible for green bond issuance.

The CGT is an initiative by the International Platform on Sustainable Finance that seeks to identify commonalities and differences in existing taxonomies.

“When this mapping is complete, financial institutions and market participants will be able to refer to a common set of definitions under the CGT, which would help increase taxonomy-aligned financing solutions and facilitate sustainable development in markets which the CGT covers,” said MAS.

Besides the taxonomy, Menon also elaborated on a blended finance platform that aims to mobilise a fund of US$5 billion, which was mentioned by Senior Minister Teo Chee Hean in Singapore’s national statement at the world climate action summit on Saturday.

The Singapore government will contribute concessional capital to support the partnership, though the amount is not confirmed at this point.

The platform – called the Financing Asia’s Transition Partnership – targets three key areas of green and transition investments most pertinent for Asia. These are energy transition acceleration such as the managed phase-out of coal, green investment projects involving mature technologies such as renewable energy and clean technologies that looks at emerging green technologies such as hydrogen.

The central bank is discussing with multilateral development banks, development finance institutions and philanthropies to mobilise a base of concessional capital for this platform, as well as banks and institutional investors to bring in commercial capital, said Menon.

Menon also announced the launch of a transition credits coalition to help identify barriers and potential solutions to develop transition credits as a viable market solution.

Still a novel type of asset class, transition credits are carbon credits generated when coal-fired power plants are retired early and replaced with cleaner energy sources.

Teo said on Saturday that Singapore is prepared to buy these credits provided they meet standards of environmental integrity.

Partners of the coalition include multilateral development banks such as the Asian Development Bank and Multilateral Investment Guarantee Agency, carbon credit standard setters such as Gold Standard, industry coalitions such as the Glasgow Financial Alliance for Net Zero ,as well as environmental non-profits like the World Wide Fund for Nature Singapore. 

The slew of initiatives by MAS is aimed at developing transition finance to accelerate decarbonisation in Asia, said Gillian Tan, its chief sustainability officer.