The Monetary Authority of Singapore (MAS) launched the Singapore-Asia Taxonomy for Sustainable Finance (the “Singapore-Asia Taxonomy”) at the COP28 climate conference on 3 December 2023. This development is noteworthy as the Singapore-Asia Taxonomy is the world’s first multi-sector transition taxonomy for defining green and transition activities across eight key sectors, namely: (1) energy; (2) industrial; (3) carbon capture and sequestration; (4) agriculture and forestry; (5) construction and real estate; (6) waste and circular economy; (7) information and communications technology; and (8) transportation. The Singapore-Asia Taxonomy uses the traffic lights system of “green” (environmentally sustainable), “amber” (transition) and “ineligible” to classify activities based on their contribution to the taxonomy’s environmental objectives, currently focused on climate change mitigation. We previously reported on the work leading up to the finalisation of the Singapore-Asia Taxonomy here and here.

Defining Transition Activities

A distinctive feature of the Singapore-Asia Taxonomy is the introduction of a transition category of “amber” activities, acknowledging the context of Asia’s ongoing shift towards a net-zero economy taking place alongside economic development, population growth and rising energy demands in the region. Transition activities encompass existing infrastructure and activities that fall short of green thresholds but are on a trajectory towards net-zero emissions or which contribute to net-zero outcomes.

To ensure the progression towards an outcome aligned with limiting global warming to 1.5 degree Celsius (1.5°C), transition thresholds are time-bound and have sunset dates. The activity must either align with the 1.5°C pathway by the sunset date or be downgraded to the “ineligible activities” category. This approach encourages a measured transition process, discourages prolonged reliance on non-sustainable practices, and reduces the risk of greenwashing.

The Singapore-Asia Taxonomy’s focus on transition activities is particularly helpful for hard-to-abate sectors. For example, the maritime industry which does not have readily available supplies of zero- or low-carbon fuel. To address this issue, the Singapore-Asia Taxonomy introduces “amber” thresholds for vessels aligned with industry targets under the 2023 International Maritime Organization Greenhouse Gas Strategy. These targets aim for net-zero emissions by or around 2050, with intermediate goals of emission reductions by at least 20%, and striving for reductions of 30% by 2030 as compared to 2008 levels.

Further, the Singapore-Asia Taxonomy introduces the concept of “amber measures” which provide additional options for “amber activities” to demonstrate improvements over time.

Facilitating the Energy Transition from “Coal to Green”

Importantly, the Singapore-Asia Taxonomy fills a gap in international frameworks and taxonomies in providing criteria to facilitate the transition away from coal-fired power plants, providing an avenue for early coal phase-out deals to benefit from transition finance. As coal currently constitutes nearly 60% of power generation in the Asia-Pacific region, the Singapore-Asia Taxonomy further acknowledges the importance of a responsible and fair phase-out process.

In summary, the Singapore-Asia Taxonomy introduces a hybrid approach for early coal phase-out by marrying the approach of taxonomies that focus on determining the sustainability of individual economic activities, with that of transition plans which an entity’s transformation could be assessed against. The hybrid approach therefore includes facility-, entity- and system-level criteria, taking guidance from the Guidelines for Financing a Credible Coal Transition: A Framework for Assessing the Climate and Social Outcomes of Coal Transition Mechanisms published by Climate Bonds Initiative, Climate Policy Initiative and RMI in 2022.

Related Sustainable Finance Initiatives

The Singapore-Asia Taxonomy comes at a time when Singapore is actively increasing its footprint in the global sustainability sphere. On 3 December 2023, the MAS announced two other initiatives relating to sustainable finance. First, the MAS has established a partnership with Temasek, Allied Climate Partners, and the International Finance Corporation to address climate finance gaps and increase the bankability of green and sustainable projects in Asia, initially focusing on Southeast Asia, with sectorial focus on renewable energy, electric vehicle infrastructure, sustainable transport, and water and waste management.

Second, the MAS revealed a blended finance platform called “Financing Asia’s Transition Partnership” with a target fund size of US$5 billion focusing on the three themes of energy transition acceleration, green investments in mature technologies, and clean technologies. The MAS is engaging with multilateral development banks, development finance institutions, and philanthropic organisations to mobilise concessional capital for the platform while seeking commercial capital from banks and institutional investors.

On 4 December 2023, the MAS further announced the launch of a Transition Credits Coalition (TRACTION), to identify barriers and solutions for transition credits as a viable market solution in energy transition. Transition credits can be generated when high-emitting coal-fired power plants are retired early and replaced with cleaner energy sources. Carbon tax-liable companies can use these credits to offset up to 5% of their tax liabilities if the plants meet Singapore’s environmental criteria.

Looking Ahead

The launch of the Singapore-Asia Taxonomy is a positive development in the global sustainable finance landscape. The taxonomy’s industry-led, science-based approach, and interoperability with other major taxonomies (more on this below) demonstrate its potential facilitate the promotion of the green economy for Singapore and Southeast Asia. Further, there are plans for future versions of the Singapore-Asia Taxonomy to cover additional environmental objectives such as biodiversity protection and pollution prevention and control.

The Singapore-Asia Taxonomy serves as a helpful resource for issuers, financial institutions, asset owners and other stakeholders looking to source and channel capital into green and transition investments or projects. It remains to be seen whether there will be wider application of the taxonomy to specific financial markets and instruments on a mandatory or voluntary basis, and whether the taxonomy will be used in corporate disclosure regulations in Singapore. Further work on this is expected.

Finally, to enhance global interoperability, the MAS is currently mapping the Singapore-Asia Taxonomy to the Common Ground Taxonomy developed by the International Platform for Sustainable Finance. This mapping exercise aims to align the Singapore-Asia Taxonomy with the EU Taxonomy and the People’s Bank of China’s Green Bond Endorsed Project Catalogue. Once completed, financial institutions and market participants can refer to a consistent set of definitions, facilitating taxonomy-aligned financing solutions and cross-border financing flows.