The Taxonomy aims to define green and transition economic activities to identify and allocate capital to sustainable projects and initiatives.
On 3 December 2023, the Monetary Authority of Singapore (MAS) unveiled the Singapore-Asia Taxonomy for Sustainable Finance (Taxonomy) at the United Nations COP28 climate conference in Dubai. The Taxonomy sets out detailed thresholds and criteria for defining green and transition activities that contribute to climate change mitigation across eight focus sectors: energy, industrial, carbon capture and sequestration, agriculture and forestry, construction and real estate, waste and circular economy, information and communications technology, and transportation.
Th announcement follows the final consultation paper that the Green Finance and Industry Taskforce released in February 2023. For more information on the consultation see this Latham blog post.
The Taxonomy utilises a “transition” category, acknowledging the unique challenges and needs of Asia’s shift towards a net zero economy amidst economic growth and increasing energy demands. This initiative is designed to mitigate the risk of greenwashing and ensure that financed activities are on a credible path to net zero emissions.
Details of the Taxonomy
The Taxonomy introduces a “traffic light” system to categorise activities across the eight focus sectors:
- Green transition category — activities contributing substantially to climate change mitigation by:
- operating at near-zero emissions; or
- are on a 1.5ºC–aligned pathway.
- Amber transition category — activities that are not presently on the 1.5ºC pathway, but are either:
- moving towards a green transition pathway within a defined timeframe; or
- facilitating significant emissions reductions in the short term with a prescribed sunset date.
- Ineligible category — activities that are:
- neither currently compatible nor moving sufficiently rapidly towards with a 1.5°C–aligned trajectory and will require emissions reductions to be in line with a green transition pathway; or
- directly unsustainable activities (i.e., incompatible with a 1.5°C–aligned trajectory and will need to be phased out if emissions cannot be reduced).
The Taxonomy is also important for industries that struggle with technological limitations in achieving a 1.5°C–aligned reduction in emissions. For example, maritime vessels typically struggle to meet existing “green” thresholds as zero or low-carbon fuels are still in their early stages of development. Accordingly, the Taxonomy accounts for maritime vessels that are aligned with the International Maritime Organisation’s 2023 strategy for greenhouse gas reduction. This strategy aims for net zero emissions by around 2050 and includes shorter-term goals of cutting emissions by at least 20% and aiming for a 30% reduction by 2030, relative to 2008 levels.
Early Phase-Out of Coal-Fired Power Plants (CFPP)
The Taxonomy also provides a hybrid framework to phase out CFPPs at both a facility and entity level.
Facility level — relevant CFPP can be considered aligned with the facility-level Taxonomy guidance if it meets all of the following requirements:
- The financial close or final investment decision of the coal plant (i.e., signing of all the financing agreements) 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.
- In developed economies, the CFPP is retired at the latest by 2030 and in all other countries by 2040.
- Relevant CFPP must 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.
- A coal plant’s generation is replaced one-for-one with a portfolio of clean resources.
- The relevant CFPP, at a facility level as a minimum, must have a just transition plan.
Entity level — relevant CFPP can be considered aligned with the entity-level Taxonomy guidance if it meets all of the following requirements:
- The relevant CFPP owner has an entity-level commitment to:
- no new abated and unabated coal power plant development or procurement globally; and
- not to establish new or extend existing fossil-fuel based power purchase agreements (i.e., beyond those that have already been signed by December 2023).
- The relevant CFPP owner has a Paris Agreement-aligned transition plan. This transition plan needs to be independently verified or acknowledged by internationally recognised bodies or programs.
Interoperability With Other Taxonomies
The Taxonomy is intended to promote interoperability with other taxonomies, in particular the EU Taxonomy and the ASEAN Taxonomy. The “traffic light” concept, although consistent with the ASEAN Taxonomy, is a notable difference between the Singapore Taxonomy and its EU counterpart which instead operates in a binary fashion. The inclusion of the transition category aims to allow a progressive shift towards a net zero outcome across varied sectors.
Further, MAS is seeking to align the Taxonomy with the International Platform for Sustainable Finance’s Common Ground Taxonomy (CGT) to improve compatibility with international standards. This effort will allow financial institutions and market participants to use a shared set of definitions, enhancing the availability of taxonomy-aligned financing and supporting sustainable development in CGT-affiliated markets. Additionally, through the Singapore-China Green Finance Taskforce, MAS is collaborating with the People’s Bank of China to increase the adoption of financial products linked to the China Green Bond Catalogue and the Taxonomy, thereby promoting cross-border financial flows.
MAS previously sought views on the “Do No Significant Harm” (DNSH) criteria, specifying that activities that substantially contribute to climate change mitigation should not cause significant adverse impact to the other four environmental objectives of the Taxonomy: (1) climate change adaption; (2) protection of healthy ecosystems and biodiversity; (3) promoting resource resilience and circular economy; and (4) pollution prevention and control. The DNSH criteria currently remains “best practice” only and will be proposed in a separate chapter published by MAS, in order to first encourage adoption of the Taxonomy.
In addition, on 4 December 2023, MAS announced the launch of the Transition Credits Coalition (TRACTION) and two pilot projects to test the use of high-integrity transition credits in transactions for the early retirement of CFPPs. TRACTION will address challenges and develop solutions to scale up CFPP retirement using carbon credits. These credits are generated by reducing emissions when a CFPP is retired early and replaced with clean energy. These credits must meet global standards such as the Core Carbon Principles. Accordingly, TRACTION will work over two years to identify barriers and create solutions for transition credits to become a credible financial instrument. The pilot projects will also test the integration of transition credits in the Philippines. MAS aims to support the region in accelerating the phase-out of CFPPs through these initiatives. Latham & Watkins will continue to monitor developments in this area.