Modern ecocity with green trees

How FIs will create value from the Singapore-Asia Taxonomy

Authors

  • Aloysius Fua

    EY Asean Sustainable Finance Lead; Partner, Financial Services Assurance, Ernst & Young LLP

  • Praveen Tekchandani

    Partner, Climate Change and Sustainability Services, Ernst & Young LLP

15 minute read 29 May 2024
Related topics
Sustainability
Sustainability in Financial services
Assurance
CEO agenda

Economic activities will be classified through a climate science-focused lens to support Singapore’s sustainable finance ecosystem.

In brief

  • The Singapore-Asia Taxonomy will guide financial institutions to identify and classify green activities or transition toward them.
  • By leveraging the new green taxonomy, financial institutions can lead in the evolving field of green finance, supporting their decarbonization journey.
  • Assessing the environmental impact of their investments and loans will also enable institutions to manage exposure to assets with high climate risk.

Singapore has long set its sights on becoming Southeast Asia’s leading hub for green and sustainable finance. Singapore was ahead of its time in recognizing that, if we are to truly transform the regional economy, we need a sea change in capital flows and the financial institutions (FIs) that guide them. The city-state was the first in the region to implement a carbon tax regime at a time when the idea of a carbon transition was relatively new.

At the end of 2019, the Monetary Authority of Singapore (MAS) convened the Green Finance Industry Taskforce (GFIT) with a mandate to identify best practices, as well as the key measures and resources needed to develop a green and sustainable finance ecosystem in Singapore. Now, one of that ecosystem’s four pillars — the soon-to-be-launched Singapore-Asia Taxonomy — is about to embed national priorities in the local sustainable finance ecosystem.

It's widely acknowledged that the financial services sector has a central role to play in the decarbonization process, mobilizing the enormous amount of capital to succeed in the world’s journey to net-zero. Having an agreed transition taxonomy will give the region a common language to use when evaluating green investment and on which financial products and services can be built. Understanding how to assess the sustainability of economic activities in different sectors will help financial institutions to direct much-needed capital to support the low-carbon transition needed to avoid catastrophic climate change.

The Singapore-Asia Taxonomy will eventually seek to achieve five objectives:

  1. Climate change mitigation
  2. Climate change adaptation
  3. Biodiversity protection
  4. Promotion of resource resilience and circular economy
  5. Pollution prevention and control

It will cover eight sectors, five contributing to greenhouse gas (GHG) emissions (agriculture and forestry or land use; construction or real estate; transportation and fuel; energy, including upstream; and industrial) and three supporting climate change mitigation (waste and water, information and communications technology, and carbon capture and sequestration). The eight sectors covered within the taxonomy account for 90% of Southeast Asia’s GHG emissions.

Contribution to GHG emissions
of Southeast Asian GHG emissions are from the eight sectors covered within the taxonomy.
Drivers of the Singapore-Asia Taxonomy
1

Chapter 1

Drivers of the Singapore-Asia Taxonomy

Providing guardrails for the local transition to a low-carbon economy and the development of a green finance hub

Why a local taxonomy?

The world already has comprehensive and well-established frameworks, notably the EU taxonomy. The Singapore-Asia Taxonomy draws reference from the EU, Malaysian and Chinese taxonomies to ensure interoperability. But it also has distinct characteristics, developed through a lengthy consultation period with financial institutions, corporates, non-government organizations and financial industry associations.

As a result, the new taxonomy will reflect local environmental, geophysical and meteorological realities, as well as the economic priorities, challenges and opportunities of Singapore and the Southeast Asian nations serviced by Singapore-based financial institutions. For example, the taxonomy will contain detailed thresholds and criteria for financing Singapore’s early phase-out of coal-fired power plants by 2040.

Developing its own green taxonomy also allows Singapore to maintain regulatory autonomy. MAS will have the flexibility to adapt the taxonomy in line with changing circumstances – an important factor given the dynamic and rapidly evolving nature of Southeast Asian economies. We can imagine future MAS guidance may seek to either accelerate or curtail the development of certain industries.

The timing of the taxonomy launch is highly strategic. By waiting until now, Singapore has been able to ensure interoperability with other standards, supporting local institutions to operate seamlessly in the global arena. The GFIT taxonomy workstream also had the opportunity to learn from the experiences and best practices of other regions and countries. The final taxonomy is therefore expected to be robust and effective, avoiding the pitfalls experienced by countries that launched early.

Characteristics of the Singapore-Asia Taxonomy
2

Chapter 2

Characteristics of the Singapore-Asia Taxonomy

Embedding global connectivity and local priorities in Singapore’s sustainable finance ecosystem

How will the local taxonomy align with or differ from international practices?

GFIT has been careful to base the taxonomy on Singapore-specific decarbonization pathways and set up thresholds accordingly while also keeping in mind international interoperability and regional usability considerations. The new taxonomy will have multiple interoperability characteristics, including that it is expected to be:

  • Science-based to build a direct bridge between climate science and usable guidance for the financial sector. In assessing economic activities, FIs will therefore need to produce solid, science-based data for each sector and reference their data sources.  
  • Consistent with the EU Taxonomy while also using other global taxonomies as references. Capital is global, as are capital market participants. Importantly, the Singapore Taxonomy will be both consistent and compatible with other taxonomies.
  • Structured around the ISIC codes, the international reference classification for productive activities. This enables interoperability with other taxonomies based on ISIC codes, such as the Common Ground Taxonomy developed by the International Platform for Sustainable Finance.
  • Adopting Do No Significant Harm (DNSH) criteria, ensuring climate change mitigation activities do not run counter to Singapore’s other environmental objectives. For example, if renewable energy plant construction results in the destruction of endangered ecosystems, it cannot be classified as a green activity. This support for a just transition will help to ensure Southeast Asia maximizes the social and economic opportunities of climate action and does not leave communities behind.

However, the new taxonomy will also be strongly Singapore-focused — targeted at Southeast Asian economic considerations and developed with Singapore-based activities, metrics and thresholds. A key feature of the GFIT taxonomy will be the thresholds and criteria it sets out for transition activities, allowing for a progressive shift toward a net-zero outcome across different sectors.

For example, one of its more significant recommendations is the hybrid approach for the early phase out of Singapore’s coal-fired power stations. Early coal phase out will not be classified using the traffic light system of the taxonomy. Instead, investments toward early coal phase out will be eligible as transition finance.

It also has a slightly streamlined (compared with the EU Taxonomy) traffic light classification system, similar to the ASEAN Taxonomy, to differentiate an activity’s contribution to climate change mitigation:

  • Green — activities that contribute substantially to climate change mitigation that are consistent with a net-zero outcome or are on a pathway to net-zero by 2050.
  • Amber — transition activities, including those that are either transitioning toward green within a certain time frame, or enabling significant emissions reductions in the short term.
  • Red — harmful activities that are not currently compatible with a net-zero trajectory.

 

Segmental applications to embed FS into the moment
3

Chapter 3

Segmental applications to embed FS into the moment

With EmFi, nonfinancial platforms could offer payments, insurance, lending and wealth services.

How EY can Help

What does the new taxonomy mean for financial institutions?

The purpose of the Singapore-Asia Taxonomy is to direct capital flows toward green activities and to prevent greenwashing. From a practical perspective, it will become an important tool to support sustainability-based decisions, providing FIs, businesses and investors with a standardized understanding of what constitutes sustainable economic activities.

For FIs specifically, it will remove uncertainty and increase clarity and robustness in:

  • Portfolio alignment with net-zero — providing clear guidance around categorizing and assessing the environmental impact of investments and loans to better manage climate risk, paving the pathway to net-zero.
  • Risk managing investment and lending processes — enabling more accurate assessment of potential risks and opportunities with the embedding into environmental risk assessment criteria within the credit risk and investment risk management control environment, in addition to addressing regulatory compliance.
  • Product innovation — supporting the development of green and sustainable loans and bonds, and other financial instruments that are aligned with the taxonomy, underpinned by green activities and supportive of an institution’s environmental objectives.
  • Sustainability disclosures — enhancing disclosure quality (through transparency, consistency and standardization) and auditability.

Ultimately, guidance from the Singapore-Asia Taxonomy will be critical to help FIs play their part in supporting the nation’s progressive shift toward greater sustainability as well as supporting inclusive economic and social development.

Summary

Singapore is considered to be Southeast Asia’s most likely climate leader. By leveraging the green taxonomy, FIs in Singapore can not only contribute to the global effort to combat climate change and promote sustainability but also position themselves as leaders in the evolving field of green finance, supporting long-term value creation and sustainable growth

About this article

Authors

  • Aloysius Fua

    EY Asean Sustainable Finance Lead; Partner, Financial Services Assurance, Ernst & Young LLP

  • Praveen Tekchandani

    Partner, Climate Change and Sustainability Services, Ernst & Young LLP

Related topics
Sustainability
Sustainability in Financial services
Assurance
CEO agenda

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