The Green Finance Industry Task Force (GFIT), convened by the Monetary Authority of Singapore (MAS), launched its second taxonomy consultation paper, Identifying a Green Taxonomy and Relevant Standards for Singapore and ASEAN (“Singapore Taxonomy 2”) in May 2022. The consultation is open for feedback until 23 June 2022.
In this update, we take a deep dive into the GFIT’s proposals in Singapore Taxonomy 2.
What is a Taxonomy and Why Does it Matter?
Once adopted, a Singapore taxonomy could have profound implications for corporate sustainability reporting, financial institutions’ (FIs) management of environmental risks (particularly transition risks), and green financing and investment.
As the GFIT noted, the aim of any taxonomy is to provide a common framework for the classification of economic activities to enable stakeholders in gathering information related to green financing, funding and investment, as well as gain an understanding of risk management and promote investments that meet robust sustainability goals. A taxonomy should allow stakeholders to determine which financial products and services can be classified as green, or environmentally sustainable, over the long term.
Furthermore, it should enable transparent and consistent disclosures by corporates of their own economic activities and environmental profile, which then permits transparent and consistent classifications and disclosures for associated equity and debt investment, financing, and financial products. In doing so, a taxonomy would enable growth in sustainable products and services by removing ambiguity and uncertainty around classifications and labels, which in turn may stimulate demand for further environmentally sustainable financing and investment.3 The GFIT also envisaged that “the Taxonomy will serve as a powerful tool to redirect capital flows towards sustainable activities and away from unsustainable ones”.
Context
Singapore Taxonomy 2 builds on the GFIT’s first consultation paper (“Singapore Taxonomy 1”),4 launched in January 2021. It proposes additional environmental objectives, the qualifying criteria and thresholds that activities in the energy, transport, and real estate sectors contributing to the environmental objective of climate change mitigation must meet before they can be classified as green or transition activities, and the focus sectors the GFIT
will next be setting the criteria and thresholds for. Taxonomies have been established or are being established in many countries around the world, including the European Union (EU) and China. 5 Closer to home, the release of Singapore Taxonomy 2 comes after the publication of the ASEAN,6 Malaysian,7 Philippines,8 and Indonesian9 taxonomies, all within the last two years. DBS Bank also published its own taxonomy in 2020, quite possibly the first bank in the world to do so,10 with minor updates in March 2022.11 While Singapore Taxonomy 2 is primarily intended for Singapore FIs, it is also intended to contribute to the ASEAN taxonomy by creating a common language for the different FIs in ASEAN.12
A key principle of Singapore Taxonomy 2 is its interoperability with other regional and national taxonomies, particularly the EU taxonomy13 – “capital is global, as are capital market participants”.14 It is therefore important that the taxonomy is consistent and compatible with other taxonomies, particularly the EU Taxonomy and the ASEAN Taxonomy. In this regard, while the structural underpinnings of the Singapore taxonomy are largely consistent with the EU taxonomy, it has taken its own iterated and distinct approach to tailor the classifications
for use in Southeast Asia, including the introduction of a “traffic light” system for classification including transition, similar to that adopted in the ASEAN taxonomy.15
Environmental Objectives
The EU taxonomy16 is a key reference document in developing the environmental objectives for Singapore Taxonomy 2.17 The GFIT proposed five environmental objectives18 (up from four in Singapore Taxonomy 1.19):
(a) Climate change mitigation;
(b) Climate change adaptation;
(c) Protect healthy ecosystems and biodiversity;
(d) Promote resource resilience and circular economy; and
(e) Pollution prevention and control.
These objectives are broadly similar in substance to those in the EU taxonomy,20 and the ASEAN taxonomy.21
The Traffic Light System
Going beyond the EU taxonomy, which currently does not go beyond classifying economic activities as environmentally sustainable, 22 Singapore Taxonomy 2 builds on the ‘traffic light system’ first proposed in Singapore Taxonomy 1. The proposed definitions for the green, amber, and red activities are as follows:
(a) The “green” category applies to activities that contribute substantially to climate change mitigation by operating at net zero, or are on a pathway to net zero by 2050. The pathway and accompanying thresholds are based on climate science;23
(b) The “amber” category includes activities that are not presently on a net zero pathway, but are either:
a. Moving towards a green transition pathway within a defined time frame; or
b. Facilitating significant emissions reductions in the short term with a prescribed sunset date.24
(c) The “red” category concerns activities that are not currently compatible with a net zero trajectory. They should either:
a. be phased out if emissions (including Scope 3) cannot be reduced, or
b. have their emissions (including Scope 3) reduced to be in line with a green transition
pathway.25
The ASEAN taxonomy has also adopted a traffic light system, but its definitions and thresholds for the various categories may not necessarily be aligned with those of Singapore Taxonomy 2.26
Criteria and Thresholds for Significant Contribution to Environmental Objectives by Economic Activities
Instead of the Singapore Standard Industrial Classification system, the GFIT proposed the use of the International Standard Industrial Classification (ISIC) of economic activities as the starting point for its classification because the ISIC was established by the UN, is comprehensive in its coverage of economic activities worldwide, is better aligned with international emissions data, and is largely compatible with international frameworks.27
The EU and ASEAN taxonomies both contemplate the establishment of criteria for activities that contribute to their environmental objectives. 28 Criteria for activities in the energy, transport, and real estate sectors that contribute to the climate change mitigation objective were proposed in Singapore Taxonomy 2, with the criteria for the remaining five identified focus sectors29 left to future iterations of the taxonomy.
Energy
To be consistent with other global taxonomies, including the EU Taxonomy, the primary metric proposed for measuring emissions in the energy sector is gCO2/kWh. Applying the EU threshold, to qualify as a green activity, the life cycle emission intensity for new projects in the energy sector is proposed to be not more than 100g for the period 2022 to 2035. Beyond 2035, the indicative emissions intensity threshold is 50g, and any emission intensity above this threshold will be considered a red activity. To qualify as an amber activity, the proposed
threshold starts at 350g for the period 2022 to 2025, and ratchets down to 150g for the period 2030 to 2035. The amber category is not applicable for new projects and activities and solid fossil fuels projects/activities. The projects/activities must also not lock in high carbon technologies.30
Transport
The proposed criteria for activities in the transport sector are said to primarily rely on the EU taxonomy and Climate Bonds Initiative taxonomy and consider the initiatives and targets announced by the Singapore Government. For the shipping and air transport sectors, the proposed metrics are gCO2 per tonne-km and gCO2 per revenue tonne km respectively. To qualify as green, a transport sector activity must have zero direct tailpipe emissions. The amber category is available only for heavy-duty vehicles, sea and coastal water transport, and air transport, for which zero-emission alternatives do not exist. In this category, road freight transport must outperform the best in the market;31 and water transport and aviation transport must meet 1.5oC thresholds set by globally relevant sectoral decarbonisation targets set by the Transition Pathways Initiative.32
Real Estate
The emission intensity thresholds for the construction of new buildings, renovation of existing buildings, and acquisition/ownership of real estate are intended to be set in line with Singapore’s transition pathway in due course, using the Green Mark 2021 certification33 as a key starting point – all levels of Green Mark certified buildings qualify as green activities. The renovation of existing (but not new) buildings can qualify for the amber category up to 2030 if a 30% reduction in emissions or energy consumption is achieved. Buildings dedicated to
direct fossil fuel use (consistent with treatment of fossil fuels in energy) are placed in the red category.34
Do No Significant Harm (“DNSH”) Principle
Like the EU and ASEAN taxonomies, the environmental objectives are interlinked – i.e., an activity is included in the taxonomy only if it contributes substantially to one of the objectives while not significantly harming any other objectives. Unlike the EU taxonomy, which has already provided detailed activity level requirements and thresholds in respect of the application of the DNSH principle to climate change mitigation and adaptation,35
none are in Singapore Taxonomy 2. The GFIT recommended that DNSH criteria be connected to Singapore’s environmental regulations relevant to climate change mitigation and other environmental objectives and left the door open for further DNSH criteria to be developed for future iterations of the taxonomy.36
Minimum Social Safeguards (“MSS”)
To be classified as green or in transition under Singapore Taxonomy 2, an activity must also be performed by entities in a way that meets MSS requirements,37 i.e., be compliant with the OECD Guidelines on Multinational Enterprises (MNE Guidelines) 38 and the United Nations Guiding Principles on Business and Human Rights (UN Guiding Principles), with specific reference to the International Labour Organisation (ILO) Core Labour Conventions. 39 This broadly follows the minimum safeguards in the EU taxonomy. 40 The ASEAN taxonomy
currently does not require compliance with any social safeguards.
Next Steps
The GFIT will commence work on the activity-level criteria and thresholds for the remaining focus sectors for the Climate Change Mitigation Environmental Objective. This part of the work is envisaged to be released for consultation closer to the end of 2022. One final Singapore Taxonomy document reflecting feedback on the current and next consultation is targeted for release in 2023.41 The GFIT has also indicated that the remaining objectives can be expected to be covered in future iterations of the taxonomy.42
The GFIT has called on FIs to start reporting on taxonomy alignment from 2023. At the initial stage, they can identify investments that are eligible under the taxonomy classifications and then determine whether they are aligned with the different taxonomy classifications (green, amber, and red). They should then go on to report on the degree to which their investments, their products or a range of transactions are aligned with the taxonomy and the environmental objectives to which the investment contributes.43
Implications for Businesses
A green taxonomy is a formal instrument that will shape stakeholders’ perceptions about which economic activities are green and which are not. Currently, the focus of industry standards of green and transition financing is on green and transition activities (for use-of-proceeds financing) and green performance (for sustainabilitylinked financing). Not all standards adopt detailed criteria and thresholds for defining the green or transition
activities that may be financed. Green/transition activities or performance also do not have to meet DNSH or MSS requirements to qualify for green/transition financing. Similarly, impact investment funds that focus on creating positive environmental impacts often do not apply DNSH and MSS considerations in their investment decisions. With the GFIT’s recommendation for FIs to start reporting on taxonomy alignment from 2023, FIs may want to start aligning their green financing and investment products and portfolios, and indeed all their products and portfolio, with the taxonomy to mitigate environmental risk (particularly the transition and reputational aspects of such risk) and greenwashing risk. Other businesses will not remain unaffected. Once FIs start to report on the taxonomy alignment of their loan and investment products and portfolios, they will also expect their borrowers and investees to do the same. Misalignment with the taxonomy may raise environmental risk and the cost of
capital for businesses.
Conclusion
With the growing realisation of the importance of green and sustainable taxonomies as a tool for financing the transition to an environmentally sustainable economy, many jurisdictions around the world, including Singapore, already have taxonomies in place or are in the process of developing them. Countries face the twin challenges of ensuring their taxonomies are globally interoperable 44 while remaining relevant to their local context; and businesses potentially face the risks of coming under regulatory overlap and conflict due to taxonomy
fragmentation or inability to attain contextually inappropriate taxonomy criteria. In this regard, and according to the GFIT, Singapore Taxonomy 2 is a work in progress, and the taxonomy will continue to evolve. Businesses should however start to follow closely and engage in the direction of development of the taxonomy. It provides and will continue to provide important signposting for the identification of environmental risk and opportunities
in the accelerating green and just transition of the economy. There is no turning back and not a moment to lose.
1. GFIT, Identifying a Green Taxonomy and Relevant Standards for Singapore and ASEAN (May 2022).https://abs.org.sg/docs/library/second-gfit-taxonomy-consultation-paper
2. Association of Banks in Singapore, “Green Finance Industry Taskforce (GFIT) Taxonomy Public Consultation” . https://abs.org.sg/industry-guidelines/gfit-taxonomy-public-consultation
3. Singapore Taxonomy 2, p 7.
4 GFIT, Identifying a Green Taxonomy and Relevant Standards for Singapore and ASEAN (January 2021) https://abs.org.sg/docs/library/first_gfit_taxonomy_consultation_paper
5. See Sean Kidney, “Taxonomia! An International Overview” (September 2021) . https://futureofsustainabledata.com/taxomania-an-international-overview/
6. ASEAN Taxonomy Board, ASEAN Taxonomy for Sustainable Finance, Version 1 (November 2021) https://asean.org/wpcontent/uploads/2021/11/ASEAN-Taxonomy.pdf.
7. Bank Negara Malaysia, Climate Change and Principle-based Taxonomy (April 2021) . https://www.bnm.gov.my/documents/20124/938039/Climate+Change+and+Principle-based+Taxonomy.pdf
8. Bangko Sentral ng Pilipinas, The Philippine Sustainable Finance Guiding Principles (October 2021) https://www.dof.gov.ph/wp-content/uploads/2021/10/ALCEP-Sustainable-Finance-Guiding-Principles.pdf
9. Otoritas Jasa Keuangan, Indonesia Green Taxonomy, Edition 1.0 – 2022 https://www.ojk.go.id/keuanganberkelanjutan/Uploads/Content/Regulasi/Regulasi_22012011321251.pdf
10. DBS Bank, “DBS Launches World’s First Sustainable and Transition Finance Framework and Taxonomy to help Clients Advance on Sustainability Agenda” (29 June 2020) https://www.dbs.com/newsroom/DBS_launches_worlds_first_sustainable_and_transition_finance_framework_and_taxonomy_to_help_clients_advance_on_sustainability_agenda
11. DBS Bank, DBS Bank Institutional Banking Group Sustainable & Transition Finance Framework & Taxonomy (March 2022) https://www.dbs.com/newsroom/DBS_launches_worlds_first_sustainable_and_transition_finance_framework_and_taxonomy_to_help_clients_advance_on_sustainability_agenda
12. Singapore Taxonomy 2, p 10.
13. Ibid, p 46.
14. Ibid, p 7.
15. Ibid, p 97
16. Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 . https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32020R0852&from=EN
17. Singapore Taxonomy 2, p 10.
18. Ibid, p 14.
19. The four environmental objectives in Singapore Taxonomy 1 are:
(a) Climate change mitigation;
(b.) Climate change adaptation;
(c) Protect biodiversity; and
(d) Promote resource resilience.
20. There are six environmental objectives in the EU taxonomy:
(a) Climate change mitigation;
(b) Climate change adaptation;
(c) The sustainable use and protection of water and marine resources;
(d) The transition to a circular economy;
(e) Pollution prevention and control; and
(f) The protection and restoration of biodiversity and ecosystems.
21. There are four environmental objectives in the ASEAN taxonomy:
(a) Climate change mitigation;
(b) Climate change adaptation;
(c) Protection of healthy ecosystem and diversity; and
(d) Promotion of resource resilience and transition to circular economy.
22. The EU taxonomy defines as transition activities, economic activities for which there are no technologically and economically feasible low-carbon alternatives. These activities are deemed to be contributing to climate change mitigation if (based on established
technical screening criteria) they support the transition to a climate-neutral economy consistent with a 1.5oC transition pathway. They must also
(a) have greenhouse gas emission levels that correspond to the best performance in the sector or industry;
(b) not hamper the development and deployment of low-carbon alternatives; and
(c) not lead to a lock-in of carbon-intensive assets, considering the economic lifetime of those assets. Transition activities under the EU taxonomy would appear to qualify as ‘green’ activities under Singapore Taxonomy 2, but the ‘amber’ and ‘red’ categories under Singapore Taxonomy 2 do not have any counterparts in the EU taxonomy.
23. Singapore Taxonomy 2, p 49. The GFIT considered the EU Taxonomy criteria for substantial contribution to climate change mitigation as a first option for “green” criteria, to enhance international interoperability and used the work that had gone into the selection of EU criteria, applicable internationally. Only where not globally applicable, were EU metrics and thresholds adapted to reflect Singapore-specific circumstances. Generally, new activities are assessed against the green (and not amber) criteria.
24. Ibid, p 50. The amber category is intended to be relevant only for transitioning of existing infrastructure and activities and generally not to new projects.
25. Ibid, p 51.
26. The ASEAN taxonomy envisages that its thresholds for each activity will be stacked with multiple decarbonisation pathways so that there will be more than one threshold for a classification of an activity to accommodate individual Member State’s circumstances.
These stacked thresholds will converge over time. Furthermore, the taxonomy is dual-tiered, and unlike the more advanced Plus Standard, the Foundation Framework uses qualitative screening criteria only instead of quantitative thresholds for classification of activities. This dual-tier structure enables it to accommodate the diversity of approaches in Member States; for example, the Malaysian taxonomy and Philippine taxonomy use qualitative criteria only for classification.
27. Singapore Taxonomy 2, pp 21 and 23. The EU uses the Statistical Classification of Economic Activities in the European Community (NACE), a derivative classification of ISIC. While there is currently no common ASEAN-specific industrial standard, the ASEAN taxonomy’s Plus Standard Framework has also chosen its focus sectors based on the ISIC, primarily because of its compatibility with ASEAN Member States’ national standard industrial classification and with industrial classification codes used in other major taxonomies.
28. The EU taxonomy already contains criteria for activities that contribute substantially to climate change mitigation and adaptation. See Commission Delegated Regulation (EU) 2021/2139 . https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/ uri=CELEX:32021R2139&from=EN
29. Singapore Taxonomy 2, pp 38 to 40. The remaining five focus sectors are Agriculture and Forestry/Land Use; Industrial; Information and Communications Technology; Waste/Circular Economy; and Carbon Capture and Sequestration.
30. Ibid, pp 55 and 56.
31. This follows the approach in the EU taxonomy.
32. Singapore Taxonomy 2, pp 57 and 58.
33. See Building Control Authority, “Green Mark 2021” . https://www1.bca.gov.sg/buildsg/sustainability/green-mark-certification-scheme/green-mark-2021
34. Singapore Taxonomy 2, p 59
35 .Commission Delegated Regulation (EU) 2021/2139 . https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32021R2139&from=EN
36. Singapore Taxonomy 2, p 52. The ATB did not propose any DNSH criteria in the ASEAN taxonomy but contemplated the development of DNSH criteria going forward, taking into consideration parallel activities elsewhere, including in the EU.
37. Ibid, p 99.
38. The MNE Guidelines provide non-binding principles and standards for responsible business conduct in a global context consistent with applicable laws and internationally recognised standards. It covers a wide range of environmental, social, and governance topics, including human rights, labour, environment, corruption, consumer protection, consumer, and taxation. See OECD, Guidelines for Multinational Enterprises (2011) . http://dx.doi.org/10.1787/9789264115415-en
39. Singapore Taxonomy 2, pp 119 and 120. See UN, Guiding Principles on Business and Human Rights (2011) . https://www.ohchr.org/sites/default/files/documents/publications/guidingprinciplesbusinesshr_en.pdf
40. To qualify as environmentally sustainable under the EU taxonomy, an economic activity must be carried out in compliance with procedures implemented by the undertaking carrying out the activity to ensure the alignment with the OECD MNE Guidelines and the UN Guiding Principles (including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the ILO on Fundamental Principles and Rights at Work and the International Bill of Human Rights).
41. Singapore Taxonomy 2, p 124.
42. Ibid, p 110.
43. Ibid, pp 104 and 105.
44. In this regard, see the efforts of the International Platform on Sustainable Finance , https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/international-platform-sustainable-finance_en of which the Ministry of Finance and MAS are members, to compare taxonomies, particular those of the EU and China, as a first step towards aligning them.
