December 4, 2023
SINGAPORE – To boost climate mitigation across eight key sectors, Singapore has set new criteria for banks and financial institutions on the financing of green business activities, and transitional activities that are currently not green but are on a pathway to net-zero emissions.
This will reduce the risk of green or transition washing by banks and financial institutions, and ensure that transition activities will meet the green criteria over time.
The Singapore-Asia Taxonomy was launched by the Monetary Authority of Singapore (MAS) on Dec 3 at the ongoing United Nations COP28 climate conference in Dubai.
Speaking at the launch at the Singapore Pavilion, MAS managing director Ravi Menon said: “The world needs not just green finance for solar panels and wind farms. It needs transition finance to provide the funding support for businesses and sectors that are not so green, to adopt cleaner technologies, increase energy efficiency and become greener over time.”
Senior Minister Teo Chee Hean, who was also at the launch, said the Government will be prepared to provide catalytic capital as part of a US$5 billion (S$6.7 billion) blended finance platform to channel much-needed funding towards greening the region.
Catalytic capital could come in the form of grants and loans with lower interest rates. This would then help to attract commercial capital.
As for the taxonomy, which was drawn up after several rounds of consultation, it covers these eight sectors: energy, industrial, carbon capture and sequestration, agriculture and forestry, construction and real estate, waste and circular economy, information and communications technology, and transportation.
“Defining transition is particularly salient in Asia, where the progressive shift towards a net-zero economy is taking place alongside economic development, population growth and rising energy demands,” said MAS in a statement.
“Providing clarity on what constitutes sustainable and transitional 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.”
Transitional activities, such as the phasing out of coal-fired power plants, do not meet the current green thresholds but are on a pathway to net zero, or can contribute to net-zero outcomes.
Achieving net-zero emissions by 2050 is crucial to ensure business activities are aligned with the goal of limiting global warming to 1.5 deg C above pre-industrial levels.
“To signal the importance of progression towards a 1.5 deg C-aligned outcome, transition thresholds do not last indefinitely and have a sunset date,” said MAS.
The Singapore-Asia Taxonomy has set out criteria for financing the phasing out of coal-fired power plants. That is a critical part of the energy transition in the Asia-Pacific, where coal accounts for almost 60 per cent of power generation.
The criteria stipulate that banks lend money to coal plant owners so that they can close their plants early to recoup some money.
Electricity generated from the phased-out plants must be fully replaced with clean energy within the same electricity grid, and the coal plants need to have a just transition plan. This takes into consideration the socio-economics of closing down a coal plant, such as by ensuring workers are reskilled and can move to other renewable sectors.
Alternatively, banks could also finance decarbonisation measures or processes that help to reduce the emission intensity of activities and enable the activities to meet the green criteria over time, MAS said.
Explaining why phasing out coal in Asia is challenging, Mr Menon pointed out the “coal economy” is a key source of employment, with the International Energy Agency estimating that more than 6.7 million people in Asia are employed across the coal value chain.
He added that as coal plants in the region are young and less than 15 years old – many of them benefit from long-term purchase agreements or policy reliefs that allow them to operate long after they become unprofitable.
To further drive the phasing out of coal, MAS is also launching a Transition Credits Coalition, or Traction, to help identify barriers and potential solutions for transition credits as a viable market solution.
Transition credits can be generated from reductions in emissions when high-emitting coal-fired power plants are retired early and replaced with cleaner energy sources. If the plants are found to meet Singapore’s environmental criteria, the credits can be used by carbon tax-liable companies to offset up to 5 per cent of their tax liabilities.
Elaborating on the US$5 billion blended finance platform, known as the Financing Asia’s Transition Partnership, Mr Menon said it will target three key areas of green and transition investments that are most pertinent in Asia.
One key area is energy transition acceleration, which covers projects like the managed phase-out of coal together with renewable energy replacement. Another area is green investments in projects involving mature technologies like scaling up renewables, modernising the grid and electric vehicle infrastructure. The third area is clean technologies, which will focus on more emerging green technologies that are being piloted, such as the use of hydrogen and carbon capture, utilisation and storage.
Financiers and investors will form partnerships, managed by an asset manager, with dedicated investment and impact objectives for each investment theme.
The platform was announced by Mr Teo, who is also the Coordinating Minister for National Security, when he delivered Singapore’s national statement on Dec 2 at the World Climate Action Summit, part of the COP28 conference.
Said Mr Menon: “MAS is discussing with multilateral development banks, development finance institutions, and philanthropies to mobilise a base of concessional capital for this platform.”
MAS is also reaching out to banks and institutional investors to bring in commercial capital – with a view of reaching the US$5 billion goal.
In addition, MAS, Temasek, the Allied Climate Partners and International Finance Corporation said that they will establish a partnership to address climate finance gaps and to increase the bankability of green and sustainable projects in Asia, with an initial focus on South-east Asia.
The partnership aims to identify and develop a pipeline of investments in sectors including renewable energy and storage development, electric vehicle infrastructure, sustainable transport, as well as water and waste management.