The Green Finance Industry Taskforce (GFIT) is an industry-led initiative brought together by the Monetary Authority of Singapore (MAS). Aiming to accelerate the development of green finance, its current task is to develop a taxonomy defining what projects and companies should qualify for green finance.
The taskforce is currently asking for feedback through a consultation process. While the initiative could create a common language for the different financial institutions in ASEAN, the taxonomy should take care in certain areas to avoid turning the exercise into a missed opportunity.
A strong case for an ambitious green taxonomy for Singapore and ASEAN
The Singapore taxonomy will be more detailed than its Asian counterparts. The “Climate Change and Principle-based Taxonomy Discussion Paper” issued by Bank Negara Malaysia in 2019 and the Chinese Green Industry Guiding Catalogue both remain high-level but do not include any systematic quantitative thresholds.
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The challenge will be to come up with threshold metrics that align with the Paris Agreement targets for each activity comparable to the ones proposed in the draft European Union (EU) green and sustainable taxonomy. While some thresholds might vary from European standards, these should be minimal and should only be near- to medium-term; probably no longer than 2030.
Singapore is one of the world’s most economically and socially developed parties to the Paris Agreement and is supposed to peak emissions early and decline fast under the principle of common but differentiated responsibilities. The majority of the other ASEAN nations fall into the category of emerging economies, and therefore are expected to take bolder climate action than the least-developed nations found in some other parts of the world.
The UN principle of common but differentiated responsibilities acknowledges that countries with different levels of development should be allowed to peak emissions at different dates. However, many scenarios suggest that this should mostly take place before 2030, and that all nations join a steady reduction to net-zero after this date and the differentiation of different greenhouse gas (GHG) emissions reduction targets diminishes as we approach the second half of the century.
Many analyses (science-based targets and C40 cities targets, for example) see a common responsibility to hit net zero by 2050 for all nations, regardless of their economic and social development. The differentiated responsibility therefore involves the trajectory (the curve of the GHG reduction graph), not the destination.
Tricky transitional issues
In its first version, the Singapore taxonomy proposed a ‘traffic light system’ with green, yellow and red categories. While green is in and red means out, the yellow category is more complex, covering “transitional” projects or companies that are still emitting greenhouse gases but which have time bound strategies for further emissions reductions.
Transition issues are complex. On the one hand, there needs to be financial mechanisms to encourage high-emissions businesses to embark on the pathway to a low carbon future without collapsing in the process. On the other hand, these must not delay or deflect research and investment in more ambitious ‘straight to green’ projects.
Climate compromises in the name of ‘being realistic’ can be dangerous. The scientists at the UN’s Intergovernmental Panel on Climate Change (IPCC) have offered this assessment of realism: “Pathways limiting global warming to 1.5°C with no or limited overshoot would require rapid and far-reaching transitions in energy, land, urban and infrastructure (including transport and buildings), and industrial systems.”
Mixed appetites for fossil fuels
Unlike their European counterparts, the GFIT suggests including activities involving “abated natural gas” in the taxonomy on the basis that a rapid urbanization will continue to require sectors such as steel, aluminum, and cement for which no technologically or financially feasible green alternatives currently exist.
Many financial regulatory bodies and international organisations such as the Organisation for Economic Cooperation and Development (OECD) and the United Nations (UN) are now counselling that investment in all fossil fuels must end to achieve Paris Agreement goals.
Major asset owners and asset managers are announcing disinvestment from the fossil fuel sector. Therefore, it could be unwise from either a climate crisis or an economic risk perspective to include gas in the green financial taxonomy, abated or not. This will create incompatibility with other green taxonomies, reduce international investment in projects and companies labelled under such a taxonomy, or will lead to a second screening to bring projects up to Paris-compatible standards. This was experienced by China when ‘clean coal’ was included in that nation’s green bond taxonomy, in contrast to all other taxonomies.
The importance of the do-no-harm principle
To qualify under the taxonomy, an economic activity has to contribute to one of four environmental objectives related to climate change mitigation, adaptation, biodiversity protection and resource resilience, and must not:
- Significantly harm any of the four environmental objectives;
- Impose negative impact on communities’ social and economic well-being, unless the trade-offs can be justified in the long run; and
- Breach local laws and regulations.
An effective way to support the transition effort would be to develop a “do-no-harm” scorecard against a full range of social and environmental principles covered by the Sustainable Development Goals (SDGs). This could involve a checklist approach whereby impact on SDG targets are used to screen a project.
Over time, there will be pressure from many investors interested in green finance to encourage issuers to achieve a higher standard on the full range of sustainability issues.
An opportunity to show real climate leadership
By taking the initiative to create a common language for all financial institutions in ASEAN, Singapore is asserting its ambition to become the green finance hub of Asia. However, in the view of research institutions such as Climate Action Tracker, the mitigation measures for Singapore and the other ASEAN nations included in their NDCs do not amount to the requirement to keep temperature rises below 2°C and closer to 1.5°C as stated in the Paris Agreement.
Fortunately, the international pact incentivises improved ambition levels going forward. This situation can strengthen, rather than weaken the case for an effective green taxonomy which helps future investment align targets with the Paris Agreement.
There is a real opportunity for Singapore to show climate leadership by setting an ambitious taxonomy aligned with climate science and the Paris Agreement goals. It is crucial now more than ever to avoid locking capital in transitional technology that will harm the climate in the long-term. It will thus be important to watch out for the results of the consultation and the final version of the taxonomy.
In the past, Singapore has demonstrated a world-beating capacity to dramatically shift the nature and focus of its economic development path to respond to changing times. The green taxonomy offers a chance to repeat that success.
Carbon Care Asia Limited (CCA) is a leading provider of consultancy services on corporate sustainability and carbon strategy, greenhouse gas reduction, climate competence, green finance and environmental, social and governance (ESG) reporting.