As a linchpin for sustainable finance, a taxonomy facilitates market transparency and integrity by providing technical (and potentially legislative) guidance for both public and private sector financing. Cognisant of its geoeconomic importance, many states have entered the standard-setting race by either publishing their own taxonomies or “bandwagon-ing” with others through coalition bodies.
Amid Singapore’s whole-of-government initiative to establish a robust ecosystem of policies and incentives for green innovation, the development of its national sustainable finance taxonomy has been a key watchpoint for the financial services industry, especially so since the city-state has set its sights on becoming Asia’s leading green finance hub. Aptly named the Singapore-Asia Taxonomy, it banks on the development narrative of Asian economies, while drawing reference from the European, Malaysian and Chinese Taxonomies to ensure interoperability. This is a lofty endeavour, but the nation-state already has a leg-up by being the first in Southeast Asia to implement a carbon tax regime in 2019.
More recently, the Monetary Authority of Singapore (MAS) announced that it would commit 2 per cent of its portfolio to its climate transition programme, coupled with the establishment of the China-Singapore Green Finance Taskforce (GFTF) earlier in April 2023. These will add further impetus to the taxonomy development workstream.
Internationally, the European Union (EU) Taxonomy stands out for its comprehensiveness and high ambition. For this reason, it has been widely perceived as the gold standard given its strict standards in qualifying activities that exclusively meet the green criteria. However, in Asia, where many carbon-intensive industries still operate, there is an urgent need to ensure financing mechanisms are available for an orderly transition. Fittingly, Singapore’s Green Finance Industry Taskforce (GFIT), convened in 2019 to develop the domestic taxonomy for Singapore, intends to include transition activities in the Singapore-Asia Taxonomy.
This is much like Malaysia’s Climate Change and Principle-based Taxonomy, which classifies activities under any of these categories: Climate Supporting, Transitioning, or Watchlist. Such a classification system should guide the appropriate development of transition finance instruments and minimise the occurrence of transition-washing, ensuring that corporates with a credible transition plan have access to the necessary financing to exit energy-intensive businesses incompatible with the current net-zero emissions regime.
In March 2023, the Asean Taxonomy also released an updated version to allow the financing of coal phase-out, possibly leading MAS to also call for a final consultation regarding the same. It is plausible that the Singapore-Asia Taxonomy will closely align with the Asean Taxonomy, since it is targeting Singapore-based financial institutions which are active in Asean. Both taxonomies are in favour of adopting the traffic light differentiation mechanism, and the Singapore version will take its cue from the Plus Standard going forward. Arguably, the writing is on the wall for a regional taxonomy that is universally adopted by all Asean Member States (AMS), unless the regulatory practices across jurisdictions are standardised and the economic disparity among AMS resolved.
Even as sustainable finance regulation gain traction worldwide, many aspects of it are still not cut and dried. For instance, the jury is still out on whether a taxonomy should be government-led or market-led, given the complex nature of taxonomy implementation, not to mention any extra-territorial effects it may have. To better prepare for upcoming developments, Singapore-based financial institutions could monitor policy direction and trends on public debt issuance, such as the alignment of the Singapore Green Bond Framework with the national taxonomy.
While taxonomies are purportedly science-based, national priorities may also be weaved into the guiding text to either accelerate or curtail the development of certain industries. In many parts of Asia, access to reliable, clean and affordable energy remains an aspiration. Singapore, largely reliant on natural gas (labelled as a ‘transition fuel’ but not considered a clean energy source) for its own energy requirements, will likewise have to find a sweet spot in rebalancing its energy mix while meeting both its long-term economic and climate goals. Interestingly, being a key node in the global Liquefied Natural Gas (LNG) industry implies that featuring LNG supply chain investments in the Singapore-Asia taxonomy as a means to facilitate the region’s energy transition would benefit Singapore’s economy.
A taxonomy will only be considered mainstream if it successfully assimilates into the operating architecture of the wider financial ecosystem. For instance, iif taxonomy criteria are leveraged for frontline regulatory disclosure requirements, public-listed corporates may be compelled to disclose sustainable practices aligned with classified activities under the taxonomy, in turn ratcheting up demand for services in sustainability reporting, assurance and due diligence etc. Even if taxonomy usage is not mandatory, it is conceivable that sovereign wealth funds may become early adopters by aligning their investment portfolio screening and evaluation criteria with its definitions and guidelines.
Indeed, the public authority responsible for developing a sustainable finance taxonomy is confronted by a slew of political and economic concerns that impact both domestic and international financial markets. Due to the normative nature of taxonomy design, policymakers need to balance multiple stakeholder interests domestically while maintaining good economic ties abroad. Granted, the economic influence of a country such as its currency and law in international business affairs are also contributing factors to the overall credibility of a taxonomy. As socio-economic conditions evolve in Asia, the Singapore-Asia Taxonomy is expected to adapt to new knowledge frontiers and technologies that not only mitigate climate change, but continuously address biodiversity loss and support communities at risk.
Troy Han holds a Masters (Msc) in Asian Studies from the S. Rajaratnam School of International Studies (Nanyang Technological University, Singapore). His research interest centres on policy-oriented issues spanning the environment, business, and politics in Asia.