Contact us
A coastal city skyline at dusk.
29 February 2024

Embracing the Future of Sustainable Finance: The Singapore-Asia Taxonomy

4 minute read
Corporate climate action Net zero
Michelle Loi Principal Consultant, Sustainable Finance

In December 2023, a potential game-changer for the sustainable industry in Asia was launched: the Singapore-Asia Taxonomy.

This significant shift in sustainable finance was launched by the Monetary Authority of Singapore (MAS). The framework provides detailed thresholds and criteria for defining green and transition activities across eight key sectors, which represent 90% of Asia's greenhouse gas (GHG) emissions.

What is the Singapore-Asia Taxonomy?

The Singapore-Asia Taxonomy is a guiding framework that will benefit businesses, and financial institutions who adopt it, by helping them to better manage climate risks and support their journey towards net zero.

The taxonomy's sophisticated traffic light classification system, a first of its kind globally, identifies activities as green (sustainable), amber (transitional), or red (ineligible) across various sectors. The sectors covered are Energy, Real Estate, Transportation, Agriculture and Forestry/Land Use, Industrial, Information and Communication Technology, Waste/Circular Economy, and Carbon Capture and Sequestration.

It aligns with five key environmental objectives, including climate change mitigation (the focus of the Taxonomy), climate change adaptation, biodiversity protection, resource resilience, circular economy, and pollution prevention and control.

Additionally, it includes important 'Do No Significant Harm' (DNSH) criteria and social safeguards to ensure that environmental benefits do not come at the cost of social or other environmental harm.

Five key sustainable finance opportunities

The taxonomy's categorization system and screening criteria present a wealth of opportunities.

Here we outline the top five opportunities for business or finance institution on their way to net zero, or just starting out on their net zero journey:

1. Supports transition finance: moving from brown to green

The measures-based approach focuses on encouraging capital investments in decarbonization measures or processes. Specifically, it targets activities that are not currently meeting green criteria but have the potential to transition towards sustainability. Businesses and financial institutions investing in decarbonization processes can support these activities and gradually reduce their emissions intensity, aligning over time with the green criteria of the taxonomy. This approach is particularly beneficial for sectors that have hard to abate carbon emissions but are essential for economic growth. The measures-based approach provides practical pathways to achieve their sustainability goals.

2. Drives climate action and inclusivity in specific sectors

With sector-specific technical screening criteria, it guides key sectors towards sustainability goals, whilst acknowledging the unique challenges and needs of each industry. This fosters innovation amongst businesses and enables financial institutions to support sector-specific sustainable transitions. The taxonomy's emphasis on a 'just transition' promotes a socially inclusive shift, highlighting the opportunities and need to focus and invest in projects that are environmentally sound and socially responsible.

3. Empowers investors with clarity

The taxonomy offers a definitive framework for investors and businesses to evaluate the sustainability of their investments, facilitating informed decision-making. When incorporated into due diligence and screening, it diminishes uncertainty and helps prevent greenwashing.

4. Guides an early move away from coal-fired power plants

Coal currently dominates in Asia's energy mix and emits hundred times more carbon than solar and wind. There are more than 5,000 coal-fired power plants in the region. The taxonomy's separate criteria for coal-fired power plants phase out is a significant step in opening pathways for renewable energy investment. It provides facility and entity-level requirements for coal plants, emphasising the need for positive emissions savings, alignment with 1.5°C targets, replacement of coal generation with clean resources and just transition plans.

For companies, it represents opportunities to invest in and finance renewable energy projects, energy efficiency improvements, and to support innovations in low-emission technologies. Together, this fosters a faster shift to a green economy.

5. Aligns with global taxonomies

The taxonomy is compatible with other global taxonomies, such as the EU taxonomy. The economic activities in the taxonomy were defined using ISIC codes ( International Standard Industrial Classification) because of their widespread use and coverage. This alignment with the International Platform for Sustainable Finance's Common Ground Taxonomy (CGT) opens new avenues for investors and businesses to engage in sustainable initiatives across the Asia-Pacific region.

Navigating challenges

Implementing this taxonomy comes with its complexities. The detailed and industry-specific nature of sustainable finance taxonomies can be challenging for small and multinational firms that must navigate varying global regulations. Aligning and interpreting different standards adds to these challenges, especially for businesses operating across borders.

In order to successfully navigate this transition, financial institutions and businesses need to:

  • Build or source a solid understanding of the taxonomy,
  • Identify the scope and boundaries of operations covered by the taxonomy, and
  • Adapt operating models, products, and services to be taxonomy-aligned.

This is an ever evolving, dynamic environment. South Pole is well-equipped to guide financial institutions and businesses in understanding and implementing the Singapore-Asia taxonomy. South Pole's expertise in aligning investments and financing activities with the criteria of global taxonomies (i.e. EU taxonomy), can help Asian financial institutions and businesses channel capital towards impactful, taxonomy-aligned investments.

The Singapore-Asia Taxonomy is a guiding light in sustainable finance, providing a clear, actionable guide for financial institutions and businesses to realign their strategies, to foster a sustainable and impactful economy. Companies that embrace this taxonomy and work through the challenges will make real progress towards a net zero future.

Want to find out more about Sustainable Finance in Asia?
Want to find out more about Sustainable Finance in Asia?
Available Languages