Green Finance Industry Taskforce launches third consultation on green and transition taxonomy
On 15 February 2023, the Green Finance Industry Taskforce (“GFIT”) launched its third and final public consultation on a green and transition taxonomy for Singapore-based financial institutions. The consultation seeks views on the detailed thresholds and criteria for the classification of green and transition activities in five sectors: (1) agriculture and forestry/land use, (2) industrial, (3) waste and water, (4) information and communications technology, and (5) carbon capture and sequestration. Views are also sought on the Do No Significant Harm (“DNSH”) criteria. The consultation closes on 15 March 2023.
The taxonomy aims to provide a common framework for the classification of economic activities to enable stakeholders to gather information related to green financing, funding and investment, and gain an understanding of risk management and promote investments that meet robust sustainability goals. This third consultation builds on GFIT’s two earlier rounds of consultations in January 2021 and May 2022, which proposed thresholds and criteria for the energy, transport and real estate sectors. The eight sectors covered within the taxonomy account for close to 90% of greenhouse gas emissions in South-east Asia. GFIT will publish the final taxonomy, which will take into account feedback from all three public consultations, by H1 2023.
Traffic light classification system
GFIT has adopted a traffic light classification system to differentiate an activity’s contribution to climate change mitigation, one of five environmental objectives (“EOs”) under the taxonomy. A key feature of the GFIT taxonomy is the thresholds and criteria it sets out for transition activities, which allow for a progressive shift towards a net zero outcome across different sectors.
- A green classification represents activities that contribute substantially to climate change mitigation that is consistent with a net zero outcome, or are on a pathway to net zero by 2050. Generally speaking, any new activities (e.g. a new power plant or a new building) have to meet the green criteria. This is consistent with the need for transformational changes for all new infrastructure to meet the Paris Agreement.
- An amber classification represents transition activities, including those that are either transitioning towards green within a certain time frame, or enabling significant emissions reductions in the short term. The amber category is relevant only for transitioning of existing infrastructure and activities and does not apply to new projects. Either way, the transition period cannot last indefinitely and an activity should be following an identified pathway to net zero by a specified sunset date. At the sunset date, there is no longer an amber category and either the activity is aligned with the Paris Agreement pathway or it is downgraded to “Red”. Generally, the sunset date is 2030 and all amber traffic lights will disappear after this time unless stated otherwise in the criteria.
- A red classification represents harmful activities that are not currently compatible with a net zero trajectory.
GFIT seeks feedback on the traffic light system usability and ease of navigation.
Measures-based approach for industrial sector
A key proposal of this public consultation is the adoption of a “measures-based approach” for the industrial sector. Unlike other sectors, for the industrial sector, there is a lack of certainty around the technological solutions to achieve net zero.
There are two ways to classify and identify activities that are “transitional” and therefore changing over time:
- Transition plans: Rely on plans put in place at the company level towards net zero.
- Measures-based approach: Put forward a list of eligible technologies or green/transition “measures” that make a substantial contribution to reducing short term emissions.
While GFIT is generally supportive of transition plans, an entity-based approach relying on transition plans is not easy to implement within a taxonomy. Taxonomies are more granular in nature, focusing on activity-level criteria which can be used to inform and enhance entity transition plans. Taxonomies are also, in general, reliant on current performance to prove eligibility rather than future performance. Transition plans are an indicator of future performance, but it is not easy to ascertain how feasible it is to meet plans at a point in time.
GFIT therefore proposes to utilise the measures-based approach to positively reinforce decarbonisation efforts by establishing an amber category for identifying measures that support emissions reduction, rather than specific economic activities alone.
For example, in cement manufacturing, the amber category in the taxonomy provides a list of decarbonisation measures or retrofitting plans which should be put in place to support better energy efficiency outcomes.
DNSH criteria
GFIT is also seeking views on the DNSH criteria. The criteria specifies that activities which are making a substantial contribution to climate change mitigation should not be carried out in a manner that would cause significant adverse impact to the other four EOs under the taxonomy (namely, (1) climate change adaptation, (2) protecting healthy ecosystems and biodiversity, (3) promoting resource resilience and circular economy, and (4) pollution prevention and control).
By way of illustration, the construction of a hydropower generation facility may have met the thresholds and criteria to be classified as a green activity under the climate change mitigation EO. The DNSH criteria would additionally require that the construction and operation of the facility not result in significant adverse impact to the environmental ecosystem within the vicinity of the facility, and the facility owner has to demonstrate that practical measures will be put in place to mitigate any adverse impact.
Reference materials
The following materials are available on the Monetary Authority of Singapore (“MAS”) website www.mas.gov.sg and Association of Banks in Singapore website www.abs.org.sg:
