Singapore finance task force proposes pathway for high-emitters to raise sustainable capital

THE Green Finance Industry Taskforce (GFIT) has proposed a path in Singapore’s green and transition taxonomy for high-emissions industrial activities to qualify for sustainable financing, despite challenges in setting thresholds.

In its third and final public consultation paper released on Wednesday (Feb 15), GFIT proposed that financiers under the framework take a “measures-based” approach for selected industrial sectors, where there is uncertainty around technology solutions to achieve net-zero emissions. Without a good way to determine science-based metrics and thresholds for these sectors, the proposal suggested instead to require that they adopt a range of emissions-reduction measures.

GFIT is an industry-led initiative, convened by the Monetary Authority of Singapore (MAS) to accelerate the development of green finance.

Singapore’s taxonomy uses a traffic light framework, where activities classified as “green” can qualify for green or sustainable financing, while those classified as “amber” can access transition financing. Those in the “red” category or deemed to pose “significant harm” would not be eligible for sustainable financing.

The difficulty lies with setting qualifying conditions in the amber category for a handful of sectors, specifically in the manufacturing of basic chemicals, cement, basic iron and steel, and hydrogen. GFIT said these industries are “inherently” in transition towards net zero, making the exercise of drawing a line between red and amber performance problematic. Chief among reasons are that there is no data available to create a line with any credibility or science basis. The line between red and amber would therefore be arbitrary, the taskforce noted.

Examples of eligible decarbonisation measures or retrofitting plans for chemical manufacturers include the revamp, modification or purchase of equipment that can bring about a 30 per cent improvement in energy efficiency, and a switch to process technologies that do not directly release carbon dioxide.

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While GFIT could have gone with classifying activities as “transitional” through companies’ net-zero plans, it said an entity-based approach relying on transition plans is not easy to implement within a taxonomy, as such plans are an indicator of future performance. “It is not easy to ascertain how feasible it is to meet plans at a point in time,” the taskforce said.

Taxonomies, it added, are supposed to be “more granular in nature”, focusing on activity-level criteria which can be used to inform and enhance entity transition plans, and reliant on current performance to prove eligibility.

As with all amber transition zones mentioned in the proposed taxonomy, the approach is to phase out the zone at a sunset date stated to ensure a movement towards green, GFIT said. Eligible measures are to be implemented by 2035 for the chemical manufacturing sector, for example.

This consultation, which is open until Mar 15, also seeks views on the detailed thresholds and criteria for the classification of green and transition activities in agriculture and forestry/land use, waste and water, information and communications technology, and carbon capture and sequestration.

Together with the other sectors looked at in previous consultations in January 2021 and May 2022, namely energy, transport and real estate, the eight sectors covered within the taxonomy account for close to 90 per cent of greenhouse-gas emissions in South-east Asia, MAS noted.

With that, MAS’ chief sustainability officer and assistant managing director for development and international Gillian Tan said the final taxonomy, set to be published by June, is expected to drive financing flows to catalyse Asia’s transition to net zero.

“Adapting international best practices for use in Asia, the taxonomy’s extensive activity and emissions coverage will encourage Singapore-based financial institutions to direct capital flows towards green and transition activities, thereby guiding the region’s transition to a low-carbon future,” she added.

Proposed approach supports transition finance

Kelvin Tan, HSBC’s head of sustainable finance and investments for Asean, said this third consultation solicits feedback on one of the most critical elements of a transition taxonomy: the definition of amber activities.

“As various jurisdictions across the globe start to adopt the traffic light approach, which GFIT first pioneered in the development of their taxonomies, the key question has always lied in how amber activities should be defined,” he said.

“As GFIT’s consultation paper explores an additional way of looking at amber activities that is centred around corporate transition plans and a measures-based approach for certain sectors, this will hopefully help shed light on how financial institutions may optimise their support for the transition of hard-to-abate sectors.”

Tan added that this discussion might help to provide supplementary options to be considered by other taxonomies that are actively being developed, especially those in South-east Asia, such as Thailand’s and Asean’s.

The GFIT consultation paper also highlighted the role of corporate transition plans in enabling and facilitating the financing of the transition to a low-carbon economy, he said.

Cherine Fok, partner at KPMG for ESG, called the measures-based approach “a practical step towards effecting real change”.

“The measures-based approach, while not perfect, allows industrial processes a facilitated transition towards more environmentally responsible practices. From an outcomes perspective, it is a responsible approach towards transition, where direct exits will likely result in social and economic impacts that may outweigh environmental benefits,” she said.

Mike Ng, head of sustainability office for global wholesale banking at OCBC, said the bank “appreciates having common parameters set within the national context to start with”, given the ongoing challenge to prescribe precise metrics and thresholds for projects and technologies that are still at a nascent stage or evolving dynamically. The parameters could anyway, with time, be further evaluated and refined with real-world applications, he pointed out.

However, he said guidelines set out in the taxonomy may require adaptation to incorporate local standards and context when assessing projects located outside of Singapore. “Each country is at a different stage of green development, and thus infrastructure and certification standards may differ from country to country,” he said.

EY’s Asean sustainable finance lead Aloysius Fua said considering the challenges faced by the industrial sector, which includes data availability from a climate science perspective, adopting a measures-based approach that positively reinforce decarbonisation efforts “may be the next best alternative”. It also supports transition finance, he added.

Yulanda Chung, head of sustainability for institutional banking at DBS, said the bank was aware of the challenges in establishing transition pathways. “Taking a measures-based approach with clear near and medium-term targets could be a step in the right direction, as it can help to drive carbon reduction in key industries until industrial low-carbon solutions can be scaled. At the same time, we need to be mindful (of) how this aligns with other taxonomies, as consistency across jurisdictions is important to investors and lenders.”