MAS proposes key criteria for early retirement of coal plants, disclosure guidelines for ESG ratings providers
FOR the early retirement of coal-fired power plants to be considered credible, they have to be shut by 2040, demonstrate emissions savings and be replaced by clean-energy production.
These are some of the proposed key criteria for early coal-phaseout projects by the Monetary Authority of Singapore (MAS). They were recently added to the Singapore-Asia taxonomy, the city-state’s national classification system that defines the economic activities eligible for sustainable financing.
Another proposed requirement spelled out on Wednesday (Jun 28) was one suggesting that plant owners have to commit to ceasing development of new coal plants, and be required to come up with a transition plan aligned with limiting global warming to 1.5 deg C by 2030.
MAS launched a second consultation on the same day to establish a code of conduct that requires providers of environmental, social and governance (ESG) ratings and data to disclose how forward-looking considerations are factored into their products.
Announcing the launch of the consultations, Second Minister for Finance Indranee Rajah said these efforts to define and refine the standards and practices guiding financial institutions can create the right architecture to facilitate capital flows towards a more sustainable future.
Early coal phase-out
Including criteria on early coal-phaseout in Singapore’s taxonomy would catalyse green and transition finance flows that would enable the decarbonisation of brown sectors, said Indranee, who was speaking at a conference organised by the International Capital Markets Association.
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As many existing taxonomies focus on what constitutes “green” activities, there is a lack of standardised definitions on what can be credibly considered “transition”, which refers to the greening of brown industries.
Having these definitions would lower the barriers to entry for private capital, since there is an inherent risk of financial institutions being accused of transition-washing if there is no accepted understanding of what constitutes a credible transition.
“Defining ‘transition’ is especially important in Asia, where many economies are still rapidly developing and there is still a growing demand for energy. By covering the transition category, the Singapore-Asia taxonomy is able to cater for the need for significant transition in this part of the world,” said Indranee.
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In response to queries from The Business Times, Eric Lim, chief sustainability officer at UOB, said that the recommendations laid out in the consultation paper would provide a common platform for the multiple stakeholders typically involved in an early coal phase-out project to be aligned.
Among the recommendations, Kurt Metzger, director of energy transition at social enterprise Asia Research and Engagement, said the inclusion of plant-level emission reduction and one-for-one replacement with clean-energy resources by MAS is commendable.
Mike Ng, head of the sustainability office for global wholesale banking at OCBC, said the guidance addresses several aspects of what constitutes a credible phase-out plan in a practical manner, which will help the banks in their decision-making.
However, Lim noted that the feasibility of implementating such transactions at scale will require many factors beyond guidelines. For one, there needs to be strong demonstration from governments on their planned policies and measures to decarbonise the energy sector.
They can show this by identifying coal plants and coal asset owners suitable for an early phase-out and provide that list to financial institutions.
Another key issue brought up by a few observers was how such financing will be counted towards financial institutions’ financed emissions.
On this issue, amending carbon accounting rules to recognise financed emissions from coal transition as a positive activity is necessary for financial institutions, said Metzger.
Nonetheless, Kelvin Wong, deputy head of energy, renewables and infrastructure at DBS Bank, said that the delineation of eligible early retirements as transition finance transactions from pure coal financing plays in the consultation paper would give a degree of assurance to banks when managing associated risks.
OCBC’s Ng said he hopes to see more consideration of the compatibility of such funding with a bank’s net-zero commitment targets.
While MAS’ proposed guidance is a step in the right direction, Metzger said there is “still a long road ahead before the coal transition mechanism becomes mainstream”.
Disclosure guidelines for ESG data providers
MAS also saw the need to develop a code of conduct for ESG ratings providers as it is a nascent industry with evolving regulatory clarity, even as there is growing use of these ESG ratings and data by investors.
The proposed code of conduct seeks to establish minimum industry standards on governance, transparency and management of conflicts of interest. This is to boost market confidence in the use of ESG ratings and data products, in addition to safeguarding against greenwashing risks.
MAS will take a phased and risk-proportionate regulatory approach by making this code of conduct, which was modelled after the International Organization of Securities Commissions’ recommendations, voluntary for a start.
The finalised code of conduct “will enable financial market participants to better understand the use case of ESG products and provide more accurate market-pricing signals relating to transition risks and opportunities”, said Indranee.
A spokesperson from the ESG research arm of index provider MSCI, a main provider of ESG ratings and data, said it maintains a strong culture of independence and transparency when providing these ratings to global investors. It is now reviewing the proposed code of conduct and will respond to the consultation paper.
Investors told BT that the proposed disclosures are unlikely to lead to major change to how they purchase and use the information from these providers, largely because they do not rely on them to make investment decisions to begin with.
There may be exceptions if the disclosures reveal non-compliance by an ESG third-party provider on the way they collect, process and update the data, said Joanne Khew, ESG specialist at asset management firm Eastspring Investments.
Daniel Ng, investment manager of Asian equities at asset manager abrdn, said that its investment process is built on primary due diligence, and that ESG ratings and data from third-party providers function more as a check against how the market views a company’s ESG performance.
Khew echoed similar points on how such data is merely a starting point, before the investment teams apply their in-house evaluation tools, in combination with analysts’ assessments before making a decision.
Nonetheless, both agreed that the proposed code of conduct would improve the rigour of the ESG data provider landscape.
“This is specifically pertaining to areas where minimum standardisation is provided on the source type of primary and secondary data collected, how these are standardised, and the frequency of updates to the underlying data,” said Khew.
ESG analysis may also move away from being an exercise in ticking boxes “towards one that is more holistic and focused on providing insights,” said Ng.
“It will move away from providing a snapshot of what companies look like now, towards what companies could look like in the future, which is valuable for market participants,” he added.
The central bank will continue to monitor global regulatory developments before consulting on a more formalised framework in the future.
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