Sustainability Financing: Taxonomy Proposed for Singapore-based Financial Institutions to Identify "Green" Activities

Increasing interest in green or sustainable finance calls for a recognisable framework on what green or sustainable finance is, which will help financial market participants and their stakeholders compare and assess green or sustainable products and services based on a common understanding.

Against this background, the Green Finance Industry Taskforce ("GFIT") has been convened by the Monetary Authority of Singapore (MAS) to accelerate the development of green finance through four key initiatives: (i) develop a taxonomy; (ii) enhance environmental risk management practices of financial institutions ("FIs"); (iii) improve disclosures; and (iv) foster green finance solutions.

Under the first focus area, GFIT conducted a public consultation to seek feedback on the appropriate taxonomy, as a classification tool, to help Singapore-based FIs identify economic activities that are considered "green" or are transitioning into "greener" activities in sustainability financing. The proposals were set out in the GFIT consultation paper titled "Identifying a Green Taxonomy and Relevant Standards for Singapore and ASEAN" ("GFIT Taxonomy Consultation Paper") made available on the website of The Association of Banks in Singapore (ABS). The consultation closed on 11 March 2021.

Taxonomies for sustainable finance are meant to support an overarching set of environmental goals, and determine whether the activities are consistent with these environmental goals with reference to a threshold or tolerance. By evaluating and classifying activities as "green", based on tolerance thresholds, a taxonomy would:

1. Establish clear criteria for determining activities which are environmentally sustainable;
2. Remove uncertainty as to whether certain activities are environmentally sustainable;
3. Bring clarity to discussions around green and sustainable products; and
4. Alleviate concerns on greenwashing (a process of creating a false or misleading impression that a product is environmentally sustainable).

It is hoped that a taxonomy would provide more certainty and confidence to the market on the classification of green products and services and therefore encourage more capital flows to support sustainable investments.

In the GFIT Taxonomy Consultation Paper, GFIT sought comments on:

1. Whether there is a need for Singapore to have its own taxonomy;


2. The four environmental objectives for the taxonomy, namely: (i) climate change mitigation; (ii) climate change adaptation; (iii) protection of biodiversity; and (iv) promotion of resource resilience;


3. The selection of the economic sectors that are covered by the taxonomy;


4. The proposed "traffic light" classification system for activities within the selected economic sectors by grouping them into three classifications, namely, "green" for activities that are clearly aligned with the environmental objectives of the taxonomy, or undertaking a transition consistent with emissions-reduction pathways aligned with meeting the environmental objectives; "yellow" for activities with a quantifiable and time-bound pathway towards either green or significant de-carbonisation that will contribute to the objectives of the taxonomy; and "red" for activities that are inconsistent with the environmental objectives of the taxonomy; and


5. The treatment of transition activities in the taxonomy.

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