Singapore taxonomy tries to unlock amber’s potential

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??This week: The Singapore Green Finance Industry Taskforce has launched a follow-up consultation on the Singapore Taxonomy for sustainable finance, and is proposing a “measures-based approach” to transition activities.

The Singapore Taxonomy uses a traffic light model that categorises activities as green, amber or red, depending on how aligned they are with climate goals. The amber category is for those that are appreciably moving towards green or facilitating significant emissions reductions in the short term, which is of particular importance in South-east Asia where sustainability is still developing.

The problem lies with defining what counts as amber. To be able to say that Cement Plant A belongs in amber and can therefore obtain transition financing while Cement Plant B is red and cannot be funded, the authors of the taxonomy and investors need to figure out whether there is a realistic emissions pathway for cement plants in the relevant markets to transition to green. But it is almost impossible at the moment to draw a credible pathway in many South-east Asian markets because of a lack of good data and research.

Like Jurassic Park (the original 1993 film version), there’s a lot of potential trapped in amber; they just need to set it free.

Waiting for the data and research to arrive is not a great solution, because of the urgency of the climate crisis and the needs of the region. The economies of South-east Asia are still extremely brown, and there’s a shrinking window of opportunity to green them and still achieve the Paris Agreement climate targets.

Instead of waiting for enough information to draw that amber-or-red emissions threshold, the Singapore Taxonomy is instead providing a list of qualifying measures that are expected to significantly reduce emissions.

Furthermore, these “amber” zones will be sunsetted, which means that past a certain date there will only be green or red.

The hope of course is that this will end up better than Jurassic Park (again, the original 1993 film version).

The measures-based approach seems like a practical way to solve the problem of threshold uncertainty. It’s saying, in a way, that it doesn’t matter what your starting point is or how quickly you need to decarbonise, if you’re doing something that meaningfully reduces your emissions, you can obtain transition funding. This could be hugely impactful in South-east Asia, where the transition financing needs are as great as the ability to satisfy the bureaucratic need for precise impact measurements and thresholds is small.

Sunsetting is a critical feature in this model, because it limits how much freeloaders and underperformers can benefit from the system. Going back to the example of basic chemicals manufacturing: The amber category for this sector ends in 2035, so currently non-green borrowers must make enough progress by then to qualify for green financing or they will be shut out.

?? Top ESG reads:

1. It’s a crossroads year for voluntary carbon markets, and Asia-Pac companies are doubling down to “wait and see” if the industry’s coming standards can overcome a crisis of confidence, says Bain.
2. What does it mean to account for natural capital? Olam’s annual report offers a glimpse into putting a dollar value on impact.
3. Frasers Property Ltd’s Australia arm’s financing is now fully green or sustainability-linked after finalising terms for a five-year, A$340 million and US$75 million sustainability-linked loan.
4. ESG jobs in banking are growing despite a wave of layoffs in the industry, according to Barclays analysts.
5. Thailand is following the footsteps of other Asian countries to restrict plastic waste imports, with a full ban from 2025.

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