Overview
As global financial institutions (FIs) ratchet up their climate ambitions and pledge to achieve net-zero, it is important that these ambitions are accompanied by transparent and credible decarbonisation pathways. This involves the setting of robust interim targets, as backloading needed measures in the later years increase the risks of missing the net-zero goals. MAS is engaging key international organisations such as the Glasgow Financial Alliance for Net Zero (GFANZ) that are developing decarbonisation pathways backed by science for the financial and real economy sectors. These organisations will work closely with financial institutions in Singapore and the region to support their net-zero and decarbonisation efforts.
MAS also recognises the need to guard against the risk of greenwashing given increasing inflows into sustainable products and funds. Greenwashing can occur at the firm level and product level, such as the overstatement or lack of clarity about a firm’s sustainability commitments, or lack of alignment between the product’s stated sustainability objective versus its actual investment allocations.
MAS seeks to mitigate greenwashing in the financial system through the following enablers, (i) taxonomies to serve as an established, science-based and common reference for financial institutions to determine if an economic activity is green or transition, by enabling activities to be evaluated against specific criteria; (ii) consistent disclosures to ensure that FIs and corporates report the activities conducted and the extent of greenness, and in certain jurisdictions, referencing the taxonomy; and (iii) leveraging technology to obtain real-time data to facilitate timely evaluation of the greenness of companies and activities, and verifying compliance with international standards. MAS’ efforts on disclosures are detailed in the “A Climate-Resilient Financial Sector” section of the Sustainability Report.
Interoperability across different taxonomies
To unlock sustainable finance, we need common definitions for activities that contribute to climate goals. Taxonomies are emerging as a key tool for unlocking green and sustainable finance. By providing clarity to the market on what activities can be considered green or sustainable, taxonomies facilitate the scaling up of green finance.
In January 2021, the Green Finance Industry Taskforce (GFIT) issued a Phase 1 taxonomy for public consultation. The taskforce proposes for the taxonomy to cover five core sectors comprising agriculture and forestry/land use, real estate, transportation, energy, and industrial, which account for 90% of ASEAN GHG emissions and 40% of economic value add, and three enabling sectors comprising information and communications technology, waste/circular economy, and carbon capture and sequestration, whose products and services contribute to the environmental objectives. The GFIT launched a second public consultation in May 2022, which laid out a guiding framework to define green and transition activities and the technical screening criteria in the three core sectors – energy, real estate and transportation. Thresholds for the remaining five sectors will be detailed in a subsequent public consultation. The May 2022 public consultation also incorporates a user guide for financial institutions and companies to apply the taxonomy.
ASEAN Taxonomy Board (ATB)
In March 2021, the 7th ASEAN Finance Ministers and Central Bank Governors Meeting (AFMGM) endorsed the development of a multi-tier ASEAN Taxonomy for Sustainable Finance, to serve as an overarching guide for all ASEAN Member States (AMS), complementing their respective national sustainability initiatives and serving as ASEAN’s common language for sustainable finance. The ASEAN Taxonomy Board (hosted by Sustainable Finance Institute Asia) was established in March 2021 to undertake the taxonomy development.
The ASEAN Taxonomy comprises two tiers, (i) the principles-based Foundation Framework which provides baseline guidance to determine if activities contribute to the Taxonomy’s environmental objectives; and (ii) the Plus Standard, with metrics and data-backed activity-level thresholds to further classify transition economic activities in the 6 focus sectors and 3 enabling sectors identified by the ASEAN Taxonomy Board (ATB).
MAS is the Vice-Chair of the ATB, and Chair of the workstream that is developing the Plus Standard. The first iteration of the ASEAN taxonomy, entitled “Version 1 of the Key Components of the ASEAN Taxonomy for Sustainable Finance”, was published on 10 November 2021 during COP26.
The ATB is conducting a targeted consultation on the ASEAN Taxonomy Version 1 document through 2022. Feedback from stakeholders will inform the next phase of work, which includes the development of guidance under the Foundation Framework for the other environmental objectives (beyond climate change mitigation), as well as the development of activity-level thresholds for the Plus Standard.
Alignment of products with international principles
MAS seeks to promote the development of sustainable finance solutions products that are robust and aligned with internationally recognised principles and standards. The Green and Sustainability-Linked Loan Grant Scheme (GSLS) and Sustainable Bond Grant Scheme (SBGS) require recipients to be aligned with well-established and internationally recognised principles such as the International Capital Market Association (ICMA) Green, Social, Sustainable, and Sustainability-linked bond principles, and the Loan Market Association (LMA) Green and Sustainability-linked loan principles. These principles provide guidance on preserving the integrity of the product by capturing the fundamental characteristics common to each type of ESG product. This includes guidance on the use-of-proceeds of capital raised, level of ambition for target setting, reporting frequency, and external verification. The principles allow for standardisation in the market on what constitutes a green, social, sustainable, or sustainability-linked bond or loan, which in turn discourages the origination or issuance of falsely categorised products that fall short of the guidelines.
To verify that grant scheme applicants adhere to these principles, applicants must obtain external verification of the alignment to relevant principles prior to the inception of the product. For Sustainability-linked instruments with defined Sustainability Performance Targets (SPTs) or targeted ESG ratings scores, applicants are required to seek external verification of their progress towards the fulfilment of the SPTs or attainment of higher ESG ratings on an annual basis.