MAS Advances Its Green Finance Strategy, Proposes Green Taxonomy
The Green Finance Industry Taskforce (GFIT or the Taskforce) of the Monetary Authority of Singapore (MAS) is consulting, until March 15, 2023, on the third and final version of the green and transition taxonomy for financial institutions in Singapore. GFIT will finalize the taxonomy by the first half of 2023. In another update, the International Swaps and Derivatives Association (ISDA) published a paper that examines MAS work toward the regulatory framework for sustainability-linked derivatives in Singapore.
Proposal on Green and Transition Taxonomy
This third consultation builds on the two earlier rounds of GFIT consultations in January 2021 and May 2022, which proposed thresholds and criteria for the energy, transport and real estate sectors. The eight sectors covered within the taxonomy account for close to 90% of greenhouse gas emissions in South East Asia. This third consultation seeks views on the detailed thresholds and criteria for the classification of green and transition activities in the remaining five sectors: Agriculture and Forestry/Land Use, Industrial, Information and Communications Technology, Waste and Water, and Carbon Capture and Sequestration. This proposal covers the adoption of a “measures-based approach” for the industrial sector. The measures-based approach aims to determine science-based metrics and thresholds for the “amber” category based on the emissions performance of the activity. The approach requires the production process of the industrial raw materials to adopt a range of emissions reduction measures. In addition, the Taskforce is seeking views on the “Do No Significant Harm (DNSH)” criteria. The five environmental objectives under the taxonomy are climate change mitigation, climate change adaptation, protect healthy ecosystem and biodiversity, promote resource resilience and circular economy, and pollution prevention and control.
The Taskforce has adopted a traffic light classification system to differentiate the contribution of an activity to climate change mitigation, which is one of five environmental objectives under the taxonomy. A key feature of the taxonomy is the thresholds and criteria it sets out for transition activities, that allow for a progressive shift toward a net zero outcome across different sectors:
- A green classification represents activities that contribute substantially to climate change mitigation that is consistent with a net zero outcome or that are on a pathway to net zero by 2050.
- An amber classification represents transition activities, including those that are either transitioning green within a certain time frame or enabling significant emissions reductions in the short term.
- A red classification represents harmful activities that are not currently compatible with a net zero trajectory.
Paper on Regulatory Framework for Sustainability-Linked Derivatives
The paper on intends to describe the potential approach of MAS toward regulation of over-the-counter (OTC) sustainability-linked derivatives and provides guidance to help market participants develop their own assessments. It covers two categories of sustainability-linked derivatives: in Category 1, performance indicators and related cashflows are embedded within the derivatives transaction while in Category 2 derivatives the key performance indicators (KPIs) and related cashflows are set out in a separate agreement that references the underlying derivative transactions for setting the reference amount to calculate the KPI-linked cashflow. The paper also discusses the related compliance issues if Category 1 and Category 2 sustainability-linked derivatives are considered OTC derivatives contracts. Certain Singapore-licensed banks that are incorporated in Singapore and their subsidiaries are required to ensure their financial contracts governed by foreign laws (that is, laws other than Singapore law) contain enforceable contractual provisions suspending termination rights in the event of resolution. To the extent a sustainability-linked derivative is an OTC derivatives contract, a Singapore-licensed bank subject to the contractual stay requirement would need to ensure compliance with these requirements when entering into sustainability-linked derivatives.
Keywords: International, Asia Pacific, Singapore, Banking, Derivatives, ESG, Climate Change Risk, Sustainable Finance, Green Taxonomy, GFIT, Sustainability Linked Derivatives, ISDA, MAS
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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