Towards net zero: Asia’s green transition

Singapore’s commitment to fostering a greener future was further demonstrated at the COP28 climate conference in Dubai in 2023 with the launch of the Singapore-Asia Taxonomy for Sustainable Finance.

As the world’s first multi-sector transition taxonomy for defining green and transition activities across eight key industries, it creates a common definition for sustainable economic activities and a common language for investors, issuers, banks and policy makers. 

It also provides a credible framework for the phase-out of coal-fired power plants, which currently account for almost 60 per cent of power generation in the Asia-Pacific region.

Aligning capital allocation and investments with sustainable goals is vital along the pathway to net zero, but the definition of environmental sustainability can vary widely. 

A taxonomy enables financial institutions to better support a more climate-resilient economy and helps organisations to report on clearly defined sustainable activities related to their projects. 

Singapore focuses on transition

The Singapore-Asia Taxonomy sets out detailed thresholds and criteria for activities that contribute to climate change mitigation across ten focus sectors: energy, real estate/construction, transportation, agriculture, forestry/land use, industrial, information and communication technology, waste, water as well as carbon capture and storage.

Defining “transition” is particularly important in Asia, where the shift towards a net-zero economy is occurring alongside population growth, economic development and rising energy demands. 

“Obviously, there’s a significant interest in fuelling the transition towards net zero, especially in Asia,” says Dennis Lee CPA, partner and deputy industry lead, ESG Practice at RSM Singapore.

“The two largest banks in Singapore, for example, last year reported that their green financing loan books showed more than 30 per cent growth – just in 2023. 

 

"In this part of the world, especially in Southeast Asia, we are still heavily dependent on non-green energy sources, such as fossil fuels and carbon-intensive economic activities. …to truly achieve our climate goals, we need to help industries transition."

 

By 2030, Asia is expected to book about US$150 billion (A$219 billion) in terms of green investment, whereas in the last 20 years, Asia’s green investment portfolio barely exceeded US$40 billion (A$58 billion).”

Bing Yi Lee, partner at PwC Singapore’s sustainability and climate change practice, describes the focus on transition as a defining feature of the Singapore-Asia Taxonomy. 

“In this part of the world, especially in Southeast Asia, we are still heavily dependent on non-green energy sources, such as fossil fuels and carbon-intensive economic activities,” he says. 
“Therefore, to truly achieve our climate goals, we need to help industries transition.”

A taxonomy with traffic lights

To achieve this, the taxonomy features a traffic-light system to classify and distinguish green, amber and ineligible red activities across the focus sectors. Green relates to sustainable activities aligned with science-based pathways. 

Amber includes activities that are already moving toward the green pathway within a defined timeframe, or activities that facilitate the reduction of emissions and help to achieve green eligibility criteria.

“Within the amber category, something unique about the Singapore-Asia Taxonomy is that it not only considers amber ‘activities’ but also amber ‘measures’,” says Bing Yi Lee.

 This measures-based approach seeks to encourage capital investments into decarbonisation measures that will help reduce the emissions intensity of activities and enable them to meet the green criteria over time.

Bing Yi Lee cites the example of chemical manufacturing.

“When evaluating an economic activity – such as the manufacturing of chemicals, you typically evaluate the technical features of the chemical production facility to determine whether it meets the technical criteria or thresholds for green or amber status. 

“The concept of amber ‘measures’ acknowledges that for the chemical facility to become green or transitional, capital expenditure on specific measures is required to achieve that goal. 

“These measures could include retrofitting or revamping equipment used in the production facility. It's about the building blocks needed to achieve the overall green or amber activity.” 

Benefits for business and banks

Michelle Loi, principal consultant, sustainable finance at climate consultancy South Pole, says the Singapore-Asia Taxonomy presents several benefits and opportunities for business and financiers.

“The taxonomy offers a chance for companies to align their financing with green and transition projects through different financial products, such as green bonds and transition loans,” she says. 

“This alignment not only broadens a company’s access to capital, but also enhances their credibility and ensures that the financial transactions that take place are science-based and adhere to best practices.” 

On the flip side, Loi says the taxonomy may enable banks to increase their financing options to clients while providing more clarity and transparency for investors.

 

"The taxonomy offers a chance for companies to align their financing with green and transition projects through different financial products, such as green bonds and transition loans."

 

Bennett Wong, ESG practice leader at RSM Singapore, says the taxonomy also focuses on the need for a just transition.

“The groundbreaking part [of the Singapore-Asia Taxonomy] was to contextualise the thresholds and the operational milestones of the EU taxonomy to South-East Asia’s circumstances, bearing in mind that economies in South-East Asia are also quite different. 

“It’s very agriculture-based and coal is a huge part of the fuel source for South-East Asian economies.”

“The traditional thinking is that, with coal plants, you’ve got existing power purchase agreements, so how do you shut them suddenly without existing stakeholders losing too much of what has already been put in?”

Wong explains that an initial idea was to monetise the process with transition credits, but the new school of thinking requires consideration of the industries and communities that rely on coal plants. 

“You’ve got the grid, you’ve got workers, you’ve got communities that live nearby who are providing workers,” he says. 

“Maybe the idea is not to shut down the plant, but to kind of break it up and identify components where you could potentially monetise. For example, steam turbines within the plant — they could be reused if they were upgraded. 

“This is a different angle from the earlier proposition, which was to shut coal power plants down, and then figure out how to monetise the avoided emissions from that. I think it’s still a developing conversation, especially when it comes to a just transition, but the evolving alternatives seem to take that into account in a more concrete way.”

The growth of national taxonomies

There has been a proliferation of taxonomies in recent years. They are now in place in countries like South Africa, Colombia, South Korea, Thailand and Mexico. 

Malaysia unveiled its Principles-Based Sustainable and Responsible Investment Taxonomy for the Malaysian Capital Market in 2022 and Indonesia launched its Green Taxonomy the same year. 

Taxonomies are currently in development in Australia, while the New Zealand government is seeking advice about the design of its own.

National taxonomies enable countries to tailor their frameworks to local contexts. For example, Colombia has zeroed in on biodiversity in its taxonomy and is focused on the management of soil and land by the forestry, agriculture and livestock sectors. 

However, divergent taxonomies can create significant challenges for both cross-border investors and businesses in navigating multiple and potentially conflicting disclosure and reporting requirements.

“The logic we hear is that we can’t wait for a universal standard to be created, and so we now have a number of taxonomies,” Wong says. 

“The good thing is that they’re all taking reference from the EU taxonomy – it is the mothership – and we’re all adapting it to our own circumstances. 

“I think the evolution could mirror that of reporting standards, where they move towards greater similarity as time proceeds and as we get closer to 2030 and 2050.”

In the meantime, however, Wong says the immediate risk of divergent taxonomies is if multinational companies take advantage of different thresholds. 

 

"The economy is still in flux, taxonomies are in flux and even [accounting] standards are constantly evolving."

 

“An asset that would not qualify for financing under one taxonomy in a particular jurisdiction may qualify for some kind of financing in a different jurisdiction because they have a slightly different taxonomy,” he says. 

“I think that’s the danger, but I think it can be mitigated if it’s the same bank providing the financing. I also think that, eventually, the world will move towards coalescing around a common language and hopefully 2030 and 2050 will be the arbiter.”

Dennis Lee stresses that the Singapore-Asia Taxonomy is principle-based rather than prescriptive. 

“The economy is still in flux, taxonomies are in flux and even [accounting] standards are constantly evolving,” he says. 

“If you look at how ISSB [International Sustainability Standards Board] has moved, it’s a transition between many standards. 

“We have had over 200 ESG standards in the last 20 to 30 years, and it’s now at least converging into a few common languages and, ultimately, into the sustainable, scientific interpretation of financial impact, which is ISSB.

A taxonomy is not a cure-all along the path to a net-zero future, but it will help companies and the broader economy move in the right direction.

“We cannot be presumptuous to think that if we follow the taxonomy, nothing can go wrong,” Dennis Lee says. 

“There will still be the minority that forms alternative views and has other levels of interpretation, but it’s all part and parcel of moving towards the greater goal of managing climate change better by 2050.”

A credible phase-out of coal

The Asia-Pacific region is home to approximately 5000 coal-fired power plants. Michelle Loi, principal consultant, sustainable finance at climate consultancy South Pole, explains that many of them are about 10-13 years old, while the typical lifespan of a coal-fired power plant is about 40 years. 

“This helps to contextualise what the transition means for Asia and why the acceleration of capital is so vital to helping the transition,” she says.

“The Singapore-Asia Taxonomy offers guidance on transition activities related to the early retirement of coal-fired plants. Asia currently accounts for about 60 per cent of global coal use, so if we decarbonise in Asia, it will dramatically help decarbonise the rest of the world.”

The phase-out of coal-fired power plants must be science-based, economically viable and socially inclusive. 

The taxonomy sets out both entity- and facility-level criteria that are aligned to a 1.5°C scenario. This includes ensuring that the electricity generated from the phased-out coal-fired power plants is fully replaced with clean energy within the same electricity grid, and a just transition plan is in place.