The coal to green transition plays a vital role in reducing global greenhouse gas emissions. The transition will not be possible without adequate financing. However, challenges lie in crafting credible and just coal phase-out guidance that sufficiently allays concerns among financial institutions regarding the financing of such projects.
Seeking to meet this challenge, on 28 June 2023, the Monetary Authority of Singapore released the Fourth Green Finance Industry Taskforce (“GFIT“) Taxonomy Consultation Paper (“Consultation Paper“) which sets out the criteria for financing the early phase-out of coal fired power plants (“CFPPs“) under the Singapore-Asia Taxonomy. The criteria are aligned to global science-based 1.5°C-aligned decarbonisation pathways, and take into consideration other guidance such as the ASEAN Taxonomy, and the “The Managed Phaseout of High-Emitting Assets” report by the Glasgow Financial Alliance for Net Zero. The consultation period closed on the 28 July 2023.
Due to the complexities surrounding the assessment of the credibility of early coal phase-out, it is proposed that early coal phase-out is not classified using the Singapore-Asia Taxonomy’s traffic light system.
Instead, the Consultation Paper proposes:
- A hybrid approach that marries the taxonomy approach with a transition planning approach.
- Facility level criteria (taxonomy approach) apply to the CFPP facility and determines the level of ambition for the early coal phase-out process.
- Entity and system level criteria (transition planning approach) apply to CFPP owners and provides the necessary safeguards to protect against undesirable outcomes.
2. Only if all the criteria are met will the managed coal phase-out process be considered aligned with the Singapore-Asia Taxonomy and eligible for transition finance.
It is proposed that after 2025, a revised criteria accounting for new developments in the field should be adopted.
The Consultation Paper’s proposed addition to the Singapore-Asia Taxonomy is the latest regional guidance in support of early coal phase-out being eligible for transition finance. The ASEAN Taxonomy was the first regional taxonomy to introduce coal phase-out as an activity eligible to be classified as sustainable. You may read our Legal Update titled “ASEAN Taxonomy V2: Enabling a Just Transition Towards Sustainable Finance Adoption by ASEAN” here. Recently, Glasgow Financial Alliance for Net Zero also launched a public consultation on its proposed set of voluntary guidance for financing the early retirement of CFPPs in Asia Pacific.
As the demand for energy transition mechanisms is gaining momentum, a financing framework that provides clear guidance for a credible and just transition is crucial to push climate action. A credible and just framework will enable an acceptable ambition level and the right level of technicality to be set to prevent greenwashing, and which will help transition financing to be scaled up with confidence.
Given the institutional support to turn coal green, financial institutions should carefully consider the Consultation Paper and take the opportunity to review their policies towards the funding of early coal phase-out. For the financial institutions which are also listed on the Singapore Exchange, this may potentially have an impact on their sustainability reporting and disclosures (including as to its sustainability strategies, goals, and targets) to the market.
For corporations with CFPPs in their portfolio, this is a good opportunity to review their strategies on the phasing out of these assets as well as access to transition financing to facilitate a potential move to renewable energy production systems. Companies that manufacture or service low carbon power generation could also be involved in the transition through strategic partnerships to help corporations with CFPPs meet the one-to-one replacement criteria.
For more information, click here to read the full Legal Update.
