Navigating the world of sustainable finance, transition finance, and taxonomies can feel a bit overwhelming. But don’t worry! We are here to help you understand these important concepts as you embark on your sustainability journey.

What is Inside This Article?

• Explaining Sustainable Finance Taxonomies
• Wondering what Transition Finance means?
• Overview: Hong Kong Taxonomy
• Overview: Singapore-Asia Taxonomy
• How does all this impact your company?
• How can OCBC help you seize emerging sustainability opportunities?

What is a Sustainable Finance Taxonomy?

Think of taxonomy as a classification system that outlines what economic activities align with a net zero trajectory by 2050 and other environmental goals.

Here is why it matters:

• Defining ‘Sustainable’: A taxonomy helps clarify what qualifies as sustainable in the market; reducing the risk of green-washing.
• Building Investor Confidence: It assures investors that their contributions are making a positive impact and not causing harm.
• Setting Clear Guidelines: A well-designed taxonomy lays out environmental objectives, sectors, and activities that are in scope, complete with metrics and thresholds (often called Technical Screening Criteria, or TSC) to guide financial institutions and corporates in classifying activities as green or transitional.

This clarity is crucial for facilitating transition finance and moving towards a cleaner, and greener economy.

What is Transition Finance?

Transition finance is all about helping high-emitting and hard-to-abate business activities or industries decarbonise. These industries can include aviation or steel for example, where solutions aligned with a net zero economy are not always currently economically feasible.

While there’s ongoing debate about its exact definition, the core idea revolves around financing short-term emissions reductions.

Taxonomies that incorporate transition finance aim to clarify what this financing looks like and how it can be applied.

What is the Hong Kong Taxonomy?

With the need for green and sustainable finance growing, governments and financial institutions worldwide are recognising the importance of standardised frameworks, like taxonomies, to direct capital towards sustainable activities.

In May 2024, the HKMA introduced the Hong Kong Taxonomy, designed to give financial professionals and other stakeholders a consistent and globally recognised definition of “green” and “environmentally sustainable” economic activities.

Here are some key features of the taxonomy:

• Guided by Science: This taxonomy aligns with the Paris Agreement, focusing on climate change mitigation as its central objective.
• Clarity and Verification: Its goal is to provide clear criteria for what can be considered ‘green,’ helping to verify claims and reduce the risk of greenwashing.
• Ambitious Thresholds: The thresholds reflect the global need to transition to net-zero emissions by 2050, promoting significant decarbonization efforts.

While the Hong Kong Taxonomy doesn’t cover transition finance for now, it’s a living document. The HKMA has said it plans to expand its coverage to include more sectors and activities in the future.

About the Singapore-Asia Taxonomy

The Monetary Authority of Singapore (MAS) introduced the Singapore-Asia Taxonomy in December 2023. This is the world’s first multi-sector transition taxonomy.

The Taxonomy provides a clear classification system to ensure that companies align with Singapore’s and the region’s environmental goals. It’s all about supporting the Paris Agreement’s aim to keep global temperature rise to 1.5°C above pre-industrial levels.

The Taxonomy focuses on both green and transition activities and is built around five key environmental objectives. The first version highlights economic activities and technical screening criteria specifically for climate change mitigation, with more objectives to come in future updates.

One of the standout features of the Taxonomy is an intuitive traffic light classification system. This system makes it easy to identify activities based on their environmental impact:

• Green Activities: These activities are at near-zero emissions or are on a pathway aligned with the 1.5°C target and are the eligible projects that can qualify for green loans or bonds.
• Amber Activities: Not quite green but are still contributing to important emissions reductions! Amber activities are currently not on the 1.5°C pathway, but they contribute towards a more sustainable future. Most of these activities are eligible for transition financing until a sunset date of 2030.
• Red Activities: These are the activities that don’t meet the green or amber criteria and are not eligible for sustainable finance.

What Does This Mean for Your Company?

1. Align Your Investments with Green or Transition Criteria
   

   Taxonomies offer a fantastic opportunity for companies like yours to align investments and activities with credible, science-based criteria for green and transition efforts. By doing this, you not only enhance the credibility of your climate strategy but also show your investors and stakeholders that you’re committed to the climate transition. Plus, you will be future-ready and aligned with Hong Kong’s goal of carbon neutrality before 2050!

2. Leverage Green and Transition Financing Solutions
   

   Want to support your transition goals? Taxonomies are here to help! By aligning your financing with green and transition investments, you can tap into sustainable financing solutions like green and transition loans and bonds. This way, you gain access to a wider range of capital from financiers focused on sustainable investments. It’s a win-win: your projects gain credibility, and your financing aligns with best practices!

How Can OCBC Help You Capture Emerging Sustainability Opportunities?

1. Assess Your Alignment with Taxonomy Criteria
   

   If you are feeling overwhelmed by taxonomies and their criteria, don’t worry! OCBC is here to guide you. We can help you understand how to align your financing and investments with the Taxonomy’s green or transition criteria, setting you on a path towards a future-ready, low-carbon economy.

2. Offer Credible Transition Financing Solutions
   

   OCBC can help you structure robust sustainable and transition financing solutions that meet the Taxonomy criteria. We can support you in developing dedicated Sustainable and Transition Financing Frameworks so you can explore multiple financing options that align with your transition strategy and climate aspirations.

3. Support You on Your Climate Transition Journey
   

   At OCBC, we’re well positioned to partner in your climate transition journey! With our expertise in international taxonomies and our partnerships with industry players, we can help guide you. Together, we can figure out where you are in your sustainability journey and what steps to take next to align with recognised decarbonisation pathways.

Listen to Our Podcast!

Join our experts as they dive into the Singapore-Asia Taxonomy! In this episode, Ong Shu Yi, our ESG Analyst, and Alyssa Ng, the Director of our Global Wholesale Banking Sustainability Office, share insights on the Taxonomy and what it means for both OCBC and our clients. Don’t miss out—tune in now! (English only)

Why It Matters:

Did you know that a long-term average temperature of above 1.5°C  for the planet could lead to serious climate impacts like more frequent droughts, heatwaves, and heavy rainfall? To keep our planet’s temperature below this limit, we need to achieve net zero emissions by 2050. This means significant decarbonisation across all sectors. Let’s work together to make a difference!