Singapore vs EU: Similarities and Differences Between Taxonomies
Analyzing the approach of Singapore’s and the EU’s classifications for sustainable finance
Sustainable finance taxonomies play a crucial role in guiding investments towards environmentally and socially responsible activities. Though at different stages of development, Singapore (SG) and the European Union (EU) have both developed taxonomies to support transparency on the sustainability of different economic activities and facilitate sustainable investment decisions¹. In this article, we explore the key similarities and differences between Singapore’s Taxonomy and the EU Taxonomy, in terms of their approach and classification methods.
Differentiating Through a Traffic Light System
The most significant distinction between the two taxonomies lies in Singapore’s adoption of a traffic light system. The SG Taxonomy uses a color-coded classification to categorize economic activities based on their alignment with environmental objectives.
- Green Category: Activities or companies that fall into this category are clearly aligned with the taxonomy’s environmental objectives. They make substantial contributions to one or more environmental goals, such as climate change mitigation or adaptation, without causing significant harm to others.
- Amber Category: The amber category includes transition activities or companies that are not fully aligned with the taxonomy’s objectives but are working towards it. These activities demonstrate a commitment to sustainable practices and are on the path towards full alignment.
- Red Category: Activities or companies in the red category are inconsistent with the taxonomy’s objectives and need improvement or phasing out to be considered environmentally sustainable.
The EU taxonomy, on the other hand, focuses mainly on identifying activities that are already environmentally sustainable, without adopting a color classification system ².
Focus Sectors and Objectives
The Singapore Taxonomy specifically targets eight focus sectors that have the highest environmental impact in the country. These sectors align with those that the EU Taxonomy focuses on, reflecting their similarity in scope. They include: energy, transportation and fuel, construction/real estate, agriculture and forestry/land use, industrial, information and communications technology, waste and water, and carbon capture and sequestration.
The Singapore Taxonomy encompasses five objectives:
- Climate change mitigation,
- Climate change adaptation,
- Protect biodiversity,
- Promote resource resilience and circular economy,
- Pollution prevention and control.
The EU Taxonomy, on the other hand, delineates six objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
Although largely aligned with those of the Singapore Taxonomy, the latter has included the circular economy objective into the overarching theme of resource use, effectively consolidating six objectives into five.
Criteria and Thresholds
Currently, the criteria and thresholds for economic activities in the Singapore Taxonomy are only available for contribution to climate change mitigation. We expect the criteria for the remaining objectives to be added in future developments. The technical screening criteria within the Singapore Taxonomy are similar to those within the EU Taxonomy for many activities. However, there are differences in thresholds based on the specific activity.
For the activities defined within the Singapore Taxonomy for Climate Change Mitigation, we find that:
- 44 activities (70%) of the SG Taxonomy have the same alignment criteria as the EU Taxonomy
- 7 activities (11%) of the SG Taxonomy have different alignment criteria from the EU Taxonomy
- 13 activities (19%) are exclusive to the SG Taxonomy
Despite some differences in criteria and thresholds, the overall approach and objectives of both taxonomies are aligned with promoting sustainable practices and supporting the transition towards a greener future.
While we advocate for higher cohesion between these two frameworks, we understand that achieving perfect harmony may be unrealistic due to distinct market forces, regional nuances, and political contexts. Nonetheless, even if regulatory jurisdictions adapt to their regional imperatives, the broader aspiration should be cross-border regulatory alignment. This is of paramount importance, especially considering the global scope of financial markets that effortlessly span regional borders.
Clarity AI can support current sustainability disclosures for investment firms operating in Singapore, and it’s working on developing a solution to report on the upcoming Singapore Taxonomy, leveraging its best-in-class EU Taxonomy product. Contact our team to know more.
¹ The fourth and final consultation on the Singapore Taxonomy closed on 28 July 2023. We are awaiting the final form of the scope and rules. This analysis is based on the advice of the proposals that have been published to date on the Singapore Taxonomy.
² It is worth noting that the EU taxonomy’s assessment of capital expenditure (CAPEX) and operating expenditure (OPEX) supports the alignment of future revenues and echoes the considerations made for transition activities.