Under the Bonnet – A sustainable finance taxonomy for Australia
Following the Australian Sustainable Finance Institute’s (ASFI) Roadmap in 2020 and appointment of a board and executive in 2021, the Institute recently laid out its 2022 priorities – first off the blocks is tackling a sustainable finance taxonomy for Australia. RIAA spoke with ASFI’s chief executive Kristy Graham about plans and progress on the Institute’s taxonomy work.
Can you explain what a taxonomy is and how a taxonomy for sustainable finance would be used?
Taxonomies are a classification system for identifying activities or assets that deliver on sustainability objectives – could be climate mitigation, climate resilience, biodiversity conservation, circular economy. They provide clear, transparent and scientifically credible definitions of sustainable activities to enable the allocation of capital towards these activities and away from activities that don’t meet these definitions.
They are increasingly playing a critical role in sustainable finance policy and regulation in a number of countries including the EU, UK, South Africa, Singapore and the ASEAN region. Canada is also thinking about the role of taxonomies to support the growth and impact of their sustainable finance market.
Taxonomies solve a range of challenges to support growth, impact and therefore credibility of sustainable finance markets. They:
– Translate international goals and objectives into concrete investment opportunities – they outline what a 1.5 degree trajectory looks like in x sector, at the asset or activity level, helping finance to flow towards implementation of the high level commitments they’ve made and have been made by governments.
– Guard against greenwashing – by bringing more integrity and credibility to sustainability claims made by corporates and the finance sector.
– Reduce the transaction costs and market friction of every issuer, investor and ratings agency using slightly different methodologies to compare different financial products and companies. This also helps to overcome the current capability gap facing sustainable finance by mobilising capability to develop the technical screening criteria that are relatively easy to apply by analysts.
– Harmonise the different languages being used across finance and between policy makers, regulators, corporates and finance sector. Taxonomies provide a credible and comparable metric (taxonomy alignment) that can be incorporated into sustainability disclosures to measure the outcomes of activities rather than just the intent.
Creating a sustainable finance taxonomy was just one of 37 recommendations set out in ASFI’s Roadmap in 2020. It’s now a key priority for the Institute for 2022, why is it so important for Australia?
Over the last couple of months, we have been talking to regulators, our members and other parts of industry about how an Australian taxonomy fits within the sustainable finance policy architecture. There is a lot of interest from our members and the Council of Financial Regulators (CFR) for us to accelerate the work, particularly given the pace of international developments.
It was initially planned for 2023. But given the EU reporting requirements are coming in sooner, the sense is that if Australia has not at least started work in this area we will become a rule taker of rules that are not necessarily fit for purpose in an Australian context. We would be accepting internationally set rules that may not be appropriate for our context, particularly with regard to the transition challenge many sectors face.
Ensuring capital flows to the transition required in many sectors of the Australian economy will be a key objective of the Australian taxonomy and we will work with closely with experts and industry groups in Australia and internationally who are thinking through many of these issues.
Without having kicked off the process yet, is there anything you expect might be unique to Australia, or similar to other regions?
Ultimately, everyone wants interoperability between taxonomies. This does not mean they have to be exactly the same, but investors and financial institutions reporting under the taxonomies want harmonisation as much as is possible and we’re working closely with processes happening internationally to ensure this.
The need to explicitly focus on transition through an Australian economy is similar to how we’ve seen the ASEAN and Singaporean taxonomy develop, but slightly different from the EU taxonomy. Something else that is likely to be different for an Australian taxonomy is how we integrate social safeguards and ensure First Nations perspectives are included.
The ASFI process differs from other regions in that it is an industry-led initiative with input from government, as opposed to the other way around. Once developed, how do you see the taxonomy being taken up in Australia, and what is the role of government and regulators in ensuring its success?
In addition to industry support, this work has strong support from the CFR, recognising the importance of a taxonomy that reflects the structure of the Australian economy, and the risks to Australia and our financial system if we are not actively shaping emerging international norms in this area to suit Australia’s interests.
We have a close working relationship with the CFR, including their involvement in the project, and its full weight behind our taxonomy. While it is not a government-driven process, we are conscious of the need to work closely with government and make sure it is invested in the taxonomy. There is also growing interest in the taxonomy work from other parts of government, both state and federal and its role as a tool to channel capital towards transition activities.
We have had conversations with the CFR about pathways to adoption and there is precedent for the Australian Securities and Investment Commission (ASIC) adopting an industry developed code, among other approaches, but by working closely with government and regulators we look forward to continuing these conversations as the work progresses.
Looking ahead two years, can you describe how you see a taxonomy influencing and being used by the Australian finance industry?
The taxonomy and the open and inclusive process being used to develop it will bring many different stakeholders into more nuanced and sophisticated discussions around financing the climate and broader sustainability transition required in Australia.
Once it’s been developed, its adoption by the finance sector, even if voluntary to begin with, will help to drive a convergence in the standards used to report on the impact corporates and financial institutions are having on sustainability issues, helping to drive discussions on ESG and sustainability from one focused on risk management to one focused on impact, with the taxonomy providing the framework to credibly and easily compare the impact of different activities, companies, assets, portfolios and financial products.
What is your greatest hope for the process or the outcome?
That we develop a broadly supported, internationally credible proposal for an Australian taxonomy, that would be used by the finance sector and supported by the Federal and State Governments in Australia. And that in the process it stimulates discussion and activity on what a more comprehensive sustainable finance strategy looks like in Australia so that policy and regulation is aligned to support the growth, credibility and impact of the sustainable finance and sustainable investing market in Australia.
Kristy Graham is Chief Executive Officer at the Australian Sustainable Finance Institute.
RIAA is pleased to be continuing to contribute to ASFI’s work and direction, including as a member of the ASFI Technical Advisory Group.