In recent years, momentum has been building around channeling capital into sustainable projects and economic activities to help the economy and societies become more resilient to climate-related risks. A sustainable finance taxonomy, if done right, will help achieve this, by articulating a set of principles and criteria used to classify sustainable activities and projects. By extension, investment in or funding provided for these activities and projects can thus be classified within ‘sustainable finance’.

In the 2023-2024 federal budget announcement on 21 April, Australian Treasurer Jim Chalmers committed $1.6 million to supporting the initial development of an Australian Sustainable Finance taxonomy, to be done in partnership with the industry and coordinated by the Australian Sustainable Finance Institute (ASFI), a body that RIAA incubated and spun out in 2022. The taxonomy would have the overarching role of guiding the transition of the economy and aligning private investments with sustainability goals and net-zero commitment by 2050. At the same time, jurisdictions worldwide have also started legislating their own definitions of sustainable finance, with more than 30 taxonomies having been developed, 10 of which have been adopted and are functional. This was spearheaded by the EU taxonomy – one of the earliest and most comprehensive taxonomies and linked with compulsory disclosure requirements.

Why the need to have an Australian Sustainable Finance Taxonomy

Opening the panel discussion on ‘What will the Australian Sustainable Finance Taxonomy look like?’, Linda Romanovska, member of the EU Platform on Sustainable Finance, commented that a taxonomy would be a critical tool to allow more capital to flow into both transitioning and developed sustainable activities in Australia. Through the Australian Sustainable Finance Roadmap, the development of which RIAA played an instrumental role in, a sustainable finance taxonomy was identified as high-priority foundational work. The idea received industry-wide support as well as endorsement from the regulators.

Speaking from a regulator’s perspective, Dr Sean Carmody from APRA, who has been actively engaged in the process of taxonomy development, showed support for this work:

‘Each of the regulators came to the issue with a different focus based on our mandate. For example, greenwashing and quality of disclosure is important from ASIC’s point of view [See Karen Chester’s keynote speech here]. For APRA, as the prudential regulators of banks, insurance and superannuation funds, we are interested in risk management and climate change related risks for organisations. The value that a taxonomy brings is that when you report under these frameworks, you have the credibility of science and evidence informed disclosure and consistency such that when you look across organisations whether as an investor or a regulator, you can see who’s doing a good or bad job.’

Dr Carmody also said that a lesson learned from overseas efforts was that a transition category would be crucial for Australia to mobilise capital given the different starting points and sectoral geographical differences across jurisdictions.

Charles Davis, Managing Director of Sustainable Finance and ESG at CBA, spoke to the benefits of having a mandated taxonomy for banks to assist with capital allocation decisions and fair competition in the market. Most banks have sustainability finance targets, but due to a lack of common standards and criteria for assessing sustainable finance activities, banks have been developing their own taxonomies for reporting. Therefore, an industry-wide integrated taxonomy is the direction the broader industry needs to move towards for transparency and credibility. It would not only guide reporting entities but also enable stakeholders to assess reporting on a line-for-line basis.

As global fund managers are facing an increasing number of taxonomies, Sybil Dixon from Vanguard Investments Australia gave her opinion on Australia having its own:

‘Ultimately the objective of the Australian Sustainable Finance taxonomy is that it will be inter-operable. But at the end of the day, it is also a tool for the government to rate finance. So there is a role for the local “accent” if we are speaking about developing a language to talk about sustainable finance reasonably consistently globally. As long as the core of the taxonomy is the same, differences should only come through in the communications permitted around the taxonomy. For example, there is consistent definition of what is “green” but one region may be more revenue-focus.’

Charles Davis also added that on social and biodiversity issues, Australia is in a very different place. The underlying principles and technology should be consistent, but the nature of the taxonomy needs to be regionally embedded.

What will be the direction for Australia’s sustainable finance taxonomy?

Summarising some of the recommendations that came out in the report, Kristie Graham, Chief Executive Officer at ASFI, said the core principles of the taxonomy included usability for broad sectoral coverage, credibility through scientific-based technical screening criteria, inter-operability, and prioritisation of objectives. Other key recommendations involved a transition category underpinned by robust methodology and clear communication. The ‘Do No Significant Harm’ principle from the EU taxonomy would be adapted into the Australian context, especially with respect to First Nations Peoples’ Rights.

The panel also identified a unique feature of the Australian taxonomy which is unlike other jurisdictions where taxonomies remain the creation of the public sector. In the case of the Australian taxonomy, it has to date been led by the private sector, and aims to be informed by best practice as well as decarbonisation pathways of each sector. With this approach, the taxonomy development has now managed to gain credibility with government as well. Going forward, a continued buy-in from diverse stakeholders within and outside of the finance system will be crucial to lend credibility to the work.

On the other hand, the greater leverage given to the private sector raises the question of how to build resiliency for the taxonomy against lobbying from fossil fuel groups and others, as has happened in other countries. This resiliency can come from the process itself, whereby rigorous science-based principles would be solidified before screening criteria are designed, or from the transparency of having a diverse group of expertise across sectors. Sharing her experience working on the EU taxonomy, Linda Romanovska asked:

‘Something we started in the leadership stage of developing the taxonomy is defining the ambition level for each objective we’re addressing. It’s not just about having a scientific base, but we have to have an agreement across the board about what’s the ambition level we try to achieve in terms of climate, biodiversity, etc. So are we looking into what policy commitments Australia has? Can we define that ambition level before diving into developing the criteria? We want industries around the table to have a voice.’

To this, Sybil Dixon added that it is not the ambition of the taxonomy to cover the entire economy. There will be taxonomy-aligned sustainable activities and non-aligned activities, but still sustainable. It’s about providing the incentive and guidance for companies to set targets and understand where they are on the transition.

Wrap-up

• An Australian sustainable finance taxonomy would provide the consistency and credibility in assessing sustainable finance activities, incentivise capital flow and enable fair market competition
• To maintain inter-operability among international taxonomies, there should be consistency in design principles, structure, and objectives but regional and sectoral differences in screening criteria
• Resilience can be built through science-based underlying principles, diverse groups of expertise, and setting out clear ambition levels

Next steps

From 1 July, the Australian Sustainable Finance Institute (ASFI) will begin creating screening criteria for three priority sectors. Technical work related to data requirements, transitional activities, social safeguards, and a ‘Do No Significant Harm’ framework will also be undertaken. To ensure the effectiveness of this work, a Taxonomy Technical Expert Group (TTEG) consisting of 20-25 experts from various fields will be established, including experts on sustainable finance, climate science, industry, policy, and First Nations representation. The Australian Council of Financial Regulators Climate Working Group will oversee this phase of taxonomy development.

<hr>

By Judith Vu, Intern at RIAA.