Australia’s Sustainable Finance Taxonomy set to bolster net zero investments

Much more than a classification system, Australia’s highly anticipated Sustainable Finance Taxonomy is set to be a key accelerator of investment into net zero activities and assets.

Meticulously designed, the taxonomy includes world-first features that meet challenges unique to Australia, and provide much greater certainty to climate capital both here and overseas.

The Australian Sustainable Finance Institute (ASFI) developed the taxonomy in response to compelling and widespread calls from finance sector leaders for clarity on ‘green’ investments.

For ASFI’s inaugural CEO, Kristy Graham, the ask was clear, “When I started in this role four years ago, everyone – the big banks, superannuation funds, the RBA and Treasury – was calling for a classification tool to engender confidence in claims about sustainability credentials.

“Investors and other capital allocators want to know exactly what activities and assets will enable them to reach net zero commitments, and at what point. That's what the taxonomy does,”

Kristy Graham

ASFI CEO

“They said if we have a clear and consistent understanding of what is classified as green, it will unlock a significant amount of domestic and international capital for transition activities and assets.”

There was a particularly strong demand for measures to alleviate the risk of greenwashing, which the finance industry saw as stifling the deployment of capital into decarbonisation.

“Investors and other capital allocators want to know exactly what activities and assets will enable them to reach net zero commitments, and at what point. That's what the taxonomy does,” Graham says.

Bridging sustainability and finance

To ensure confidence in the taxonomy, ASFI developed a rigorous collaboration, co-design and consultation process, with trust-building transparency embedded.

This brought together experts in finance and sustainability, including the CEFC, and a range of sectors key to the Australian economy. The Council of Financial Regulators provided governance oversight, further assuring integrity and credibility.

The taxonomy’s evolution was additionally supported by Treasury, the RBA, ASIC and APRA, and ASFI drew upon the expertise of the Climate Bonds Initiative to guarantee compatibility with international best practice.

“It was a colossal effort, but we’re now seeing that Australia’s taxonomy is more fit for purpose than others that haven't had such a collaborative development phase,” Graham says.

Nicole Yazbek-Martin, Executive Manager: Sustainability Standard, led ASFI’s stewardship of the project. Alongside Graham, both have deep expertise in sustainability and finance, as well as an understanding of the perspectives and opportunities different stakeholders bring to the net zero challenge.

Graham's passion to make a meaningful contribution to global decarbonisation has led her from a deforestation program in South America, to development initiatives in the Pacific and sustainable finance roles in London.

She says a defining moment in her career came while working in Bolivia for a local NGO funded by European governments.

“That’s when I understood the power of finance to shift real world outcomes, and was driven to work in London to learn more about the power of the finance sector to solve sustainability challenges,” she says.

Leading the world in decarbonisation clarity

It was always a goal for Australia – as a small, open economy – to have a taxonomy that’s interoperable with international versions so we can attract overseas funds.

But rather than a cut and paste, find and replace, version of the EU’s taxonomy, Australia’s has been a global frontrunner in its inclusion of the vital but difficult to abate mining and agriculture sectors, as well setting expectations of engagement with First Nations peoples.

Significantly, the Australian Sustainable Finance Taxonomy is also leading the world with its intentional, science-based focus on transition, rather than simply classifying activities as ‘green’ or ‘not green’.

Stemming from that is the taxonomy's inclusion of decarbonisation measures, such as how to get a steel mill, cement plant or mining operation to where they need to be by 2050.

Graham says this unique approach is attracting a lot of interest internationally.

“They're all thinking about how they credibly define what is and what isn't supporting the transition,” she says.

“We're all starting from different points, but how we get capital to support transition measures is crucial.”

Piloting to take-off

Just a few months since its release, ten financial institutions, including the major banks and the CEFC, have joined the voluntary taxonomy pilot program, testing adoption and implementation alongside several other organisations.

Among the ways it’s already starting to be employed is as a framework for labelling sustainable debt, and as a criteria to assess the alignment of investment portfolios with sustainability targets.

As the pilot progresses, ASFI continues to scope how the wide-ranging tool can be implemented more broadly and, along with the CEFC, provide guidance on its use.

Strong market exposure

Graham says there has been a huge ripple effect throughout Australia’s finance sector from the CEFC’s involvement with the development and use of the taxonomy.

“The CEFC team has played an incredible leadership role, as well as providing strong relationships and exposure into the market,” she says. “The range of different ways that the CEFC is looking to apply the taxonomy will demonstrate it is far more than just a green bond framework.”

Adaptation and resilience

As the taxonomy gets set to move beyond the pilot stage, there is already strong demand from the finance sector for a more comprehensive framework.

“Given there’s a certain amount of warming locked into the system, there’s appetite for more granular criteria on assets and activities that will support climate and adaptation resilience,” Graham says.

Global capital markets have been building expectations for this type of information for about a decade, and the shift is only accelerating, particularly in Australia, Europe and Asia.

“The purpose of the taxonomy is to make sure we can capture the opportunities presented by that shift and attract the capital we need. It is very much an opportunity identifier, for both domestic and international investors.”