First round of public consultation on Australia’s Sustainable Finance Taxonomy

In a major development for Australia’s sustainable finance market, the Australian Sustainable Finance Institute (ASFI) released a public consultation paper on the Australian Sustainable Finance Taxonomy (Taxonomy). The Taxonomy is being developed by ASFI in partnership with the Australian Government.

The core principles guiding the initial development of the Taxonomy are:

• credibility;
  
  
• usability;
  
  
• interoperability; and
  
  
• prioritisation for impact.

With these principles in mind, and drawing on taxonomies across the European Union, the United Kingdom, the Asia-Pacific region and Canada, the Taxonomy will provide a set of common definitions for sustainable economic activities, which can be used to credibly and transparently define sustainable investments in the Australian economy.

This is ASFI’s first public consultation on the Taxonomy and it will be followed by targeted consultations and a further public consultation in Q4 2024.

This Insight is the first of a two-part series on ASFI’s consultation paper. It is introductory in nature, providing an overview of the nature and purpose of the Taxonomy. Detailed insights on the proposals for the three sectors being considered as part of this consultation (electricity generation and supply; minerals, mining and metals; and construction and the built environment) will follow.

What is the purpose of the Taxonomy?

The Taxonomy will provide a system of classification for assessing whether the economic activities of Australian borrowers are aligned with or contribute to net zero and other sustainability goals. Its purpose is to support the flow of capital into sustainable opportunities and the achievement of Australia’s climate, environmental and social objectives, while addressing greenwashing and ensuring market integrity, transparency and fairness.

At least initially, alignment with the Taxonomy will be voluntary, although the Australian Government will consider making compliance mandatory through legislation.

Backed by science

In order for Australia to continue to attract international capital to support its climate transition, it is important that the Taxonomy is recognised as credible within the international capital markets. The Taxonomy has therefore been developed based on internationally recognised, science-backed net zero scenarios published by the International Energy Agency (IEA), together with relevant Australian-aligned scenarios from the CSIRO (and others).

Global interoperability

ASFI is acutely aware of the need for the Taxonomy to be aligned and interoperable with the taxonomies of other jurisdictions. A lack of alignment and interoperability is likely to lead to further uncertainty in the deployment of sustainable finance and capital.

There are currently around 40 taxonomies that have been developed (or are being developed) globally. Although the aim of each taxonomy is the same, there are certain differences, including methods of classification, use of a binary as opposed to a ‘traffic light’ classification system, mandatory versus voluntary compliance (most are voluntary), and different sectoral scopes.

Environmental objectives – the proposed ‘Taxonomy Headline Ambitions’

With international interoperability of sustainable finance in mind, ASFI is proposing that the six environmental objectives of the Taxonomy be aligned (to the extent appropriate in the Australian context) with other taxonomies.

The environmental objectives are:

• climate change mitigation;
  
  
• climate change adaptation and resilience;
  
  
• biodiversity and ecosystem protection;
  
  
• pollution prevention and control;
  
  
• sustainable use and protection of water resources; and
  
  
• transition to a circular economy.

These environmental objectives are expressed as ‘Taxonomy Headline Ambitions’ (or vision statements), which are the broad, aspirational goals linked to each environmental objective. These are not taxonomy-specific definitions or targets. Rather, they provide direction for the initial development of both substantive and ‘Do No Significant Harm’ (DNSH) criteria for all of the environmental objectives covered in the Taxonomy.

In this consultation, ASFI asks stakeholders whether ‘the headline ambitions reflect Australia’s highest national goals for climate and environmental sustainability’.

In-scope sectors

The Taxonomy will initially comprise technical screening criteria addressing climate change mitigation for six priority economic sectors. It will include a framework and minimum social safeguards to ensure activities that positively contribute to climate change mitigation are undertaken in ways that recognise and seek to mitigate impacts on other sustainability objectives and social outcomes.

The six sectors covered by the Taxonomy are proposed to be:

• electricity generation and supply;
  
  
• minerals, mining and metals;
  
  
• construction and the built environment;
  
  
• manufacturing and industry;
  
  
• transport; and
  
  
• agriculture and land.

Of the in-scope sectors, only the first three sectors are being considered as part of the initial consultation. Other sectors will be covered in the next public consultation on the Taxonomy, due in Q4 2024.

Next steps in developing the Taxonomy

The overarching objective of the public consultation is to test and obtain feedback on whether draft taxonomy products align with the core principles established by the Australian Government for the Taxonomy - namely, credibility, usability, interoperability and prioritisation for impact. It is also seeking feedback on the Taxonomy’s headline ambitions.

ASFI is seeking feedback on the draft Taxonomy by 30 June 2024, and has particularly encouraged First Nations to provide feedback, acknowledging that ‘the development of an Australian taxonomy cannot be done well without First Nations people’.

The consultation period is relatively short so we encourage you to consider what the implications of the proposals may be for your business and to make a submission on the areas which are open for consultation. If you would like more information or assistance, please don’t hesitate to contact us.