- The Australian Sustainable Finance Institute (ASFI) has released a paper to support the development of Australia’s first sustainable finance taxonomy
- The new taxonomy will pave the way to address issues in ESG investing such as green washing
- Stockhead reached out to ASFI’s executive officer, Kristy Graham
ESG investing is set to get a boost next year as Australia aims towards passing our first sustainable finance taxonomy.
Earlier this week, the Australian Sustainable Finance Institute (ASFI) released a new report that outlines the key considerations that could become the backbone of an Australian taxonomy to drive investments into our transition to a net zero economy.
ASFI has been working on developing the taxonomy since its establishment in July 2021, recognising the urgent need to mobilise more capital towards the country’s energy shift away from fossil fuels.
To provide technical input, ASFI brought together an expert group of 55 members and observers from across the finance sector.
These include experts from banking, consulting, superannuation, asset management, private equity, ESG market specialists, academics, as well as Australian governments and regulators including the RBA, ASIC, and APRA.
So how does a sustainable finance taxonomy exactly help our transition to net zero?
Well firstly, a sustainable finance taxonomy is effectively a set of definitions on economic activities or assets that are considered sustainable, which can be used to define sustainable investments credibly and transparently to stakeholders.
In other words, a taxonomy makes it easier to identify investment opportunities and guide capital where it’s needed most to achieve climate, environmental and social objectives.
They also provide the finance sector the confidence and assurance of sustainability claims, enabling comparability between investment products and portfolios and reducing transaction costs.
For ESG investors, the new taxonomy will address the issue of greenwashing by enabling them to identify funds which are falsely labelling products.
The taxonomy is expected to become one of the main tools to help investors understand whether an economic activity is environmentally sustainable.
“Science-based and credible”
ASFI Executive Officer Kristy Graham says “the strongest and most consistent messaging from our research and consultation is that the taxonomy must be science-based and credible.”
This is critically important to ensure that our Taxonomy provides a common language that could be operated alongside those already exisiting in other international markets.
It should give banks and insurers confidence in their sustainability claims as they design new products, make sustainability commitments, and prepare their disclosures.
“Taxonomies have been used alongside disclosures as a way to give the market a credible basis on which to make claims about the sustainability credentials of financial products,” Graham told Stockhead.
Graham explained that in some countries, governments are leading the development process but in others, industry or the finance sector are much more involved.
“In Australia, ASFI has been developing the taxonomy as an industry-led initiative, but in close collaboration with the government,” said Graham.
Are we reinventing the wheel?
Europe is by far the world leader when it comes to green taxonomies.
EU’s taxonomy for sustainable activities was published in June 2020, and entered into force on 12 July 2020.
Under the Taxonomy Regulation, the Commission came up with a list of environmentally sustainable activities by defining technical screening criteria for each environmental objective.
Around 20 other jurisdictions globally are also either in the process, or will have developed a taxonomy soon.
Graham said Australia will pretty much be following the blueprint that’s already been laid out in those jurisdictions.
“Because capital markets are global, you want international interoperability between all of these frameworks that are being developed elsewhere,” said Graham.
“ASFI will be using and adopting what we can from other jurisdiction rather than reinvent the wheel, but we’ll also work out where there are areas we need to do additional work in.
“We’re confident we’ll be able to achieve international interoperability while considering Australia’s unique economy circumstances and starting position.”
What becomes of fossil fuel and nuclear energy?
On 6 of July 2022, the European Parliament voted to allow gas and nuclear energy to be labeled as green investments under the EU Taxonomy framework.
This means that going forward, these resources will be considered sustainable and, consequently, suitable for investment through ESG-labelled funds.
Experts have criticised the move as a knee jerk reaction, accusing politicians of succumbing to Russia’s energy blackmail.
Back home, ASFI is expected to release another paper in December which will address the framework and process around the labelling of Australia’s own energy mix – including the labelling of fossil fuels and nuclear energy.
That paper will be followed up by a public consultation process in February or March next year, which then lead to a Phase 2 paper where the recommendations will be scrutinised by participants from the industry.
Australia’s big four banks are sure to have a lot of input into this process, as they’re expected to face increasing anger from shareholders over funding fossil fuels during the coming annual meeting season.
Asked what the Big Four’s feedback has been during the last process, Graham said members have been very supportive.
“All members have been very involved in this process, both on the steering committee as well as the technical advisory group,” she said.
“All of them have been very supportive of having a clear and consistent framework to support them making sustainable financing decisions.”