The Australian Sustainable Finance Institute (ASFI) has continued its evolution with financial support for its much touted Sustainable Finance Taxonomy being announced in the federal budget.
ASFI will receive $1.6 million to support delivery of the taxonomy, which is a vital step in preparing the Australian finance sector for the next stage of sustainability disclosure rules which are emerging globally.
But of course ASFI is working on more than just the taxonomy, the organisation released a wide-ranging ‘Roadmap’ in late 2020 which covers the ambitions of the organisation.
OnImpact spoke with CEO of ASFI, Kristy Graham, about her plans post-budget, as well as how the taxonomy will integrate the views of impact investors.
Strong Support for ASFI from Federal Government
The Federal government has committed funds to work with ASFI on the taxonomy, and while the organisation has always had strong connections to the public sector (Kristy Graham was previously Director of Private Finance at DFAT) this funding allocation formalises the relationship.
“Collaboration between government and industry will play a central role in the next phase of the taxonomy project, with the Government co-funding ASFI to lead the taxonomy’s development.” Kristy says.
“In this development phase of the project, ASFI will convene a new Taxonomy Technical Expert Group (TTEG) comprising experts in sustainable finance, climate science, industry, policy, and Indigenous representation to oversee the development of screening criteria and other products with input from taxonomy and sustainability specialists.”
ASFI has close ties to industry, and is a powerful convening force, but it will be important to then link these insights to the government’s broader agenda.
“ASFI will also undertake comprehensive stakeholder engagement across key sectors. The Australian Council of Financial Regulators Climate Working Group (the CWG) will oversee this phase of the project, as part of its role supporting the development and implementation of the Government’s Sustainable Finance Strategy. Led by Treasury, the CWG will review outputs and provide feedback on the taxonomy’s development to facilitate alignment with the Government’s key sustainable finance policy objectives, and wider market and regulatory developments in sustainable finance.” Kristy says.
A Global Movement, With an Australian Accent
The Australian taxonomy operates amid a global movement in which developed economies are making their own moves to reform the way the finance industry measures and manages its broader impacts.
The Australian economy is unique, which means its taxonomy will also need to be. The word ‘transition’ will be central to the Australian model. Our economy remains heavily dependent on exporting fossil fuels, and the pathway beyond that will need to be managed.
“The Australian economic context is unique in that we have a carbon-intensive economy, with the majority of gross value added (GVA) derived from sectors such as mining, construction and manufacturing. We are also a net recipient of direct foreign investment, meaning that we are highly exposed to changes in international policy.” Kristy says.
“This is important to note, as many of Australia’s top exports are from high-emitting industries, including mining and agriculture, and are highly vulnerable to the global transition to a low-carbon economy. However, we also have the potential to be a significant producer of the inputs, materials, products, and services needed in a net zero and sustainable global economy. For example, Australia is well-placed to take advantage of rising demand for renewable energy exports, including access to abundant natural resources, a track record in building large-scale energy industries and a reputation as a proven partner to Asia’s biggest energy importers.”
The devil is in the detail, and there will be plenty of debate and discussion about the nuance of the system. This is an important part of the process, and it will also be useful to ensure unintended outcomes are mitigated for communities that have not historically had a voice in financial policy-making.
“There are some sectors, such as mining and minerals and agriculture that aren’t covered by the EU taxonomy and so Australia will need to develop criteria for these sectors. There are others, like energy, where our starting point for the transition is quite different from other countries and so while our end goal is the same, our transition pathway to get there will look different, which is the ‘Australian accent’.” Kristy says.
“Further, many taxonomies internationally apply additional qualifying criteria to ensure the achievement of one taxonomy objective does not come at the cost or harm of other environmental, social or governance considerations. In the Australian context, it will be especially important to incorporate minimum social safeguard requirements that ensure the protection of First Nations rights and heritage.”
How Will Impact Investing Be Treated?
Impact investing is a specialist approach, the sector has already done a lot of work fine-tuning norms and frameworks. But the approach is focussed on ‘sustainability’ and in this first iteration, it will be looking at environmental impacts and the imperative to slow climate change.
“The purpose of a taxonomy is to provide clarity and consistency around what constitutes as a ‘sustainable’ economic activity in order to guide capital to support the achievement of Australia’s climate, environmental and social objectives.” Kristy says.
“Social impact investing has developed impact measurement and management frameworks that help to guide how impact is considered, measured and reported, however these frameworks generally don’t measure whether a particular activity, asset or investment product contributes to the national social goals in a country. Social taxonomies will build on the work already done in social impact investing to support the finance sector to credibly and consistently assess and report on the social impact that activities, assets and financial products are creating.”
There is hope that the social aspects of financial disclosure will get its own treatment.
“While the initial phase of the Australian sustainable finance taxonomy work will focus on climate and then broader environmental objectives, a social taxonomy is something being considered in a number of countries, including Australia, to support greater allocation of capital towards social impact.” Kristy says.
Integration with Emerging Global Norms
The ISSB is an emerging accounting approach for how companies and investors should disclose their environmental impacts. If Australia wants to engage with this kind of policy, it will need to have clear definitions of terms, and offer industry a standard. This means the taxonomy must come first.
“The ISSB standards require disclosure of sustainability risks and the impact these have on the financial value of enterprises, however taxonomies are tools that allow consistent and credible reporting of the impact of enterprises on sustainability objectives such as climate change mitigation and adaptation, biodiversity, or circular economy. In some countries taxonomy alignment is a common metric that is required for sustainability or climate disclosures, and taxonomy alignment of Capex can be a valuable metric to assess implementation of transition plans.” Kristy says.
“Two guiding principles in the taxonomy’s development are credibility and international interoperability. Capital flows are global, and the taxonomy should be aligned to international approaches, while acknowledging Australia’s unique context. To support this, it will be crucial to consider common global frameworks and reporting standards, including the ISSB and the Taskforce on Climate-related Financial Disclosures (TCFD). Taxonomy reporting can be integrated into reporting done under these frameworks to provide a comprehensive assessment of performance across sustainability and environmental objectives.”