Australia’s Sustainable Finance Taxonomy: Driving Capital Toward the Sustainable

The Taxonomy: A Closer Look

The Australian Sustainable Finance Institute — whose membership encompasses financial institutions, peak bodies (trade organisations) and academics, among others — was established in 2019 to ensure funding from the nation’s financial services system flowed toward initiatives that build a “sustainable, resilient and inclusive Australia.” The ASFT is ASFI’s product, intended to help address greenwashing (making false sustainability claims) and to facilitate Australia’s transition to net zero carbon emissions.

The ASFT will initially include criteria specific to each of six priority industrial sectors: electricity and energy, industry, built environment, transport, resources, and agriculture and land. 

In support of Australia’s commitment to net zero greenhouse gas emissions by 2050, the taxonomy will:

• Supply guidance for and foster consistency among businesses, investors and regulators
• Improve transparency and support development of sustainable finance products
• Provide consistent terminology for sustainability initiatives
• Help define how economic activity will change over time

A common language: The taxonomy will achieve these goals by providing a common language as the basis for identifying opportunities and creating sustainable assets and initiatives. It will also facilitate comparisons among investment products and portfolios by assuring sustainability claims.

The ASFT will be available by this year’s end. This initial version will define two types of activities — “green” or “transition” — to mitigate climate change and will include criteria to “do no significant harm” and to provide a “minimal social safeguard.” From mid-2025 onward, the Australian Government will consider additional use cases for the ASFT and will consider extending it to encompass additional sustainability objectives in the future.

Source: Sustainable Finance Roadmap, Australian Government, The Treasury, 2024.

How Will Businesses Be Impacted?

The ASFT is a phenomenon of finance driving new behaviours in business, but it will eventually be backed by regulatory authority. At the same time, the ASFT will be a powerful tool for businesses to understand their own sustainability as well as their ability to obtain green funding.

Adopting the ASFT goes beyond reporting; it will classify what activities qualify as sustainable by measures that businesses, investors and regulators hold in common. 

• Not just words: It won’t suffice to apply new terms to the same data as an afterthought. To acquire green funding in the future, businesses will have to ensure their operations are sustainable according to the criteria defined in the taxonomy. 
• Changes to products and services: In addition, they’ll have to collect the requisite data to demonstrate taxonomy alignment — and this implies deep changes to embed ASFT considerations in the design of products and services, and how data is collected. 
• Process changes: Aligning an entire business with ASFT will call for cultural and operational change as well as modifications to processes and data structures. There will be some overlap with the metrics and data businesses already use in greenhouse gas emissions and other reporting. Leaders will want to identify efficiencies where they can.
• Beyond the enterprise: Leaders will want to consider their organisations’ roles in the supply chains of their trading partners. These partners will be seeking sustainability data from suppliers to support their own taxonomy reporting. 

Where to Begin?

In aligning with ASFT, business leaders will want to consider their sustainability strategy overall, their sustainability reporting obligations, and how best to achieve synergy between these two slightly different mandates. They will need to define what “success” looks like in taxonomy-aligned sustainability reporting and identify the right people, technology and data to achieve that.

Understanding the board’s strategic perspective will be essential to executing a unified approach to deep changes. ASFT alignment’s strategic importance should come as tone from the top, and be embedded throughout the company’s products, services, reporting and marketing KPIs and messaging. All of this takes time, so now is the right time to begin a conversation with the board and the aforementioned stakeholders, even as the regulations are being finalised.

A note to multinationals: It’s important to note the range of taxonomies emerging around the world. The ASFT coordinates with taxonomy development elsewhere in the world, including the European Union, Canada, the United Kingdom and across the Asia-Pacific region.

A multinational enterprise with operations beyond Australia’s borders might choose to align with the highest standard worldwide. International efforts are under way to coordinate sustainable finance taxonomies from other jurisdictions.