Australian rules needed to help finance energy transition
One piece of work currently under planning is an Australia-specific sustainable finance taxonomy, which would give clear definitions of what constitutes “green”, “sustainable” and “transition” finance.
Australian Sustainable Finance Institute executive officer Kristy Graham says a local taxonomy is critical for the continued financing of energy projects. This is because Europe’s taxonomy, on which most of Australia’s sustainable financing is currently based, is so strict around transition finance, with no room for new oil and gas.
“The sense from regulators, the government and the finance sector is that we wouldn’t be able to ensure that sufficient capital could keep flowing to that sector without this Australian taxonomy,” Ms Graham said.
She said transition finance will be critical in making sure different sectors of the economy transition in a way that supports people and is fair, and the government now has the opportunity to move into a leadership role globally, with other Asian countries like Singapore also working on transition definitions.
“Really because Australia is coming in to this all a bit late, transition finance is an area where we could provide global leadership,” said Ms Graham.
She said one important role for an Australian taxonomy would be to help guide the country’s energy transition by providing clear and consistent definitions and defining how economic activities will need to transition over time to continue to be classified as sustainable.
“It has become clear from discussion with members, regulators, government, and the finance sector more broadly, that there is strong demand for ASFI to drive an industry-led process to develop a sustainable finance taxonomy for Australia,” she said.
While the taxonomy would be designed to operate globally, it would help Australia align with Asia’s net zero emissions 2050 targets, which include more fossil fuels than Europe’s 2030 targets.
“One of the challenges in the Australian context is there’s no regulation that says everyone needs to think about transition in this particular way,” Ms Graham said.
Mr O’Connor said the taxonomy is an important first step, but Australia would also need to quickly adopt the International Sustainability Standards Board recommendations, which will include rules around carbon disclosures.
ASIC chairman Joe Longo and Reserve Bank governor Phil Lowe both said in March that Australian companies need to do more work to detail their carbon exposures, with the Council of Financial Regulators, together with APRA, focused on ensuring the template for reporting delivered by the ISSB fits local market requirements.
Mr Longo has also signalled that Australia could legislate in line with its international peers to mandate carbon disclosures, a move that would force banks to disclose how much carbon is emitted from everything that they finance, from mortgages to car loans and across all the businesses to which they lend.
National Australia Bank, which closed a €1 billion green bond after receiving €2.3 billion in orders last week, and Commonwealth Bank of Australia helped finance the ASFI’s taxonomy work. Ms Graham said the institute’s banking members are motivated to help find debt capital markets solutions, like transition bonds, to finance new projects.
Westpac chief executive Peter King said after the election on Sunday that the new parliament is likely to have “a very big focus on climate in terms of the priority agenda items” but he said the move was likely to result in clear plans for the future, giving the banks the ability to plan.
Mr O’Connor said the implementation of ISSB standards is going to be “very fast” and will come alongside ASIC’s possible changes to the Corporations Act to deal with greenwashing.
He stressed the importance of working with the private sector to catalyse finance after the last federal government failed to grasp the opportunity, even though capital markets, investors and banks have all been moving in the direction toward sustainable finance.
“We need Paris-aligned signals set at a national level to unlock more capital and support the net zero transition,” Mr O’Connor said.