More than 80% back transition category for Aussie ‘green’ taxonomy, ASFI finds

Industry-led sustainability initiative issues recommendations for Australian sustainable finance taxonomy.

More than four-fifths of respondents to consultations by the Australian Sustainable Finance Initiative (ASFI) support the inclusion of a transition category for Australia’s “green” taxonomy.  

The development of an industry-led Australian Sustainable Finance Taxonomy was announced as priority for 2022 by the ASFI in March.  

Following nine months of work on the framework, including input from its 56-strong technical advisory group, ASFI published its 15 recommendations for feedback on Wednesday. 

Included in the list is a recommendation for a “traffic-light colour coding framework” to distinguish green, transition and excluded activities under the taxonomy. 

In October, ASFI published a “framing paper” as part of its efforts on the sustainable finance framework, drawing on the work on sustainable finance taxonomies in other jurisdictions, including the UK, EU and Canada.  

Later that month, Kristy Graham, executive director of ASFI, told Responsible Investor that – given that the need for guidance on allocating capital to credible transition activities is emerging as a “key driver” – Australia’s taxonomy “will likely need a ‘transition category’ with living criteria that will become more stringent over time”.   

Eighty-four percent of those who responded to ASFI’s consultations, including the framing paper survey in October, agreed on the need for a transition component, the recommendations report revealed. Investment heavyweights Schroders, State Street Global Advisors and AMP were among those who shared their views. 

The absence of a transition element from the EU’s green taxonomy has been raised by market participants, including Patricia Plas, group director of public affairs at French insurer Axa. In July, she told RI: “Obviously what we as society need to do, and what needs to be financed, is the transition. The hole for the moment is how do you define that and where do you put the transition in the framework.”    

ASFI stated that feedback from stakeholders “indicated a strong preference for the inclusion of transition criteria in the Australian taxonomy to guide capital toward initiatives aligned with credible sectoral decarbonisation pathways”. 

The body added that the finalisation of the methodology for integrating transition activities into the taxonomy will be a matter for further consultation, alongside outreach on “identifying priority sectors to include in the Australian taxonomy” and “developing entity- and activity-level technical screening criteria”.  

Three suggested categories for transition activities are put forward with the recommendations: pathway differentiation approach; transition risk and opportunity approach; and activity categorisation approach.  

Potential political headwinds to the work on the taxonomy are also raised in the recommendations, especially given current cost of living pressures. “The recent history of climate change politics in Australia also suggests that the likelihood of political sensitivities and controversies needing to be managed is high,” ASFI wrote.  

However, it continued: “To maintain credibility, the Australian taxonomy will need to develop the criteria for the high-emitting sectors, despite the above present-day challenges.” 

ASFI’s recommendations also include making reporting on taxonomy alignment mandatory “where users are seeking to make claims around the sustainability objectives covered” by the framework. Such a requirement it stated would “assist with addressing greenwashing”. 

Greenwashing is a growing focus for Australian regulators. Last week, the Australian Securities and Investments Commission (ASIC) issued infringement notices to Vanguard Australia over alleged misleading disclosures. 

In October, ASIC also revealed that super funds in the country are among those it is currently investigating over potential greenwashing.  

Do no significant harm

Another recommendation from ASFI is that Australia should develop a “do no significant harm” (DNSH) criteria that meets its own “unique needs, including standards for respecting indigenous rights and heritage”. 

Under the EU’s taxonomy, there are more than 700 individual DNSH criteria. ASFI stated that there could be “usability issues” if Australia adopted the EU’s approach wholesale, but added that there “may be opportunities to simplify DNSH requirements without significantly compromising the Australian taxonomy’s credibility and rigour”.

It noted that the UK’s Green Taxonomy Advisory Group (GTAG) is exploring options to streamline DNSH requirements to make the country’s taxonomy more usable. 

On the recommendations, ASFI’s Graham said: “This report is the result of a collaborative process across the finance sector, with strong engagement from across superannuation, asset management, banking, insurance and financial services as well as government and regulators. The 15 recommendations provide a pathway for the development of a taxonomy that is science based, interoperable with international taxonomies and useable.” 

ASFI’s recommendations paper will be open for public consultation until mid-February. 

UK misses deadline

The recommendations come as the UK Treasury announced that it will miss its 1 January deadline to propose regulations on climate technical screening criteria for the UK’s own green taxonomy, with a further update expected in early 2023.  

James Alexander, CEO of UK sustainable investment body UKSIF, said he was “naturally hugely disappointed by today’s statement confirming further delays to the taxonomy’s implementation”. 

He urged the government to “restate its intention to swiftly delivering a science-based taxonomy and a clear timeline for implementation”.