New sustainable finance strategy: what you need to know

Insights20 Nov 2023

By David Cooper, Fay Calderone, Mark Dessi, Jennifer Degotardi, Kristy Dorney, Sevan Gore, Julian Hammond, Suzie Leask, Meg Lee and Anne MacNamara

We highlight the key implications financial market participants should be aware of.

By David Cooper and Nancy Harb

The Sustainable Finance Strategy (Strategy) Consultation Paper (Consultation Paper) is ambitious in its aim to help Australia become a renewable energy superpower, with anticipated reforms to the funds and financing sector. We highlight the key implications financial market participants should be aware of.

The three pillar approach

Pillar 1

Priority 1: Establish a framework for sustainability related financial disclosures
Priority 2: Develop a Sustainable Finance Taxonomy
Priority 3: Support credible net zero transition planning
Priority 4: Develop a labelling system for investment products marketed as sustainable

Pillar 2

Priority 5: Enhancing market supervision and enforcement
Priority 6: Identifying and responding to potential systemic financial risks
Priority 7: Addressing data and analytical challenges
Priority 8: Ensuring fit for purpose regulatory frameworks

Pillar 3

Priority 9: Issuing Australian sovereign green bonds
Priority 10: Catalysing sustainable finance flows and markets
Priority 11: Promoting international alignment
Priority 12: Position Australia as a global sustainability leader

The Strategy is comprised of three pillars and 12 priorities, outlined above, aimed to:

mobilise the private sector investment needed to support Australia in becoming a renewable energy superpower, transition to net zero and meet other sustainability goals;
ensure that Australian entities can access capital to pursue business opportunities that support the transition and align with positive sustainability outcomes; and
ensure climate and sustainability-related opportunities and risks are well understood and managed at the entity and systemic level.

The Government is currently implementing mandatory climate-related financial disclosure requirements for large companies and financial institutions, proposed to commence on 1 July 2024. These are aimed at increasing transparency and accountability around climate-related plans, opportunities and financial risks for large businesses and financial institutions.

We have previously reported on this and the proposed climate-related financial disclosure regime, in our articles, Climate disclosure consultation provides some direction to industry; and Mandatory climate-related financial disclosure: Australian Government releases second consultation paper.

Sustainable finance taxonomy

In the 2023-24 Budget, it was announced that the Government would partner with industry to support the initial development of an Australian sustainable finance taxonomy (Australian Taxonomy). The Australian Taxonomy will aim to centralise consistent and credible information on the alignment between the country’s net zero transition (and other sustainability goals) with particular assets, activities and industries across the financial market. The Australian Taxonomy will be designed to align and operate with existing global sustainable finance frameworks and taxonomies, acting as a key foundation for Australia’s sustainable finance landscape.

A draft of the Australian Taxonomy has yet to be released; however, the Consultation Paper notes the following key features are likely to be included:

a common policy object to support mobilisation of capital towards sustainable activities. Initially, these will be directed at mitigating climate change and assisting regulators in assessing claims of greenwashing;
sustainability objectives relating to climate, nature, circular resource use, pollution, social objectives and other goals;
a set of science-based screening criteria;
‘do no significant harm’ provisions – meaning that aligning with one sustainability objective is not sufficient where significant harm is still caused under another sustainability objective; and
treatment of transitional activities. The Australian Taxonomy will include transitional activities, which are not entirely green but aim to facilitate the transition to lower emissions.

The initial development phase of the Australian Taxonomy will be overseen by the Council of Financial Regulators Climate Working Group and led by the Australian Sustainable Finance Institute.

Labelling system for ‘sustainable’ investment products

A number of investment products are currently being marketed as ‘green’ products, causing concerns around the extent of environmental, sustainable and ethical misrepresentation across the industry – known as ‘greenwashing’. The Australian Securities and Investments Commission (ASIC) has launched a number of actions in response to greenwashing concerns, some of which have been noted by ASIC in an article published last week. The lack of consistent regulatory guidance on the management and verification of sustainable marketed investment products is a likely contributor to the increased occurrence of greenwashing.

The Strategy proposes that the Government legislate a labelling regime for investment products marketed as ‘sustainable’ or similar, including managed funds and products offered within superannuation funds. This is set to begin implementation in 2024 and will encompass:

the standardisation of sustainability terminology usage as relating to investment product marketing;
all financial products marketed to retail investors; and
requirements for investment product issuers to provide retail investors with additional information on sustainable investment products, both pre-contractually and on a periodic investment basis.

Green bonds

What are green bonds?

Green bonds are bonds that require their proceeds to be exclusively applied to financing or re-financing new or existing projects that support climate and environmental objectives. There is yet to be a standardised definition of what constitutes a project providing climate and/or environmental benefits. However, the Reserve Bank of Australia (RBA), in its September Bulletin, has noted that the International Capital Market Association’s ‘Green Bond Principles’ (GBP) are one of the most commonly used guidelines. The GBP lists four main criteria:

proceeds from green bonds are used in projects with clear environmental benefits;
the process for evaluating and selecting the project is disclosed, allowing investors to assess the environmental objectives of the project and how the bond issuer determined that the project met the issuer’s sustainability criteria;
allocation of the proceeds from green bonds are transparent and trackable by investors; and
the issuers should publish annual reports detailing: projects funded by green bonds, progress those projects have made, the amounts allocated to each project and the expected environmental impacts.

Government proposal

The Strategy proposes that the Government strengthen its leadership and engagement on sustainable finance by developing an Australian sovereign green bonds program, attracting green capital and supporting further growth of sustainable financial markets. The Strategy cites the popularity of sovereign green bond issuance following the first issuance of sovereign green bonds by Poland in 2016. It notes that Australia’s issuance of sovereign green bonds will incentivise international green capital through an increase in transparency about climate outcomes and the scale of green investments available.

The Australian Office of Financial Management will hold responsibility for issuing green bonds and has commenced work with the Treasury to develop a green bond framework.

The first issuance of Australia’s sovereign green bonds is expected to occur in mid-2024.

Catalysing sustainable finance flows and markets

The proposal

The Clean Energy Finance Corporation (CEFC), the Australian Government-owned green bank, finances large-scale investments in emission reduction and provides discounted loans and finance for clean energy projects. The Strategy proposes that the CEFC will expand its discounted financing for priority sectors and contribute to the development phase of energy assessment tools for financial products to highlight best practice in sustainable finance.

What is missing from the Strategy?

Alison Atherton noted in ‘Making money green: Australia takes first steps towards a net zero finance strategy‘, that the Strategy also does not focus on green finance skills and competencies for providers of sustainable marketed products. The Institute for Sustainable Futures at the University of Technology Sydney defines these skills as ‘climate/climate risk-related skills, knowledge areas or competencies’ in its report ‘Advancing climate skills in the Australian financial system‘. The Strategy focuses on informing investors in the sustainable finance space to curb greenwashing and misinformation, neglecting that systemic change requires the building of green finance skills and competencies by providers of sustainable products and projects to ensure that they are effective in moving Australia closer to its net zero targets.

It will also be interesting to see if the Strategy is expanded to include a role for other Australian Government entities, such as ARENA (the Australian Renewable Energy Agency), who, with the CEFC, jointly manages the Clean Energy Innovation Fund that invests in pre-seed to growth-stage technology companies focused on decarbonisation.

Conclusion

The Consultation Paper puts forward a number of recommendations that aim to assist Australia with achieving its target of net-zero by 2050. Most of the ambitious proposals, however, are still in their incubation phase. Only time will tell whether they will ‘provide a strong foundation for sustainable finance in Australia’ as intended or whether additional policy and practice settings are required to fully pursue this goal.

Industry is encouraged to make submissions on the Consultation Paper. Submissions close on 1 December. Make a submission.

Please contact any member of Hall & Wilcox’s ESG and Energy teams if you would like to discuss the Strategy or any other clean energy or energy transition initiatives you may be considering in your business.

Our article, Draft Australian Climate Standards: getting ready for the ‘biggest change to corporate reporting in a generation’, outlines the new standards, who may be affected and the implications for listed and private companies and financial institutions.