In the latest episode of Corrs’ Essential ESG
podcast, Alison Morris and Emmanuel Georgouras discuss macro trends
in sustainable finance.
Alison and Emmanuel discuss sustainable finance taxonomies and
the regulatory classifications and challenges we can expect to see
emerge in the Australian market.
Essential ESG is a podcast series presented by Corrs
that breaks down topical issues affecting the rapidly evolving
environmental, social and governance landscape in Australia and
beyond.
TRANSCRIPT
Alison Morris, Special Counsel, Banking and
Finance
Emmanuel Georgouras, Associate, Banking and
Finance
Emmanuel: Welcome to another instalment of the
Corrs Essential ESG Podcast. My name is Emmanuel Georgouras and
I’m an Associate in the Banking and Finance team and a member
of the Sustainable Finance Working Group. Today I’ll be
speaking with Alison Morris, a Special Counsel in our team. Before
I commence, I would just like to say that this podcast is being
recorded on the lands of the Gadigal People of the Eora Nation and
I pay my respects to their Elders past, present and emerging.
Emmanuel: Welcome Alison.
Alison: Thanks Emmanuel.
Emmanuel: So, today we are going to be talking
about sustainable finance. So, macro trends in regulation
specifically taxonomies and what regulatory classifications and
challenges that we can expect to see in the Australian market. So
this is the second podcast in the Essential ESG miniseries covering
Sustainable Finance Trends and we recommend listening to our intro
into sustainable finance podcasts we’ve previously recorded
before listening to this version. Our final podcast in this
miniseries will be considering how investors are increasingly
taking account of human rights factors in their investment
decisions. So, to kick-off Alison, if you don’t mind, could you
just tell us exactly what is taxonomy?
Alison: Great question Emmanuel. A taxonomy is
a classification system. And what does that mean for sustainable
finance? Well in our context it’s a set of definitions or
activities or assets that are considered sustainable and which can
be used to define sustainable investments credibly and
transparently. The criteria are generally science or normative
based and they apply to financing, lending, investments and
underwriting activities across the entire financial sector. So,
what’s an example? Well, the EU has implemented a taxonomy for
environmentally sustainable activities. For activities to be
considered ‘green’ they need to contribute substantially
to, and not significantly harm, the environmental objectives of the
taxonomy and that includes climate change mitigation and
adaptation, sustainable use and protection of water and marine
resources, the transition to a circular economy, pollution
prevention and control and the protection and restoration of
biodiversity and ecosystems.
Emmanuel: That’s really interesting Alison.
So, what’s actually driving the need for the development of a
taxonomy?
Alison: Taxonomy development is being driven by
the need to provide clear and transparent definitions of what
sustainable economic activities are and to promote consistency and
comparability facilitating the just transition to a net zero
economy and also to facilitate and encourage capital flows into
sustainable activities. It also helps reduce the likelihood of
greenwashing, as company’s activities will be assessed against
objective criteria and that improves accountability via reporting
and disclosures.
Emmanuel: It’s interesting to see, so from
there Alison maybe we can talk about the trends that are being
witnessed internationally on the taxonomy development and also its
implementation.
Alison: Sure, so the Australian Sustainable
Finance Institute (ASFI), they’ve got a
taxonomy project which is underway at the moment. They released a
paper in October 2022 which scoped International Taxonomies used
across 13 different jurisdictions. The ASFI paper found that 12
taxonomies were in place, 15 were under development and
collectively, this accounted for over 55% of global GDP. So, what
are some general observations across the International Taxonomies?
Well taxonomies are predominantly being developed to address
environmental objectives, as these objectives can be more readily
measured and tracked via science-based criteria. The EU and China
are also developing social taxonomies which categorise economic
activities achieving social objectives including promoting health,
human rights, equality or socioeconomic conditions. Taxonomies are
not yet being developed to classify and assess economic activities
against governance objectives and those would include anti-bribery
and corruption, responsible lobbying and political engagement
outcomes. It has found that jurisdictions in which taxonomies are
being developed are also seeing higher rates of greenwashing
enforcement actions against companies operating within the
financial sector. For example, the US, EU and the UK also have a
high-profile enforcement actions lead by regulators and
stakeholders against companies found to be making misleading ESG
claims regarding financial products and services they were
offering.
Emmanuel: So, are there any relevant regulatory
developments that are supporting taxonomies globally that you could
talk us through Alison?
Alison: Taxonomies are being supported by
regulatory developments in the relevant jurisdictions such as the
EU Sustainable Finance Disclosure Regulations. These regulations
require that funds disclose their sustainability risks meaning an
ESG event or condition that could cause a negative material impact
on the value of the relevant financing investment product. The
regulations also require that financial actors disclose how any
possible negative impacts are prevented and/or mitigated and the
level of sustainability integration within their investment
decision making. In terms of other trends, the applicability of
taxonomies within various jurisdictions have prioritised economic
activities carried out by sectors based on their contribution to
taxonomy objectives or the National or Regional economy. ASFI has
also found that the classification of economic activities often
employs a ‘traffic light’ approach, where green activities
are those which are fully aligned with taxonomy objectives, yellow
are those facilitating the transition to achieve taxonomy
objectives and red are unsustainable economic activities which may
harm those objectives.
Emmanuel: So, has there been any industry
feedback or commentary on the EU taxonomy at all?
Alison: More recently there has been some
criticism of the EU taxonomy because of its inclusion of nuclear
energy and natural gas. With other jurisdictions currently
developing taxonomies being urged to avoid politicisation of
activities to be included in the taxonomy. In terms of lobby
groups, Greenpeace and a coalition including Client Earth and the
World Wild Life Fund have lodged separate legal challenges in April
2023 with the EU’s General Court, respectively arguing that the
EU executive has acted unlawfully in designating gas and nuclear
energy as bridge technologies to meet the EU’s goal of carbon
neutrality by 2050 and breaking the EU climate laws setting the
binding target of net zero by 2050.
Emmanuel: Are there other bodies that are
active in this space?
Alison: It is not just ASFI who are active in
this space. ASEAN has also released the second version of its
Sustainable Finance Taxonomy in March 2023, which introduced
technical screening criteria for its first focus sector, which is
the energy sector. Interestingly for classification under
ASEAN’s ‘foundational framework’ or ‘plus
standard’, a company must show that its activities contribute
to at least environmental objectives while fulfilling all three
essential criteria. These criteria are do no significant harm,
provide remedial measures to transition and address social aspects
including human rights and community aspects.
Emmanuel: It’s interesting Alison because
now it’s not just happening in the EU and the ASEAN areas I
guess if we drill down specifically into Australia there is
actually government stakeholder support for developing a
sustainable finance taxonomy on our shores so before we talk about
how the Australian Sustainable Finance Institute have published an
updated Taxonomy paper which is recommending key design elements
for an Australian Sustainable Finance Taxonomy, but also a timeline
for immediate development so late March 2023 they incorporated
input from stakeholders and the Australian Taxonomy is framed as
enabling financial institutions to identify economic activities
that address key environmental and social objectives. So, some of
these include the Paris Agreement goal of less than 1.5 degrees
global warming and Australia’s commitment to achieve net zero
by 2050 and a 43% emission reduction target by 2030. We also have
the United Nations Sustainable Development goals or SDGs. We have
reporting and disclosures under the Federal Modern Slavery Act. We
have the Protection of Cultural Heritage and FPIC (Free Prior and
Informed Consent) for First Nations Peoples. We also have risks and
opportunities associated with the taskforce on the nature related
financial disclosures, including compliance with environmental and
biodiversity laws of course and also commitments to reduce waste
and transition to a circular economy. So, ASFI is taking a holistic
approach to developing and implementing an Australian taxonomy
across the ESG spectrum so the development is supported by the
Australian government. Treasurer Dr. Jim Chalmers announced on 12
December last year that the Australian Government would work to
accelerate its Sustainable Finance strategy endorsing the
development of a Sustainable Finance Taxonomy to assist in
approving transparency to ensure the market has more credible and
verifiable data to make investment decisions. The Australian
Government announced in April this year that it will co-fund the
development of a national sustainable finance taxonomy with ASFI.
And phase 2 of the Taxonomy Project actually commenced on 1 July
2023, and this will be overseen by the Australian Council of
Financial Regulators Climate Working Group. So, this phase will
convene a Technical Expert Group to oversee the development of
screening criteria and other products with input from taxonomy and
sustainability specialists. So, this working group will then work
with Treasury to review the outputs and provide feedback on
taxonomy development to align with the Government’s sustainable
finance strategy. Now, the two key policy objectives of this
strategy are: developing a framework to assist financial markets
fund the transition to net zero and also integrating the taxonomy
into a stronger greenwashing regime. So, Treasury is motivated by
recognition that the financial sector has a significant role to
play in funding the net zero transmission and addressing
sustainability issues in investment decisions, noting that
Australia has fallen behind in keeping pace with international
taxonomy and regulatory developments. So, it’s important for
Australia to keep up to avoid having standards imposed that
aren’t suited to the Australian economy. And the Federal
Government has also announced the creation of a National
Reconstruction Fund Corporation which will provide $15 billion for
financing projects that actually support Australia’s
transformation to a low carbon economy. Australia’s Net Zero
Economy Agency will be supporting workers to transition from
emissions intensive sectors, coordinating programs to help regions
and communities take advantage of new clean energy industries, and
also help investors and companies engage with net zero
transformation opportunities. So, I guess now we can probably shift
to talking about, Alison, some of the unique barriers and
challenges in actually developing a sustainable finance taxonomy
and obviously this goal of achieving a net zero economy in
Australia? Maybe you want to speak on the emission or the
carbon-intensive industries and their resources.
Alison: Yes. Thanks Emmanuel. Australia’s
economy is reliant on emission and carbon-intensive industries and
resources. I think there’s no getting away from that!
Emmanuel: Yep! Hahaha.
Alison: Australia’s import market is also
reliant on carbon-intensive industries, including airline travel,
refined petroleum, motor vehicles, freight services and crude
petroleum. The journey of distance. Australia’s export market
is predominately emissions-heavy resources, with iron ore and
concentrates, coal and natural gas being the top three exports for
2019-20. But despite this, over 80% of Australia’s two-way
trade is with countries with net zero GHG emissions commitments in
place. And 9 out of 10 major foreign investment partners are
committed to reaching net zero by 2050. So, Australia will need to
fundamentally transition to a sustainable economy to meet its own
targets, as well as to prevent being excluded from opportunities
with its key trading partners. The ASFI report scoping
international taxonomies noted that Australia’s
carbon-intensive economy will need to evolve to meet the rising
global demands for net zero aligned products and services. Delaying
action will only exacerbate the environmental, social, economic,
and financial systems implications in Australia. This context
provides Australia with the unique opportunity to develop a
taxonomy that is specifically adapted to its economy. Now,
Emmanuel, do you want to talk to us about what ASFI’s
recommendations are for the design of that taxonomy?
Emmanuel: I think it’s a good transition
actually Alison. So, where we’ve ended up…
Alison: Pardon the pun.
Emmanuel: Yes! I think we’ve got a few
recommendations that have come out of ASFI’s design of taxonomy
actual recommendations. So, the 15 are quite in depth and we’ll
run through a few of them now. So, basically, the guiding
principles for developing a taxonomy should be credibility,
interoperability across global financial markets and also with key
trading partners, the prioritisation of sectors who actually lead
Australia’s economic transition, so according to contribution
to the sustainability objectives and also the contribution to the
economy by GDP (being gross domestic product) and the potential
growth and competitiveness opportunities and impact. So, although
the taxonomy should cover key sustainability objectives of
environmental management, resource resilience, the transition to a
circular economy and social objectives, the criteria for climate
mitigation should be prioritised. The ASFI recommendations: one is
the recommendation of the adoption of a traffic-light coding
framework. So, as you can think: green activities would be aligned
to the taxonomy objectives; yellow would be the transition
activities, so they’re on a pathway to aligning with the
taxonomy objectives; and then red is an excluded activity, so those
that are unsustainable or excluded that might cause significant
harm and they do not align with the taxonomy objectives. So,
another recommendation suggested the incorporation of an additional
qualifying criteria if the ‘do no harm’, similar to the UK
framework, will be adapted to the Australian context. So, standards
for recommending Indigenous rights and heritage and also supporting
workers and communities in relation to an equitable and a just
transition. The final recommendation by ASFI is designed to address
greenwashing by suggesting that reporting on taxonomy alignment
should be mandatory where users are seeking to make claims around
how their activities, financial instruments, products, or even the
development of sustainability labels and standards address the
taxonomy sustainability objectives.
Alison: Thanks, Emmanuel. So, that’s
interesting. What were some of the responses from stakeholders to
the taxonomy recommendations by ASFI?
Emmanuel: It’s interesting Alison because,
in line with ASFI’s membership, there was actually 38% of
respondents who were investors; and the next largest group
represented, which was civil society and NGOs, or non-governmental
organisations, was 18%. So, according to ASFI’s public
consultation with stakeholders, responses broadly validate the
recommendations made by ASFI. ASFI further noted that a majority of
respondents agreed to each of the recommendations, with a further
percentage partially agreeing and providing additional detail
around how the recommendations should be applied. So the traffic
light system I just spoke about and the ‘do no significant
harm’ recommendations, they were the main focus of stakeholder
responses. So, Alison, there is actually still some hesitancy from
stakeholders regarding the incorporation of additional qualifying
criteria for activities. So, these are – so examples can be
minimum social safeguards, although stakeholders were more open to
including the ‘do no significant harm’ criteria, actually
at 67% of support. Now, although 84% of respondents explicitly
supported the inclusion of a ‘transition’ category, there
was limited consensus on the appropriate methodology for how the
transition category could actually be integrated into the
taxonomy.
Alison: That percentage of respondents is
interesting, Emmanuel. What have we seen from the recently released
research paper by ASFI?
Emmanuel: So, ASFI recently released a research
paper which outlines ten key considerations which will form the
building blocks for the development of a transition category within
the taxonomy. So, some of the key considerations include purpose
and principles. So, one is design the methodology for integrating
transition activities into the Australian Taxonomy which should be
guided by core principles. So, as you are aware, credibility,
usability, interoperability, prioritisation, and impact, which were
all mentioned earlier. The transition category should be
principally designed to encourage the allocation of capital towards
decarbonising hard-to-abate and high-emitting sectors. So, there
should not be a transition category for other sectors. Speaking of
eligible transition sectors and activities, the transition
categorisation methodology should be designed to encourage the
allocation of a capital toward activities that decarbonise sectors
with material scope 1 and 2 emissions where economic activity will
likely remain stable or grow in a low carbon economy, for example
steel manufacturing, accelerate the decarbonisation and phasing out
of sectors with material scope 3 emissions that will face
decreasing demand in a low-carbon economy. So, one example of this
is natural gas. Or have an increasing demand-side opportunity in a
low-carbon economy, which includes sectors that could help
facilitate the transition of other sectors. So, two examples of
this could be renewable energy or afforestation. National level
determinations should be made to identify economic activities and
sectors such as green or transition-eligible, whilst users of the
Australian taxonomy should be responsible for assessing the
alignment of eligible activities or entities based on
considerations 7 to 10, which I will get to in a moment. To avoid
carbon lock-in, the transition category should only be eligible for
existing projects. New projects must meet a more stringent green
category technical screening criteria. All solid fossil fuel, so
hard coal, brown coal, and coal products for example – these
projects should be excluded for consideration under the Australian
taxonomy’s transition category.
Alison: So, Emmanuel, how does this tie in with
the general entity level requirements?
Emmanuel: In regard to what I mentioned earlier
about considerations 7 to 10, these are general entity-level
requirements. So, for activities and entities to be categorised as
green or transition under the Australian Taxonomy, they must meet
the following general entity-level requirements – so one is
set credible long-term and interim science-based targets for 2050
aligned with a 1.5 degree pathway under the Paris Agreement.
Another is develop and disclose a credible transition plan aligned
with leading international standards and disclosure
recommendations. Another is to regularly update the transition plan
and report on progress annually. And another one is to align
climate disclosures with Australia’s upcoming mandatory
climate-related disclosure requirements.
Alison: What about technical screening
criteria?
Emmanuel: In regard to technical screening
criteria, the criteria should be aligned with national sectoral
pathways that have been adapted from credible international,
science-based scenarios, aligned with achieving the Paris
Agreement’s goal that I spoke about earlier which is limiting
global warming to 1.5 degrees. The transition category should be
timebound, so basically sunset dates for example for each sector or
sub-sector, which also aligns to the Paris Agreement’s five
yearly interim targets. And the final point, entities and
activities being on trajectory to align with the 1.5 degree pathway
by the sector’s transition sunset date – these should
actually be considered eligible to be labelled transition-aligned
under the Australian taxonomy, but only as long as there is
sufficient ambition and also a credible transition plan which
outlines the strategy to achieve future emissions intensity
performance thresholds. Alison, have you seen much about
governmental support about the Australian taxonomy besides
everything we’ve just spoken about?
Alison: Emmanuel, yes, there is government
support for the development of an Australian taxonomy. Government
has stated that it is working in parallel and that its taxonomy
recommendations and proposed sustainable finance roadmap are
broadly aligned to ASFI’s recommendations. In terms of policy
considerations for government development of taxonomy, that the
system is fit for purpose to assist business and investors to make
decisions consistent with the transition to net zero, as well as
how to take more vigorous action against greenwashing. There’s
that greenwashing again!
Emmanuel: Yes, hahaha!
Alison: Governance needs to address how
ambition translates to outcomes.
Emmanuel: That’s interesting, Alison. So, I
guess probably now that we’re talking about the consequences,
maybe you can just talk a little bit about what they would be on
taxonomies, on financial services and their products.
Alison: So, the development and implementation
of taxonomies in Australia, as well as globally, mean that
companies making sustainability commitments and seeking to
undertake related activities will face increased stakeholder
scrutiny and companies engaged in greenwashing will be exposed for
their failure to act consistently with sustainability objectives.
Transparency and accountability should increase significantly.
It’s currently piecemeal, overlapping or non-existent standards
and criteria for sustainable economic activities, as we mentioned
in our first podcast. And this limits the ability to assess
corporate activities and to hold companies accountable for failing
to meet their stated objectives. Introducing consistent, uniform
and transparent criteria, and methodologies for assessing
activities against these criteria, will make it easier for
regulators and stakeholders to hold companies accountable for their
stated sustainability commitments. There is some uncertainty
regarding classification of ‘transition’ activities and how
high-emitting industries can be assessed against the taxonomy
criteria. As Emmanuel noted, ASFI has said to ‘watch this
space’. We do know that ASFI has stated that its proposed
taxonomy will not be designed to exclude carbon-intensive materials
or products which are required to support carbon-reduction projects
and activities in Australia. The development of an Australian
taxonomy must consider how to deal with the large number of
high-emitting companies with diversified activities, such as mining
and minerals companies who are looking to develop renewable energy
sources or contribute to waste reduction activities, to avoid
excluding them from capital flows necessary to support their role
in transitioning the Australian economy to net zero.
Emmanuel: Alison, what would be the priority
sectors for this do you think?
Alison: Electricity, mining, manufacturing and
agriculture will likely be the priority sectors for the Australian
taxonomy, Emmanuel.
Emmanuel: Interesting. So, I guess now that
we’re on this tangent to talk about consequences, it might be
good to just do a little deep dive into some of the other
regulatory trends that we are seeing. So, I’ll just start off
by talking about the Australian Government’s consultation paper
that has been released on key considerations for the ‘design
and implementation of the Government’s commitment to
standardised, internationally aligned requirement for the
disclosure of climate-related financial risks and opportunities in
Australia.’ And then, I guess, from what we’re seeing, this
follows the global trends of implementing the ‘Taskforce on
Climate-related Financial Disclosures’ voluntary framework. I
guess against this is which many corporates already report –
large corporates that is – into a mandatory domestic
reporting requirement. So, the quotation comes from the Government
saying that “Our initial view is that mandatory reporting
requirements should be phased in over time, both in terms of
entities covered and the reporting that is required”.
Alison: What about regulatory trends in the EU,
for example?
Emmanuel: In regard to the EU, so the EU was
also poised to introduce key parts of its European Green Deal,
after the European Parliament approved legislation on 25 April this
year that revises the EU’s Emissions Trading System, introduces
a Social Climate Fund and establishes the world’s first carbon
border tax, among other measures. So, the legislation must be
formally ratified by the European Council before it’s in force
but it will likely influence the measures taken by States looking
to implement a robust climate change mitigation and adaptation
reform. The European Commission has also proposed a Directive on
Green Claims which will require the substantiation of voluntary
green claims through the use of scientific and evidence-based
methodologies. So, the Directive is considered to introduce best
practice for combatting greenwashing, which is likely to influence
Australian regulation.
Alison: Thanks, Emmanuel. What are we seeing in
Australia regarding greenwashing enforcement action?
Emmanuel: Onshore in Australia, greenwashing
enforcement actions are showing no signs of slowing, Alison. As
we’ve seen in the media over the past year, ASIC have issued 11
infringement notices and commenced three civil penalty proceedings
to date for making false or misleading representations, including
representations about the applications of ethical exclusions in
financial products. So, I guess now that we’ve talked about
enforcement, maybe we can speak about how clients could potentially
adapt their activities to align with the development of Australian
taxonomy and maybe also some broader regulatory trends, Alison?
Alison: So, as always, preparation is key. Our
clients should consider the nature of operations, activities and
their value chain, and including whether you operate in a sector,
which will be prioritised in the transition to net zero, and also
how you can access financing to achieve this. If your organisation
has made sustainability commitments or has sustainability targets,
you need to consider how these commitments would achieve
sustainability objectives set by your organisation, and what
measures you already have in place to monitor and track activities
against these targets. And the development of an Australian
sustainable finance taxonomy is an exciting opportunity for
Australia’s financial sector to support sustainability
objectives and facilitate Australia’s transition to a net zero
economy. Expect to see considerable movement in this space as the
Government reviews submissions to its consultation paper on
climate-related financial disclosures and the development of the
Australian taxonomy gets underway by mid-2023.
Emmanuel: Well, Alison, I think that’s
actually a really great place to finish. So, as a part of our
miniseries on sustainable finance, please look out for our final
upcoming podcast which will incorporate human rights into
investment decisions and comments. Alison, thanks very much for
your time again. I look forward to another one.
Alison: A pleasure as always.
Emmanuel: Speak to you soon.
Alison: Thanks.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
 |
 |
| Lawyers Weekly Law firm of the year
2021 |
Employer of Choice for Gender Equality
(WGEA) |
