Australia’s ‘Sustainable Finance Roadmap’ to Net Zero

Pillar 1: Improve transparency on climate and sustainability

So what?

Priority 1

Implementing mandatory climate-related financial disclosure requirements for large businesses and financial institutions. These mandatory disclosures are intended to provide investors with greater transparency and more comparable information about entities’ exposures to climate-related financial risks and opportunities, and their climate-related plans and strategies.

We’re anticipating the legislation for a mandatory climate-related reporting regime to be hotly debated in the Senate in coming weeks, before finalisation. In the meantime, see our recent article here which explores the current regime and ways for companies to start to prepare now.

Priority 2

Developing the Sustainable Finance Taxonomy, in partnership with the Australian Sustainable Finance Institution (ASFI). The taxonomy is intended to mobilise private capital towards sustainable activities and to provide an important source of guidance and consistency for firms, investors and regulators to support the development of credible sustainable finance products.

ASFI intends to take a science-aligned approach to the development of the set of definitions of economic activities and assets that contribute to key sustainability objectives, and intends to focus on its global credibility. For companies (particularly those with global footprints), it will be important to have your say during the opportunities for industry consultation across Q2 and Q4 of 2024 (see here for the current consultation).

Priority 3

Supporting credible net zero transition planning. The disclosure of climate-related transition plans (as will be required under the mandatory climate reporting referred to in Priority 1) is intended to explain an entity’s climate strategy including the targets, actions, or resources for its transition towards a lower emission economy.

The Government recognises the need for further guidance to support best practice transition planning and Treasury will also develop and publish best practice guidance for the disclosure of transition plans by the end of 2025 (which we expect will be the subject of consultation).

The Government may look to follow the recent Transition Plan Taskforce Disclosure Framework which sets out good practice for robust and credible transition plan disclosures.

Priority 4

Developing sustainable investment product labels. The Government has committed to establish consistent labels and disclosure requirements for investment products marked as ‘sustainable’ or similar, including for managed funds and within the superannuation system.

Consistent and clear information is helpful for investors and we expect that regulatory certainty will be welcomed by issuers. However, setting agreed parameters on labels and disclosures will have its own challenges – any agreed labels and disclosure regime will need to be appropriately flexible across products while also providing investors with meaningful information.

It will also be important to consider whether, and to what extent, any final Australian position aligns with the emerging international approaches to sustainable investment product labels (for example, the European Supervisory Authorities are proposing new “sustainable” and “transition” categories for financial products). We understand that the Government, along with ASIC, have been closely following the RIAA labelling guidelines and they are an example of early work in the area and potential approaches which may be taken.

Pillar 2: Financial system capabilities

So what?

Priority 5

Enhancing market supervision and enforcement. The Government considers that a strong and proactive regulation of greenwashing and other sustainable finance-related misconduct will strengthen Australia’s green capital opportunities and investments. Enhanced supervision and enforcement are expected to provide transparent and comparable information across financial markets and to support ASIC’s ability to scrutinise claims made by regulated entities.

In the most recent federal budget, the Government has committed to providing $17.3 million over four years from July 2024 to promote the development of sustainable finance markets in Australia, which includes $10 million over four years for additional resourcing for ASIC to investigate and take enforcement action against market participants for greenwashing and other sustainability-related misconduct. This enhanced funding reiterates the importance of reviewing and, where necessary, revising current processes and disclosures to mitigate greenwashing risk.

Priority 6

Identifying and responding to systemic financial risks. The Australian Council of Financial Regulators (CFR) Climate Working Group will continue to develop its climate- and sustainability-related risk management capabilities and practices across financial regulators and market participants, with APRA progressing Climate Vulnerability Assessments to assess the impact of climate risk on the affordability of general insurance to 2050 and the Reserve Bank continuing to consider how climate change will affect the structure and operation of the economy.

This builds on earlier work in relation to systemic climate risk vulnerabilities taken by APRA and signposting by ASIC that climate risks may often be material business risks needing consideration and disclosure by corporates.

Developing a solid grasp of climate-related financial risks to a business remains a focus point, but so too should climate-related opportunities. Consider where your business is vulnerable to the impacts of climate, and stress test whether there are innovative ways to address these exposures.

Priority 7

Addressing data and analytical challenges. The CFR is intending to address sustainability-related data challenges by focusing on:

• accessibility of corporate climate data by market participants;
• estimation and use of scope 3 emissions by business and financial institutions;
• data to inform companies’ assessments of physical and transition-related climate risks; and
• nature-related data relevant to understanding financial risks.

There are also a range of other Government agencies working to address climate-related data challenges.

It is important to identify the scope of estimation required for material judgements, decisions and disclosures as unrecognised or undisclosed data gaps can lead to uninformed decision-making and risk of misleading disclosure.

It is also critical for entities to have arrangements in place to obtain data from parties in their value chain, to enable full and informed decision-making and accurate external disclosures that rely on this data.

Priority 8

Ensuring fit for purpose regulatory frameworks. In March 2024, the Government released a consultation paper for stakeholder feedback on options to refine the annual superannuation performance test, including to address concerns regarding the current formulation of the test operating as a barrier to integrating climate and other sustainability considerations in superannuation investment decision making. The Government has committed to continuing to work with financial regulators, governance experts and industry stakeholders to identify policy priorities for mainstreaming sustainability considerations in corporate governance and financial institution decision-making.

The Government will also continue to work with financial regulators, governance experts and industry stakeholders to identify policy priorities for mainstreaming sustainability considerations in corporate governance and financial institution decision-making.

Engaging with Government consultations can be a helpful way to advocate for regulation that aligns with corporate interests.  

Pillar 3: Australian Government leadership and engagement

So what?

Priority 9

Issuing Australian sovereign green bonds. The Government is issuing green bonds (with its first $7 billion green bond issued on 4 June 2024). Money raised from the green bond will be deployed to projects including green hydrogen hubs, community batteries, clean transport, and programs to conserve biodiversity. A well-designed and credible green bond program is intended to help mobilise additional climate-aligned capital, support the development of Australia’s broader sustainable finance markets and signal the Government’s commitment to climate, environmental and other sustainability-related goals.

The first bond issue on 4 June 2024 was over-subscribed with more than $22 billion in bids from 105 investor institutions across Australia, Asia, Europe, and North America. The demand for the bond confirms that Australia is an attractive destination for international green capital. The Government has also committed to providing investors with regular and transparent allocation and impact reporting for the issuance of and allocation of capital under the green bond. We anticipate that the green bond program will boost the scale and credibility of Australia’s green finance market by increasing transparency around climate outcomes.

Priority 10

Stepping up Australia’s international engagement on sustainable finance. The Government has made this commitment to promote the development of consistent global standards and high-quality interoperable frameworks through international ASEAN, bilateral, multilateral and regional engagement.

Global standards and expectations can often (and sometimes unexpectedly) impact Australian businesses and there is a growing need to keep track of international sustainability positions and standards as they evolve.