Funding Australia’s transition to net zero – the Australian Government’s Sustainable Finance Strategy

Treasury released its Sustainable Finance Strategy Consultation Paper (Strategy) on 2 November 2023, signalling a significant transition for the Australian sustainable finance industry from being largely market-led to a government-led approach.

The Strategy acknowledges the market’s increasing focus on climate and sustainability issues and proposes a range of measures to underpin the development of Australia’s sustainable finance market. This includes a sustainable finance taxonomy, new labelling laws for marketing investment products, globally-consistent climate disclosures and the issuance of sovereign green bonds from mid-2024.

This development comes almost one year after Australian Treasurer Jim Chalmers announced plans to pursue “a more ambitious and coordinated” strategy in 2023.

Treasury is seeking feedback from the industry by 1 December 2023.  If you’d like assistance preparing feedback, we’d be delighted to help.  Feel free to contact the authors below.

In this insight, we detail the policy priorities set out in the Strategy – and the specific feedback requested.  

The Strategy will help mobilise the private investment needed in coming decades, enable Australian firms to access the capital needed to finance their own transitions and take advantage of new opportunities that arise, and ensure that the financial opportunities and risks presented by climate change are identified and well managed.

The Strategy, Executive Summary 

Three pillars are key to achieving these objectives

1. Improve transparency on climate and sustainability: ensure market participants can identify sustainability-related risks, opportunities, impacts and plans clearly and compare and understand them.
2. Financial system capabilities: Australia’s financial system regulators and other stakeholders are already playing a part in an efficient sustainable finance ecosystem. The Government is seeking to support this momentum and ensure firms, financial institutions and regulators strengthen their sustainability-related capabilities.
3. Australian Government leadership and engagement: the Government aims to take a leading role in supporting the development of the sustainable finance market, aligning Australia’s capital markets with international standards and shaping global developments.

The Strategy details 12 policy priorities

There are four policy priorities detailed for each of the three pillars, including complementary priorities, initiatives and reform options.  The Government is seeking specific feedback on each of the policy priorities by 1 December 2023.  

Priority 1: Establish a framework for sustainability-related financial disclosure

Proposed approach

• Implement mandatory climate-related financial disclosure requirements for large companies and financial institutions.
• Closely monitor the development of other international sustainability-related financial disclosure framework and standards.
• ASIC may consider updating guidance in relation to voluntary nature-related disclosure.

Priority 2: Develop a sustainable finance taxonomy

Proposed approach

• The initial development phase:
  • Led by the Australian Sustainable Finance Institute (ASFI) with oversight by the Council of Financial Regulators (CFR) Climate Working Group.
  • The key output will be a set of preliminary taxonomy criteria for assessing how activities are aligned with climate mitigation objectives for key Australian economic sectors.
• The development phase:
  • Transition to net zero will require some ongoing investment in higher-emitting activities that have credible pathways to reduce emissions and provide critical inputs to more sustainable products. It also involves complex scientific assessment and difficult judgment.
  • The taxonomy will assess the most promising options for incorporating transition into an Australian framework.
• Further development:
  • Treasury and the CFR will consider options for embedding the taxonomy in the regulatory architecture.
  • Medium-term options include: requiring large firms to disclose the degree of alignment of their activities with taxonomy and requiring financial entities to disclose the degree of alignment of their investment products or portfolios with taxonomy.
  • It is likely that a legislative approach will give more force to the taxonomy’s use cases.
• Permanent government arrangements:
  • The taxonomy should be overseen and maintained by an appropriate government body of agency once the initial phase of taxonomy development is complete.

Priority 3: Support credible net zero transition planning

Proposed approach

• In line with ISSB standards, the Government’s proposed mandatory disclosure requirements will require transition plans to be disclosed, including information about climate-related targets and progress towards these targets, and any mitigation strategies.
• The Government is accelerating and coordinating investments in other policy frameworks, including the development of national sectoral emissions reduction pathways as part of Australia’s 2050 Net Zero Plan and the development of the sustainable finance taxonomy sustainability objectives.
• The Government does not intend to introduce transition planning disclosure requirements that go beyond ISSB-aligned standards in the near term.
• In 2024, Treasury will work with the CFR to provide updated recommendations on further steps, beyond ISSB-aligned disclosure requirement.

Priority 4: Develop a labelling system for investment products marketed as sustainable

Proposed approach

• The Government will legislate to create a labelling regime for investment products marketed as ‘sustainable’ or similar, including for managed funds and within superannuation.
• The Government intends to standardise the use of sustainability terminology by setting minimum standards for what qualifies for a prescribed sustainability label. Investment product issuers would also be required to provide retail investors with additional information, i.e., how sustainability is incorporated into the investment process, both pre-contractually and on a periodic basis.
• Treasury will commence work on this reform in 2024.

Priority 5: Enhancing market supervision and enforcement

Proposed approach

• The Government will continue to support ASIC’s capacity to supervise and address market misconduct as it relates to sustainable finance, including to target greenwashing, building on additional resourcing provided to AISC to accelerate this work in 2023-24.
• The Government will consider feedback on whether ESG rating should be captured by financial services regulation, comparably to credit ratings agencies.

Priority 6: Identifying and responding to potential systemic financial risks

Proposed approach

• Led by ARPA, the CFR will continue to expand its work on climate- and sustainability-related financial risks, deepening risk management capabilities and practices, including applying the CFR’s Climate Vulnerability Assessment process to the household insurance sector.
• APRA will continue to engage with financial institutions and other agencies and industry to better understand climate-related risks and risk management processes.
• Complementary work is underway across the other CFR agencies for instance, the RBA considers how climate change affects its monetary policy and financial stability responsibilities; the Government has restored Treasury’s capability to model climate opportunities and risks.

Priority 7: Addressing data and analytical challenges

Proposed approach

• The Government will continue to work with and seek feedback from investors and industry stakeholders to improve the availability and quality of sustainability-related data:
  • Improving data sources and analytical tools in priority sectors.
  • Strengthening the measurement of natural capital.
  • Investing in high quality climate information and services.
• Issues highlighted in initial stakeholder engagement include:
  • The estimation of scope 3 emissions in large and complex supply chains, sectors or portfolios.
  • Consistent and accessible understanding of climate scenarios and decarbonisation pathways across economies, sectors and industries, and how they affect individual sectors or firms.
  • Access to reliable and comparable sustainability data beyond emissions.
  • The availability of corporate sustainability data.

Priority 8: Ensuring fit for purpose regulatory frameworks

Proposed approach

• Financial regulation frameworks: the Government has supported financial regulators’ work to integrated sustainability considerations consistent with the existing legislative mandates; and will seek feedback on the possible longer-term direction of prudential policy frameworks in the face of climate change and sustainability risks.
• The superannuation system: the Government acknowledges the importance of the performance test to hold trustees to account for member returns; and will continue to explore further changes to improve the sophistication of the test to scrutinise underperformance across superannuation products.
• Investor stewardship: the Government is seeking feedback on reforms to support more effective and transparent investor stewardship, including for superannuation trustees and collective investment fund operators.

Priority 9: Issuing Australian sovereign green bonds

Proposed approach

• The Australian Office of Financial Management (AOFM) will be issuing green bonds. The first issuance of the Government’s sovereign green bond program is expected in mid-2024.
• Over time, green bonds are expected to support projects that address climate change mitigation and adaptation, along with natural resources depletion, loss of biodiversity and air and water pollution.

Priority 10: Catalysing sustainable finance flows and markets

Proposed approach

• Clean Energy Finance Corporation (CEFC), the largest government-owned green bank in the world, continues to be at the forefront of the Government’s efforts to drive Australia’s energy transformation, inducing as financing agent to deliver the $20 billion Rewiring the Nation program.
• CEFC will support the delivery of the Strategy by expanding its discounted financing across priority sectors and market segments, contributing to the development phase of the sustainable finance taxonomy, and contributing to the development phase of energy assessment tools for financial product applicability and consistency with sustainable finance best practice.

Priority 11: Promoting international alignment

Proposed approach

• Australia will continue to support the development of consistent global standards, and seek to maximise alignment of sustainable finance frameworks across different jurisdictions.
• Multilateral engagement will be complemented by a scaled-up focus on bilateral and regional mechanisms to promote knowledge sharing, capability development and interoperability.

Priority 12: Position Australia as a global sustainability leader

Proposed approach

• The Government will promote sustainable finance as key pillar of ambitious international engagement on climate and nature.
• Australia will continue to support innovative financing models and approaches including blended finance models.
• Australia will also expend the direct Government-led financing efforts to support regional sustainability priorities.

What next?

We are watching developments as they unfold and will keep you updated. See our Green & Social Capital insights for more, including:

• Sustainability-linked derivatives - identifying the opportunity for private capital investors
• Considering sustainability-linked derivatives? What you need to know
• So hot right now: Hong Kong is getting its green taxonomy