The European Union is about to adopt the first legislative acts operationalising a taxonomy for sustainable finance as part of its ambitious and fast-paced sustainable finance framework development – itself a cornerstone of EU’s Green Deal.
The Biden/Kerry administration has announced plans for the US to follow suit in close collaboration with the EU. China is prominently on board and working on its own framework and taxonomy along with 15 other countries. These are signatories to the International Platform on Sustainable Finance and include the UK.
All are committed to creating transparent, harmonised ground rules for sustainable investing, directing increased investment flows towards more sustainable economic activities and eliminating greenwashing in the financial sector. Yet there is radio silence on the topic from the Australian government. This threatens to leave the country well behind the global developments.
In the absence of government commitment and action, the financial private sector actors have self-mobilised as the Australian Sustainable Finance Initiative (ASFI). In November 2020 this collaboration between 80 organisations across Australia released a Roadmap for a Sustainable Financial System in Australia  designed to achieve a more resilient, forward-thinking and inclusive financial system aligned with people’s needs and well-being and ultimately the environmental and social objectives expressed in the United Nations Sustainable Development Goals. If implemented, would the ASFI roadmap hit the mark when it comes to making sure Australia gains a spot at the international negotiation table on sustainable finance?
The roadmap’s 37 recommendations set out actions, actors, and timelines the financial system would need to implement to support a net-zero (GHG emissions), resource-efficient and inclusive economy.
The Initiative is a commendable, coordinated achievement of the 140+ financial sector players who contributed leadership and support. It is a powerful, bottom-up call for a better organised, managed and executed sustainable national finance system, integrated with global markets.
And it highlights the desire by Australian financial market players for a harmonised language, methods, tools, and rulebook.
However, while the roadmap provides a comprehensive overview of the various elements needed to establish a national sustainable finance system, from the outset it has lagged behind international developments, including potential misalignments in the timeline of some proposed recommendations.
These omissions are likely to hinder the success of the roadmap.
Although published in 2020, in reviewing other jurisdictions’ sustainable finance processes, the roadmap describes pre-2018 developments in the European Union (EU) and consequently overlooks significant progress achieved and potential lessons to learn since then.
For example, a Technical Expert Group convened in 2018 released its final report in 2019 with recommendations for an EU taxonomy and Green Bond Standard. The report also called for adoption of several legislative acts on disclosures and a sustainable finance taxonomy, and establishment of a permanent advisory body, the EU Platform on Sustainable Finance, mandated with the further development of sustainable finance policies.
All are examples of practical steps towards making a sustainable finance system a reality. The roadmap does, nevertheless, recommend as an early action that Australia become a member of the EU-led International Platform on Sustainable Finance.
The start of the development of Australia’s own taxonomy for sustainable finance is planned to be a mid-term action in the Roadmap. However, there is a strong case for moving the start of taxonomy development to the group of immediate actions, also keeping in mind that taxonomy development is time-consuming.
A taxonomy would give meaning to what constitutes an environmentally sustainable economic activity, investment, company, or fund, and be instrumental to active and effective participation in the International Platform. Indeed, the International Platform has identifiedtaxonomies as one of the key tools for facilitating global alignment.
Several members – the EU, China, India, New Zealand, Singapore – are already actively working on their taxonomies, recognising that “… if developed in isolation, [this] might lead to more fragmentation of practices and rules and could inhibit the growth of [a] global sustainable finance market.”
The International Platform aims for a “Common Ground Taxonomy” in the near future.
Rather than delay to later, an Australian taxonomy in progress would mean the difference between being an equal conversation partner that can propose, contribute to, and influence at the International Platform’s negotiating table and being a late-comer apprentice, hoping to learn from others.
Likewise, the taxonomy of sustainable economic activities is akin to a backbone or common rulebook and would also function as the basis of several other recommended actions in the Roadmap – relating to the development of disclosures, financial products, marketing guidelines, and standards.
A taxonomy followed with clear product labelling and disclosure standards would make it much easier for institutional and retail investors and consumers to understand what they are paying for/investing in and what they can expect. It would reduce the prospect of potential future product mis-selling (especially “greenwashing”) or fees-charged on services-not-provided, similar to past behaviour revealed by the Royal Commission.
In a 2019 survey of Australian financial market participants’, opinions on the support for a common taxonomy and setting of standards differed.
Although there was a general agreement on the benefit of common definitions, some voiced aversion to a taxonomy as something imposed “from above”.
This notion is likely grounded in unsubstantiated perceptions of how a sustainable finance taxonomy and standards may be developed and applied. Take, for example, the same current development process of the EU sustainable finance strategy and its taxonomy.
The EU strategy was developed based on recommendations by a High-Level Expert Group from industry convened by the European Commission and has relied on participation from market players and other key stakeholders.
Its recommendations were further developed by a Technical Expert Group to define the first legislative acts on sustainable finance, including a taxonomy.
The EU Platform on Sustainable Finance is now the permanent body advising the European Commission, further developing the taxonomy and sustainable finance policies.
It is likewise strategically composed of a wide range of stakeholders from the finance industry, various sectors of the economy, NGOs, civil society organisations, and academic experts.
The taxonomy is being developed by the market for the market. The same could be done in Australia, especially in the light of ESFI is demonstrating high levels of willingness to voluntarily commit to and participate in these processes by the financial sector.
One of the first roadmap’s recommendations – to establish a permanent sustainable finance initiative – is a crucial step and to be applauded.
Such commitment to leadership from within the financial sector is crucial for the success of the strategy. The timing and sequence of the other recommended actions could be further refined to improve the alignment in between the activities, but the critical piece missing is an overarching centralised strategy endorsed and adopted by the Government.
The federal and state governments, are all but missing from the roadmap’s recommendations on “embedding sustainability into leadership”.
Ultimately, for the roadmap to be true to its goals of aligning finance with sustainability goals for the benefit of all Australians and to establish Australia as an equal player in the global arena, political leadership at the highest governance levels is indispensable.
A clear nation-wide strategic vision for sustainable finance necessarily involves a role for governments in setting out, committing to and following through policies.
There is a lot to learn and more to be expected from the current global developments on sustainable finance; and by compiling the Roadmap, the Australian financial market actors have stepped up and demonstrated their will to engage and act. Can we expect our governments to follow?
Linda Romanovska is Independent Expert Member of the EU Platform on Sustainable Finance; researcher, UNSW; principal, Melomys Advisory. Dr Kingsley Fong is associate Professor in Finance, UNSW Business School. Dr Louise Fitzgerald is advisor, UNSW Business School