After nearly two years of development, consultation and refinement, Australia now has a Sustainable Finance taxonomy. It provides a common language for financiers to use when assessing assets and making investment decisions, that corporates can also use when benchmarking their performance against climate and sustainability objectives. While on some levels this new Australian taxonomy aligns with the existing EU and Singapore taxonomies, the downscaling to local conditions and challenges will make it particularly relevant for Australian corporates and financiers. 

While the taxonomy is not mandatory, it creates a framework that corporates can use to benchmark and accelerate their climate transition performance, and for lenders and investors to identify climate transition risks and opportunities in their portfolio and respond appropriately. 

1. What is in the taxonomy? 

A sustainable finance taxonomy is “a classification system identifying economic activities that deliver on key climate and/or other sustainability objectives by reference to specific performance metrics.” Australia’s taxonomy is voluntary, and at present climate-focused. The taxonomy applies to six sectors, with the sector selection based on those representing the greatest opportunities to Australia as well as the biggest decarbonisation levers. These sectors are: 

  1. Electricity generation and supply 
  2. Minerals, mining and metals 
  3. Buildings 
  4. Manufacturing and industry 
  5. Transport  
  6. Agricultural and land. 

Aerial view of a dry, salt flat with irregular, pale blue water pools and reddish-brown surrounding vegetation.

The taxonomy sets out performance criteria required to classify certain activities as sustainable, for these six key sectors of the Australian economy. There are three performance criteria: 

  1. Climate related “technical criteria” for activities – these set out what an activity (like a mine, a power station or a building) needs to do to be considered “green” or “transitioning” (not green yet but on an ambitious and feasible pathway). 
  2. Depending on the sector, activities can meet the technical criteria by: 
  3. decarbonising their operations in the sector e.g. via renewable energy, energy efficiency, or electrification 
  4. facilitating wider transition by producing products required in a low carbon world (in a carbon-efficient manner) e.g. manufacturing low emissions technologies or mining critical minerals, or  
  5. being high-performing actors in hard-to-abate activities e.g. manufacturing of cement or chemicals. 
  6. Ultimately, activities need to facilitate transition to a 1.5 degrees-aligned world across critical sectors of the economy to meet the criteria. 
  7. The criteria set a high bar – taking the top 15-20% of domestic and global performers as a starting point and are broad – covering 140+ measures across 70+ activities. 
  8. Do No Significant Harm (DNSH) criteria for additional environmental considerations, ensuring that the pursuit of climate goals doesn’t occur at the expense of other environmental objectives included in the taxonomy (such as nature or water). 
  9. Minimum Social Safeguard screening, applied at the entity (rather than activity) level – across corporate governance, human rights and First Nations. 

The taxonomy is not prescriptive (i.e. it does not compel action), but it does define a standard for the level of progress required to meet the 1.5 degrees-aligned goal. 

Adaptation and resilience aren’t included (yet) – but are widely seen as critical and will likely form part of the next phase of work for the Australian Sustainable Finance Institute (ASFI). 

2. What is it useful for? 

For investors and lenders – this taxonomy provides a powerful tool supporting stewardship, screening and setting portfolio targets. It does this by outlining achievable but ambitious expectations for companies across the economy, and providing concrete actions to point to, rather than just emissions milestone-based targets as articulated by Science Based Targets initiative (SBTi).  

For companies in sectors covered (as listed above) – it provides a benchmark for transition plans, and a way to demonstrate whether you’re doing “enough” to meet the commitments you’re making (and that you’re on track to a science based target albeit down a lumpy pathway). As investors and lenders develop new products the taxonomy may also define the criteria to achieve a lower cost of funding or a broader capital base. 

By aligning to this standard firms can reduce the risk that climate claims are seen as greenwashing, as long as the firm making the claim (or their finance portfolio) is actually aligning, or aligned to, the standard. 

3. What should you do now? 

For corporates: understand how the taxonomy applies to you, your suppliers and your customers, and where there are likely to be pressure points if financiers start to raise the bar on climate performance; alternatively investigate whether there are opportunities to differentiate yourself on your climate performance.  

For financiers: map out which of the entities you are lending to or investing in are covered by the taxonomy, and how you can assess their transition plans against it. The criteria highlight where there are risks of financing stranded assets, as well as opportunities to fund an accelerated transition. They can also provide a framework for guiding future investments, or developing new “green” or “transition” products. 

ERM Energetics has a long track record of supporting corporates to develop transition plans, and helping investors and lenders manage decarbonisation in their portfolios. Reach out if you’re interested in exploring how to put Australia’s new Sustainable Finance Taxonomy to work in your business.