Replumbing financial markets for a sustainable future: the Government's Sustainable Finance Strategy Consultation Paper

On 2 November 2023 the Commonwealth Treasury issued a "Sustainable Finance Strategy" consultation paper, seeking feedback on a broad range of reform options. The consultation period will end on 1 December 2023. After considering stakeholder feedback, the Government intends to release an implementation roadmap for the Sustainable Finance Strategy, with the Strategy being implemented in 2024.

What is the purpose of a national "Sustainable Finance Strategy"?

Existing corporate finance law and regulation is designed to support the efficient allocation of debt and equity capital across the economy in a manner which supports the maximization of financial returns.

A "sustainable finance strategy" involves amending existing law and regulation to enable an additional set of "sustainability" objectives to be infused into that capital allocation process. The laws do not prohibit businesses from undertaking particular activities – they instead establish rules which enable investors to allocate their capital to activities which satisfy an additional set of pre-determined "sustainability" objectives. Conversely, they assist businesses whose activities are aligned with those objectives to access that capital more efficiently.

The proposed Sustainable Finance Strategy has three overarching objectives:

• mobilising the private sector investment needed to support net zero, Australia becoming a renewable energy superpower and other sustainability goals;
• ensuring Australian entities can access capital and pursue business opportunities that support the transition and are aligned with positive sustainability outcomes; an
• ensuring climate and sustainability-related opportunities and risks are well-understood and managed at the entity and systemic level.

What law reforms would be required to implement a "Sustainable Finance Strategy"?

In broad terms, the paper canvases the following possible law reforms:

• Sustainable Finance Taxonomy: new regulations supporting a classification system which defines certain "sustainable" economic activities (referred to as a "sustainable finance taxonomy"), together with a body (or bodies) to create and update the taxonomy. The initial development phase of a sustainable finance taxonomy is underway and being led by the Australian Sustainable Finance Institute (ASFI) with oversight provided by the CFR Climate Working Group.
• Sustainability Reporting by Companies: laws governing disclosure by companies of the extent to which their activities are aligned with the taxonomy.
• Financial Products/Issuers: laws governing disclosure by issuers of financial products (including managed investment schemes and superannuation funds) of the extent to which their investment portfolios, or particular investment products, are aligned with the taxonomy.
• Other Use Cases: using the sustainable finance taxonomy as the basis for:
  • an investment product "labelling regime" (aimed at addressing greenwashing); and
  • the issuance of green or transition aligned financial instruments, including bonds and loans (noting that the first issuance of the Government’s sovereign green bond program is expected in mid-2024).

The paper indicates that these reforms may be in the form of mandatory legislated changes, adoption of the taxonomy as a framework used by financial regulators (akin to the "if not, why not" regime applying to the ASX Corporate Governance Principles and Recommendations), or an altogether voluntary regime.

What about the mandatory climate-related financial disclosures?

The paper also includes reference to the previously announced mandatory climate-related financial disclosures for companies. While relevant, these financial disclosure reforms are mainly directed at disclosing the impacts of climate-related matters on a company's financial returns, as opposed to enabling investors to direct their investments to "sustainable" activities.

Regarding mandatory climate-related financial disclosures, the Government repeats its commitment to introduce similar climate-related disclosure requirements for Commonwealth entities, mirroring its commitment for the private sector (without indicating a timeframe for these changes).

The paper also highlights an immediate issue in Australia concerning a perceived lack of credibility and transparency of some companies' climate change transition plans. It indicates that when the proposed Strategy commences in 2024, the government (and ASIC) will be using the mandatory climate-related financial disclosures regime (and associated ISSB disclosure standards) as a basis for an increased regulatory focus on disclosures of transition plans. This is likely to include ASIC publishing its expectations concerning such disclosures (informed by reference to emerging international standards and practice).

What might a "sustainable finance taxonomy" regulation look like?

While it is still early days in Australia, the European Union has had sustainable finance taxonomy regulation in place since June 2020. Those regulations contain:

• broad environmental objectives to which the taxonomy is directed (i.e. climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems);
• a requirement that, for a relevant economic activity to be sustainable, it must:
  • "contribute substantially" to one or more of these objectives and "do no significant harm" to any of the objectives; and
  • comply with the relevant "technical screening criteria";
• detailed technical screening criteria which set out the objective basis on which specific activities can claim to contribute to (and do no significant harm to) the objectives; and
• rules establishing non-government consultative bodies to advise governments on the ongoing development of the objectives and the technical screening criteria.

Role of nature and biodiversity within the Strategy

Importantly, the Government is proposing to incorporate nature and biodiversity objectives into the Strategy, in addition to climate change objectives, including by:

• adapting legislative changes for climate disclosure reforms to allow for the incorporation of nature-related financial disclosures as global standards mature; and
• introducing "do no significant harm" provisions related to nature during the initial phase of taxonomy development, and exploring how nature and biodiversity objectives can be integrated once climate mitigation criteria are established.

The paper also notes that ASIC is considering how regulatory guidance could support voluntary nature-related disclosures and nature-related claims for investment products in the future.