A sustainable finance taxonomy is taking shape for Australia. What are the implications for business?
ERM Energetics
Energetics is now an ERM Group company. Sustainability is our business.
Key takeaways
A sustainable finance taxonomy is an essential part of a nation’s successful transition to a resilient and inclusive net zero economy as it has the potential to drive investment to where this net zero economy most needs it. As described by the Australian Sustainable Finance Institute (ASFI), a taxonomy provides “a set of common definitions for sustainable economic activities, which can then be used to credibly and transparently define sustainable investments”[1].
ASFI has been working for over a year to develop a taxonomy that can 1) drive capital into activities that will decarbonise the economy at the speed and scale required to meet global climate goals, and 2) improve the quality of information available to the market, promoting transparency and trust, and ultimately reducing the incidence of greenwashing.
A draft taxonomy was released in March 2024 and is open for comment until 30 June 2024. This first round of consultation focuses on the “Green” and “Transition” technical criteria as defined for three priority sectors: electricity, mining, and construction and the built environment. Companies and investors operating in these sectors should be across the criteria (and comment where appropriate), as meeting the criteria could be a factor in the cost and availability of capital once the taxonomy is finalised. The shape of the taxonomy also gives some clues into how the Government’s Sectoral Decarbonisation Pathways, due to be released in August 2024[2], might evolve.
In this article we look at what we might expect in the taxonomy for the three priority sectors.
What is covered in the draft taxonomy?
In total, six sectors aligned with the government’s sectoral decarbonisation pathways will be covered in the final taxonomy. In the current consultation period, the taxonomy for three has been drafted: electricity generation and supply, minerals and mining, and construction and the built environment. Within each, only carbon and climate-related definitions are addressed. There is no consideration at this stage for broader sustainability topics such as nature or adaptation.
What we also see is that analysis for eligibility takes place at an asset or economic activity level, rather than corporate. The analysis seeks to highlight activities that are:
These are defined as eligible activities for financing. The taxonomy calls on three principles when establishing these eligible activities:
What are investors looking for?
The taxonomy is not just a finance question, it seeks to change business strategy by influencing the availability (and hence price) of capital for activities. It isn’t mandatory and won’t prevent financing for certain activities, but the expectation is that investors making claims about how “green” their financing is will use the taxonomy as a standard measurement of the companies and assets they’re financing.
There is still a range of unanswered questions, including how it fits with other commitments (such as the Net Zero Banking Alliance where financial institutions have defined their own pathways for companies they’re lending to), as well as how investors assess the credibility of transition plans at an asset or company level.
Insights: what should sectors look out for if they want to be “Green”?
Electricity generation and supply
The criteria has generally taken a technology-driven or maximum emissions threshold-approach for qualifying “Green” or “Transition” eligible activities. For example, renewables, storage of electricity, and transmission (assuming it is transmitting mostly renewable energy) fall under the “Green” category.
Outside of solar, wind and ocean power developments, there is a general threshold of 100gCO2e/kWh for life cycle emissions from the generators to 2030. This is reduced to 10gCO2e/kWh?in 2035, 6gCO2e/kWh in 2040 and 1gCO2e/kWh in 2050.
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A notable exclusion from “Transition” activities is methane gas generation, even for a firming role in a grid with high renewables. This results in part from considering the activities in isolation, rather than taking a system-wide view. On this note, ASFI is specifically asked for insights on how to structure system-level advice for utilities or portfolios of assets containing gas firming facilities.
Particularly noteworthy given recent political rhetoric is the exclusion of nuclear and CCS on the basis of technology readiness to deploy within a meaningful timeline. Retrofit of residential networks for low-carbon gasses is also out of scope.
Minerals and mining
Australia is the first jurisdiction to include mining, and the framing is predicated on continued strong demand for some minerals and in some cases rapid expansion of capacity, requiring mining activity to be decoupled from emissions. It focuses on critical minerals and centres on four in this phase: copper, lithium, nickel and iron ore. These are the metals most needed to deliver net zero. These four can automatically qualify as Green if they meet declining emissions intensity thresholds over the period to 2036. Transition is defined in terms of technology implementation, however there is a risk that the short-list of potential technologies may be incomplete.
The mining sector boundary is set to exclude refining activities (these will be covered under manufacturing taxonomy). This may miss opportunities to optimise emissions end-to-end if the taxonomies are not designed to operate effectively together. This is a significant exclusion as it means that this taxonomy does not support all that Australia needs to see happen in the exploitation of critical minerals if we are going to benefit from the nation building opportunity that this focus on critical minerals could (and we argue should) deliver.
Iron ore similarly has decarbonisation trajectories for Green and technology implementation requirements for Transition (including for 50% of scope 1 emissions). It has additional expectations around Scope 3 emissions from offtake agreements which may be challenging for miners to achieve in the near term given technology readiness. However, this a good start on establishing a link between mining and metals production and could be extended to the other metals considered in this standard.
Another omission is that lack of focus on demand side responses in the eligible technologies. The taxonomy should consider energy efficiency, energy management and demand response as green technologies.
Construction and the built environment
Different screening criteria apply for the different stages of an asset’s lifecycle: new construction, acquisition and ownership, renovation, and replacement of equipment
The draft taxonomy has adopted a technological framework for Green and Transition criteria, focused on energy efficiency, electrification, on-site renewables (including an expectation for solar on every new / renovated rooftop, low-GWP refrigerants and low-carbon construction). Because of the specificity there is a risk that the technology lists miss some asset types such as solar hot water and heat storage, or may constrain innovation.
Procurement of off-site renewables are not part of the consideration. This means asset managers and owners must focus on asset-level decarbonisation and are not able to “hide behind” a renewable energy contract to claim a net zero portfolio.
There is an outstanding question relating to how the intensity decarbonisation targets will interact with CRREM and the SBTi pathways given CRREM’s focus on whole-of-building emissions.
What’s next?
The first round of public consultation is receiving submissions until 9:00pm, Sunday 30 June 2024 (AEST). The first round will focus on draft headline ambitions for the Australian taxonomy’s environmental objectives and the draft criteria for the first three priority sectors. We encourage companies in these three sectors to consider the content of the taxonomy and assess how they might engage with this content. Particular focus should be paid to the emissions reductions trajectories proposed in the draft, as these should be assessed relative to how achievable they are given current technology availability to deliver them. Attention should also be paid to the eligible activities, and to whether the activities presented cover all actions that might be taken.
Following a review and update, a second round of public consultation is scheduled for Q4 2024 and will seek feedback on the remaining sectors, the Do No Significant Harm framework, minimum social safeguards and the advice for how taxonomy users can demonstrate alignment. This second round of comments may give a further opportunity to comment on the ASFI framework as well as the eligible activities for each sector.
Energetics can help your business with understanding and planning to meet the Green or Transition criteria.
Footnotes and references
[3] See?trl-guide.pdf ( arena.gov.au ) ?for definition of readiness levels