ASFI recommends new classification structure for Australian sustainable finance disclosure

The Australian Sustainable Finance Institute (ASFI) is an industry-led body working closely with the government to develop a sustainable finance taxonomy for Australia. Sustainable finance taxonomies refer to a set of shared definitions of sustainable economic activity, which can then be used to “credibly and transparently define sustainable investment”.

A new report (60-page / 2.87MB PDF) by ASFI provides recommendations on designing an Australian sustainable finance taxonomy and related roadmap and timeline. The report recommends using a new classification structure to direct capital toward activities which advance sustainability objectives while facilitating an orderly transition to a sustainable economy and addressing the risk of so-called ‘greenwashing’.

AFSI’s recommendations coincide with recent reporting flagging the difficulties experienced by companies taking steps to become more sustainable when adopting global Task Force on Climate-related Financial Disclosures (TCFD) reporting requirements. In a recent article, the Harvard Business Review suggested that the present international structure struggles from a lack of “mandates and auditing…” as well as “specious targets… and complexity in terms of measurement and standards”.

Uncertainty and lack of clarity in the marketplace discourages disclosures and increases reporting burdens on companies and investors - all of which the ASFI is trying to overcome. The ASFI, which is made up of major banks, insurers, superfunds and other stakeholders, has published a roadmap (95-page/5.45MB) demonstrating support and demand for Australia’s financial system regulators to implement mandatory TCFD-aligned reporting through a phased and iterative process.

The International Sustainability Standards Board (ISSB) has proposed to develop two international financial reporting standards (IFRS) for sustainability disclosures: IFRS S1 and IFRS S2. IFRS S1 covers the general requirements for disclosure of sustainability-related financial information, while IFRS S2 covers climate-related disclosures. According to a report by the ISSB (52-page / 287KB PDF), enhanced safeguards and greater degrees of disclosure using these two proposed standards are required to ensure disclosures are “relevant” and “faithfully represent what they purport to represent”.

ASFI’s report recommends that mandatory application of its taxonomy to financing should be phased in over time and its application will depend on the claims made by the financial institution about their sustainability credentials. Financial institutions lending money must indicate their alignment with the asserted activity where they seek to “make claims around the sustainability objectives covered by the Australian taxonomy in relation to their activities, financial instruments, products and the development of sustainability labels and standards”. If they are not attempting to make such claims, demonstration of alignment will be voluntary.

ASFI intends to recommend a ‘traffic-light system’, where disclosed activities will be sorted into one of three categories based on their alignment with the taxonomy: green (sustainable) activities which are aligned with taxonomy objectives; transition activities which are on a pathway to aligning with taxonomy objectives; and excluded (unsustainable) activities which may cause significant harm and do not align with the taxonomy objectives. 

ASFI’s taxonomy project is anticipated to be completed sometime in 2025 but, in the meantime, there is considerable attention being paid by regulators and legislators to misleading disclosures around sustainable finance. The Australian Securities and Investments Commission (ASIC) has announced “a greater regulatory focus on misleading conduct in relation to sustainable finance including greenwashing” in its Enforcement Priorities for 2023. Separately, the Commonwealth Treasury sought feedback (23-page/509KB) on considerations “for the design and implementation of standardised, internationally aligned requirements for disclosure of climate-related financial risks and opportunities in Australia”. Its consultation closed on 17 February.

Against this backdrop, financial institutions should begin conducting internal reviews to assess any discrepancies between their current reporting and disclosure and that required by the ASFI’s recommendations. Especially if the financial institution is not utilising TCFD guidelines, it may need to begin tracking and sourcing activity-level and entity-level data and information from its debtors. Institutions may also want to reassess their brand and product messaging to ensure that they are not unwittingly triggering recommendation 15 of the taxonomy project, which states that “…reporting on taxonomy alignment should be mandatory where users are seeking to make claims around the sustainability objectives covered by the Australian taxonomy in relation to their activities, financial instruments, products and/or the development of sustainability labels and standards”.

Next steps for business operations

• Has your organisation adopted TCFD reporting and if not, should it?
• If your organisation does not currently report on climate-related disclosures, a clear roadmap setting out how you plan to move towards disclosing should be considered and implemented.
• Has your organisation completed an in-depth analysis on who may rely on the climate-related disclosures it is making and satisfied itself that those people will not be misled by such disclosures?
• What disclosures are your industry peers making and do your disclosures stack up?

Co-written by Jesse McNaughton with further contributions to research by Marcus Bombardiere, of Pinsent Masons.