The release of the Federal Government’s Sustainable Finance Roadmap (Roadmap) marks a decisive step towards positioning Australia as an international leader in sustainable finance. The Roadmap outlines key priorities and sets a direction post the release of mandatory climate-related financial disclosure legislation. It aims to mobilise private capital towards sustainable projects and activities and ensure access to high-quality information, crucial for informed investment decisions and robust market supervision and enforcement.

The ten priorities outlined in the Roadmap are:

1. Implementing climate-related financial disclosures;
2. Developing the Australian Sustainable Finance Taxonomy;
3. Supporting credible net zero transition planning;
4. Developing sustainable investment product labels;
5. Enhancing market supervision and enforcement;
6. Identifying and responding to systemic financial risks;
7. Addressing data and analytical challenges;
8. Ensuring fit for purpose regulatory frameworks;
9. Issuing Australian sovereign green bonds; and
10. Stepping up Australia's international engagement.

Significance of the Roadmap

The Roadmap provides an insight into how the Federal Government plans to pull levers through financial markets and institutions to mobilise capital towards economy-wide decarbonisation, in line with Paris Agreement commitments. The Roadmap also seeks to maximise economic opportunities associated with energy, climate transition and sustainability more broadly. It is a significant policy signal that the Federal Government will be taking a 'climate first, not only' approach and that stakeholders need to start grappling with supply chain risks (and opportunities) beyond climate, such as nature and biodiversity.

In particular, Australia's largest companies, financial institutions and companies above the publication threshold of the National Greenhouse and Energy Reporting (NGER) scheme disclosure requirements should pay attention to the impending climate-related financial disclosure regime that is slated to commence from 1 January 2025. Likewise, entities caught by the reporting regime (particularly high emitters in hard to abate sectors) will need to carefully consider credible net zero transition planning, given the forthcoming best practice guidance on transition plan disclosures. The Roadmap also flags that many businesses and financial institutions will be encouraged to voluntarily undertake nature-related financial disclosures, meaning that stakeholders should start preparing for this shift in the coming years.

The Roadmap also signals significant changes ahead for investment product issuers, given the development of sustainable investment product labels, which will have significant interaction with the Sustainable Finance Taxonomy, another priority of the Roadmap. The Sustainable Finance Taxonomy will be relevant to a wide range of market participants in both public and private sectors and the Roadmap indicates that the Government is currently exploring market use cases. Notably, a 2023 report showed that the EU Taxonomy had driven financial and non-financial actors (including corporates, credit institutions, investors, insurers, public institutions, auditors, consultants and SMEs) to transition their business models to align with EU sustainability objectives.

In addition, the Roadmap highlights the need for the insurance industry to accurately assess the impact of climate risk on the affordability of general insurance, and we expect APRA's publication of the Insurance Climate Vulnerability Assessment will improve the industry's ability to model natural peril risk against two climate scenarios. Finally, superannuation funds should pay particular attention to the prospective review of the annual superannuation performance test, which the government has identified as a potential barrier (as well as the outcome of the Sustainable Finance Taxonomy and product labelling developments).

Overall, the roadmap provides a clear indication of the Government's resolve to foster a nature positive and sustainable Australian economy. It shows that the Government is willing to take action across a broad spectrum of industries and adopt a whole of government approach to decarbonise and modernise Australia's financial markets and institutions and the economy more broadly. Likewise, the Roadmap makes clear that climate and nature-related risks and opportunities is no longer a 'nice to have', but rather a foundational part of Australia's economic and environmental strategy.

Prioritising access to transparent and credible information

• Mandatory climate reporting: The Roadmap emphasises the importance of the new mandatory climate reporting regime, introduced under the landmark Climate Disclosure Bill. This new reporting regime aims to help regulators assess and manage systemic risks to the financial system resulting from climate change and help investors understand climate-related risks and opportunities. If passed, the Climate Disclosure Bill will mandate climate-related financial disclosures for large businesses and financial institutions, and is slated to commence from 1 January 2025. The proposed Australian Sustainability Reporting Standards, which underpin the reporting regime, will demand a significant increase in the volume and complexity of data points across a business's entire value chain. This means that reporting entities will likely need to consider uplifting current financial reporting assurance processes in light of the new requirements. Finalisation of ASIC guidance and standards for mandatory reporting is expected by the end of 2024.
• Transition planning guidance: In addition to mandatory climate reporting, the government is prioritising the creation of guidance for credible transition planning to enhance information integrity and reduce greenwashing risks. Treasury will develop and publish best practice transition plan disclosures to support credible corporate net zero transition planning by the end of 2025. The 2024-25 Federal Budget allocated $1.3 million for this purpose. In particular, transparent and verifiable transition metrics will be critical to promote sustainability linked transition finance, which will be a key segment of the sustainable finance markets. This is particularly the case for carbon intensive and hard to abate industries which do not fit the 'deep green' activities covered by taxonomies, but nevertheless have a credible transition pathway. Transition strategies are also core elements for the finance sector and compliance with Net Zero Banking Alliance commitments relating to decarbonising loan portfolios.
• Sustainable Taxonomy: The Roadmap makes clear that the development of an internationally operable taxonomy is crucial, and will support other priorities such as consistent product labelling and market supervision and enforcement. The AFSI aims to finalise the taxonomy by the end of 2024, covering criteria related to climate mitigation for six priority sectors: electricity and energy, industry, built environment, transport, resources, and agriculture and land. This approach will align Australia's taxonomy with international standards, facilitating cross-border investments and reducing friction and transaction costs.
• Product labelling: Sustainable product labelling initiatives are set to commence by mid-2025, emphasising the importance of clear and consistent labelling to avoid greenwashing. Treasury will consult on the establishment of label and disclosure requirements for sustainable investment products starting early 2025, with a target commencement date of 2027.

Nature as a fast follower to climate

The Roadmap indicates that nature will be a 'fast follower' to climate, particularly in relation to nature-related disclosures. The Roadmap explicitly foreshadows government interest and progression of nature related initiatives, including tools and guidance for voluntary nature-related financial reporting.

• Encouraging nature-related financial disclosures: The Roadmap outlines the allocation of $4.1 million over two years for the Department of Climate Change, Energy, the Environment, and Water (DCCEEW) to create tools and guidance to assist businesses and financial institutions in voluntarily reporting nature-related financial risks and opportunities. Importantly, the mandatory climate-related financial disclosure legislation already allows the Minister to expand the regime to include sustainability risks beyond climate (such as nature), suggesting reporting entities will need to be ready to respond effectively in the coming years. These proposals reflect that while nature-related risks have been historically under-recognised and undervalued in corporate decision-making and value chains, momentum is quickly building around the need to monitor, evaluate and address these issues. The proposals also align with the recent Taskforce on Nature-related Financial Disclosures Recommendations and the landmark Hartford-Davis & Bush legal opinion (which followed the Hutley Opinions) on nature-related risks and directors' duties.
• Nature as part of the Sustainable Taxonomy: the Sustainable Taxonomy will include principles which ensure that an investment cannot be considered 'sustainable' if it causes significant harm to other environmental and social objectives (such as nature), which further flags that the government is looking beyond climate risk.
• Establishment of the Nature Finance Council: the Government established the Nature Finance Council in December 2023 to provide advice to government on how to mobilise capital required to develop a 'nature positive economy'. This new body will continue to support the Government's nature positive agenda.

Regulatory capabilities and market supervision

The Roadmap highlights that enhancing the capabilities of key regulators to respond to sustainability risks is a priority. This includes improving market supervision and enforcement, supported by consistent definitions through the Sustainable Finance Taxonomy and product labelling. This commitment to robust enforcement aims to bolster market integrity and investor confidence.

Regulatory response: ASIC has identified sustainable finance as one of its four strategic priorities for 2023-2027 and aims to maintain market integrity by supervising governance and disclosure standards. ASIC has also outlined that one of its enforcement priorities for 2024 will be targeting misleading conduct in relation to sustainable finance and greenwashing. ASIC's concerted enforcement efforts in this space were recently demonstrated by ASIC winning its first greenwashing civil penalty action regarding misleading product disclosure statements.

Systemic financial risks: Led by the Australian Prudential Regulation Authority (APRA), the Council of Financial Regulators will expand its work on climate and sustainability-related financial risks following publication of its Prudential Practice Guide on climate change financial risks in November 2021. APRA will conduct assessments to understand the impact of climate risks on banks, insurers, and superannuation funds, with insights from the Insurance Climate Vulnerability Assessments expected in the first half of 2025.

Addressing data and analytical challenges: The Roadmap highlights the importance of addressing key sustainability-related data challenges. Government initiatives include efforts by the DCCEEW to improve transparency and access to greenhouse gas emissions data, including reforms to the NGER scheme and the establishment of Environment Information Australia to provide easier access to environmental data for businesses. Further, in the 2024-25 Budget, the Government allocated $28.7 million over a ten year period (including $0.9 million per year ongoing from 2028-29) to improve accounting of greenhouse gas emissions within the agriculture and land sector. We anticipate this proposal will be welcomed by investors, given the lack of consistent and comparable data is one of the most significant barriers to responsible investment practice.

Australia as an international leader in sustainable finance

Through the Roadmap, Australia aims to position itself as a leader in sustainable finance through a series of strategic initiatives and policy measures.

Sovereign green bonds: The Roadmap highlights the Commonwealth's issuance of its first green bond on 4 June 2024. The green bond was issued to fund projects such as green hydrogen hubs, community batteries and clean transport. This initiative demonstrates the Government's commitment to align with international leaders like Japan and the EU, which have successfully issued green and transition bonds to support their sustainability goals. Sovereign issues represent under 20% of all bond issuances and 80% of all sovereign sustainable bonds on issue are green bonds. Australia's contribution to global green bond issuance has historically been low. However, there have been successful green bond issuances at the State government level, such as those by NSW Treasury Corporation and Queensland Treasury Corporation and the University sector.

Information architecture and international engagement: the Roadmap signals that Australia is in the midst of building new information architecture around sustainability metrics, reflecting the significant work on taxonomy development across the globe. Efforts are being made to harmonise compliant assets and metrics covered by different taxonomies across jurisdictions:

• For example, the Hong Kong Monetary Authority is proposing to be the first market to operationalise the International Platform on Sustainable Finance's (IPSF) Common Ground Taxonomy (CGT), seeking to bridge the EU's technical screening criteria based taxonomy and China's whitelist based approach. The CGT is a joint development of the authorities of Mainland China and the EU under the IPSF.
• On transition funding, Japan has developed its Climate Transition Bond Framework and Green Transformation programme - a public/private partnership which seeks to catalyse $1 trillion of investment over 10 years towards reaching its Nationally Determined Contributions under the Paris Agreement.

These global taxonomies and programs provide a benchmark for best practices. This is reflected in the Roadmap, which emphasises the need for increased international engagement to promote Australia as a leader in this space and consistent global standards and interoperable frameworks to enable the frictionless flow of financial capital. This approach also requires consideration and recognition of Australia's unique position (mining and agriculture base, raw and critical minerals reserves and processing opportunities, the present reliance on fossil fuels and abundance of renewable energy resources, decentralised coastal demographics and the presence of rural and remote communities across a vast geography, and the nation's vulnerability to certain natural disasters). Australia plans to host the Global Nature Positive Summit in 2024 to build consensus on principles and policy settings to deliver investment in nature.

Why organisations should start preparing for compliance

Significant developments are expected in the next year or so, highlighting the need for organisations to start preparing for the following initiatives:

• ASIC guidance and standards: Finalisation of ASIC guidance and Australian Accounting Standards Board and Auditing and Assurance Standards Board disclosure assurance standards for mandatory reporting is expected by the end of 2024.
• Final sustainable finance taxonomy: Completion of the sustainable finance taxonomy is expected by the end of 2024.
• Sustainable product labelling: Treasury will consult on the establishment of label and disclosure requirements for sustainable investment products starting early 2025, with a target commencement of 2027.

MinterEllison is available to provide comprehensive support in helping your organisation navigate the sustainable finance landscape. Our Social Impact team supports businesses across the profit-for-purpose and social enterprise spectrum, seeking to amplify social impact through impact investment, social and sustainable finance, and cross sector collaboration.