The transition to a net zero economy has been described as among 'the largest and fastest economic transformations in history'. Treasury recently released a Sustainable Finance Roadmap which outlines a comprehensive 'climate first, not only' reform agenda. It details three pillars that aim to enable Australia's financial markets to mobilise the significant amounts of private capital necessary to respond to the demands and opportunities in decarbonising Australia's economy, as well as nature-related risks and opportunities.
In this Insight, we summarise the federal government's ten policy priorities for those pillars, and highlight key takeaways for in-house legal teams.
Pillar One: Improve transparency on climate and sustainability
Pillar Two: Financial system capabilities
Pillar Three: Federal government leadership and engagement
Key takeaways for in-house counsel
Pillar One: Improve transparency on climate and sustainability
Consistent with its 'climate first, not only' approach, the government's four priorities under Pillar One are:
- implementing mandatory climate-related financial disclosures (CRFD);
- developing the Australian Sustainable Finance Taxonomy (Taxonomy) starting with climate mitigation;
- supporting credible net zero transition planning; and
- developing sustainable finance labels and disclosures.
Pillar One's regulatory developments will have economy-wide effects, perhaps most immediately for the finance and investment sector, but also for sectors that are the focus of the government's decarbonisation pathways - energy generation, mining and minerals, construction and built environment, transport, manufacturing and industry, and agriculture and land sectors.
Priority 1 – Implementation of the CRFD regime, which is imminent
Having passed the lower house, the CRFD enabling legislation has only to pass the Senate, with a likely commencement date of 1 January 2025. Reporting entities will need to comply with climate disclosure standards, due to be released by the Australian Accounting Standards Board in August. ASIC will develop and consult on guidance for reporting entities, though any guidance is not expected to be released until the end of 2025. In the longer-term, the government will consider extending disclosure requirements to nature-related standards which are currently being developed by the International Sustainability Standards Board (ISSB).
Priority 2 – Taxonomy to be released for voluntary use by firms, investors and regulators in mid-2025
Following the development of sustainable finance taxonomies in the European Union, ASEAN, and other relevant markets, the Australian Sustainable Finance Institute (ASFI) is developing an Australian Taxonomy. The Taxonomy is designed to mobilise private capital towards sustainable economic activities that meet climate change mitigation objectives in the energy generation, mining and minerals, construction and built environment, transport, manufacturing and industry, and agriculture and land sectors.
Eligible activities will need to comply with the climate mitigation technical screening criteria, minimum social safeguards and meet the Do No Significant Harm criteria for five other environmental objectives (climate change adaptation and resilience, biodiversity and ecosystem protection, sustainable use and protection of water resources, pollution prevention and control, and transition to a circular economy). ASFI recently concluded its first consultation on climate mitigation criteria for the energy generation, mining and minerals, construction and built environment sectors, and will consult later this year on the remaining sectors, Do No Significant Harm Criteria and Minimum Social Safeguards.
Over the longer-term, the government will explore regulatory use cases for the Taxonomy and consider expanding it to cover additional sustainability objectives including biodiversity and ecosystem protection.
Priority 3 – Best practice guidance for net zero transition plan disclosures to be released by the end of 2025
Treasury will develop and publish guidance on best practice transition plan disclosures. It will consider:
- the needs of transition plan preparers and users;
- emerging domestic and international frameworks and standards including the United Kingdom's Transition Plan Taskforce Disclosure Framework (TPT Disclosure Framework);
- the government's forthcoming Net Zero Plan and sector decarbonisation pathways (electricity and energy; resources; built environment; industry; transport; resources; agriculture and land); and
- observed transition plan disclosure practices now and post implementation of the CRFD regime.
With the ISSB to assume responsibility for the TPT Disclosure Framework and develop it into a global baseline for transition plan disclosures, reporting entities can expect the TPT Disclosure Framework to become the global baseline, and in turn, influence Treasury's best practice transition planning guidance.
Priority 4 – Sustainable investment product labels and disclosure requirements to commence in 2027
Labels and disclosure requirements for investment products marketed as 'sustainable' will be developed for product issuers, including managed and superannuation funds. The government will consider existing industry approaches, interactions with new sustainable finance frameworks, such as the Taxonomy and international labelling developments, particularly in the United States, United Kingdom and the European Union. With divergent approaches across these three jurisdictions, product issuers with a global presence will face an increasingly complex global regulatory environment.
Pillar Two: Financial system capabilities
Pillar Two's four policy priorities are directed at expanding financial system capabilities, first to embed climate then other sustainability matters. Market participants can expect climate and other sustainability-related risks to be mainstreamed into Australia's existing corporate governance and financial regulatory framework, including corporate governance obligations, disclosures, regulatory supervision and prudential risk management.
Priority 5 – ASIC to continue its proactive surveillance and enforcement of greenwashing and sustainability-related disclosure and governance practices
While ASIC has commenced enforcement proceedings against a number of finance sector participants, its most recent enforcement activity reminds us that it is examining greenwashing practices across the market.
Priority 6 – Systemic climate-related financial risks will remain a priority for the Council of Financial Regulators
Financial sector participants can expect updated climate-related financial risk guidance from APRA, with an expectation that climate risk considerations will be embedded early in risk management frameworks. Together with the completion of APRA's Insurance sector Climate Vulnerability Assessment in mid-2025, the financial sector will be better placed to understand how climate risk emerges across the sector and manage those risks accordingly.
Priority 7 – Council of Financial Regulators to recommend options to address sustainability data challenges in early 2025
Recognising that the absence of reliable sustainability data is an impediment to assessing risks and opportunities in financial decision-making, the Council of Financial Regulators will identify options to address data challenges across four topics. These include estimation and use of scope 3 emissions by business and financial institutions, and nature-related data relevant to understanding financial risks.
Priority 8 – No plans for wholesale reforms to corporate governance obligations and financial regulation
Treasury considers that Australia's principles-based approach to corporate governance and financial regulation has effectively adapted to incorporate evolving understanding of material sustainability risks. Instead, it will:
- continue to identify policy priorities for mainstreaming sustainability considerations into corporate governance and financial institution decision-making; and
- examine options to refine the annual superannuation performance test to address concerns that the design of the test is a barrier to integrating climate and other sustainability considerations in superannuation investment decision making.
Pillar Three: Federal government leadership and engagement
The Sustainable Finance Roadmap outlines two policy priorities under Pillar Three, which relate to the government's leadership and international engagement.
Priority 9 – Treasury to continue to support implementation of the Australian Government Green Bond Framework
The Australian Government Green Bond Framework establishes governance and oversight arrangements and is compliant with the International Capital Markets Association Green Bonds Principles. The government's first green bond was issued on 4 June 2024, with its sovereign green bond program intended to:
- finance high quality government projects with targeted environmental outcomes;
- enable investors to diversify their portfolios towards sustainable assets; and
- catalyse growth in key sustainable finance products and markets.
Eligible Green Expenditures under the framework must meet one or more of the government's three key Green Goals (of climate change mitigation, climate change adaptation and/or improved environmental outcomes) and meet key criteria. With Australia's first sovereign green bond significantly over-subscribed, indicating demand amongst investors, further green bond issuance by public and private sector issuers alike is likely to follow.
Priority 10 – Government to step up Australia's international engagement on sustainable finance
The government has committed to making Australia's sustainable finance and disclosure frameworks interoperable in Australia's broader climate and nature-related international engagement. It will continue to support innovative financing models and approaches to support sustainable investment in the region. Investors may see a broader range of investment opportunities through blended finance and other innovative funding models.
Key takeaways for in-house counsel
The trajectory of the government's Sustainable Finance Roadmap is made clear in its 'climate first, not only' approach. In-house counsel have a pivotal role in assisting their organisation to discharge evolving regulatory requirements and capitalise on emerging opportunities. We recommend they consider:
- whether their organisations understand when and how these developments will impact them. Also consider whether engagement with government, regulators and industry bodies may assist in ensuring fit-for-purpose regulatory outcomes;
- the cumulative effect of those impacts across the organisation. Legal teams can assist to navigate new regulatory requirements and support organisations to take a forward thinking and integrated approach to operationalising new regulatory requirements;
- how to ensure subject matter experts across key sustainability areas such as finance, climate, nature, human rights and risk management are called upon to assist in discharging evolving regulatory obligations; and
- engaging with key internal stakeholders to ensure they understand the trajectory of regulatory reforms, the increasingly likely potential for the introduction of mandatory nature-related financial disclosures and ensure internal teams are adequately resourced.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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