Australian sustainable-debt market striving for local application of EU taxonomy
The most active participants in Australia’s sustainable-finance market are considering how the EU taxonomy’s technical report may be locally applicable. It is early days for a local understanding and application of European principles, but harmonisation between jurisdictions appears to be a preferred outcome for many – including leveraging the EU’s work to reinforce local standards.
The EU taxonomy technical report was published on 18 June with the purpose of providing comprehensive criteria for issuers of and investors in financial products that have an environmental purpose. The aim is better to connect market practice with political goals such as the UN sustainable development goals and the Paris Agreement targets.
The EU has long been a global champion in sustainable-finance initiatives and the hope is that the taxonomy will add another constructive tool to the arsenal of investors concerned about environmental outcomes and issuers wishing to demonstrate their environmental credentials in a robust and measurable way.
The taxonomy will not carry legislative force outside Europe. However, its developers and exponents hope it will help to harmonise developing policies in other jurisdictions – of which Australia could be one. What the local market needs to decide is the extent to which local factors demand a different approach versus the benefits of outright alignment with the EU guidelines.
Preference for alignment
The broad goal of sustainable-finance market participants in Australia appears to be harmonisation of policies between jurisdictions, with the EU taxonomy providing a useful roadmap to alignment.
At a presentation of the Responsible Investment Association Australasia (RIAA) responsible investment benchmark report 2019 in Sydney on 3 July, Simon O’Connor, Melbourne-based chief executive at RIAA, told the audience: “Our preference would be to not have different taxonomies in each jurisdiction. We should look at how the EU taxonomy would be relevant and how it could be applied locally.”
Work is already underway to define the boundaries of Australia’s sustainable-finance market. The existence of a global guide like the EU taxonomy may expedite and shape local thinking on the key issues.
The Australian Sustainable Finance Initiative (ASFI) has begun work on developing a sustainable-finance roadmap for local market participants. It has established technical working groups to focus on the mobilisation of capital, the sustainability of the financial system, informed decision making and meeting community expectations.
ASFI, which is a market-led initiative, is the most comprehensive push to establish an encompassing policy for sustainable finance in Australia to date. David Jenkins, Sydney-based head of sustainable finance at National Australia Bank, says while it is too early to say whether an ASFI policy document could explicitly align with the EU taxonomy the expectation is that it will produce something along the same lines as the European initiative.
Australian market participants say a first reading of the EU document suggests there could be significant overlap with local initiatives.
Mark Peacock, head of sustainable finance at Commonwealth Bank of Australia in Sydney, tells KangaNews: “There does not seem to be much in the EU taxonomy which does not align with what should be hoped for in Australia. It will of course be necessary to tailor some aspects to our local context and this will likely come into consideration for ASFI as it works towards a sustainable finance roadmap for Australia.”
Many Australian market participants operate across borders, and those issuing or investing in Europe will inevitably be exposed to the EU taxonomy via investor expectations if not outright regulatory demands. If participants are using a standard that is considered best practice in Europe, it is likely that they will prefer to carry those standards over to their domestic activities.
Marayka Ward, Brisbane-based senior credit manager at QIC, says: “We believe financial-markets participants have a role to play and ultimately a common goal to leave an improved footprint on the environment and society. But we often have different views of and agendas for sustainable investing. This is why universal classifications, such as the EU taxonomy, are useful.”
The ASFI initiative has plenty in common with offshore groups like the EU’s Technical Expert Group (TEG), which is developing the EU taxonomy. Crucially, the starting point for both is the goal of creating market-based solutions that are palatable to legislators and regulators as a means of reaching political goals like Paris Agreement targets.
The EU TEG subgroup had expert contributions from nearly 200 individual participants from the finance industry as well as industry, scientific and environmental experts. The majority of ASFI’s founding members are also from a markets background, complemented by academic and regulatory contributors.
Australian market participants believe areas where local ambitions and outcomes are likely to be similar to the EU roadmap are a logical place for ASFI to start. Jenkins cites the example of threshold criteria established in the EU taxonomy in areas like energy-efficient mortgages, which incentivise owners to improve the energy efficiency of their buildings.
The EU taxonomy threshold criteria are premised on improving energy-efficiency performance by a minimum of 30 per cent, as well as energy performance which meets or exceeds market best practice in line with EU legislative arrangements. In Australia, Jenkins says it is logical for ASFI to leverage the extensive work the TEG has already done developing the threshold criteria within the EU taxonomy.
Developing a domestic standard for energy-efficiency in residential property could be a game-changer for debt markets. There has been limited activity in labelled green residential mortgage-backed securities issuance to date, with one of the main hurdles being the lack of clearly defined standards and corresponding loan information.
Another area where Australia could likely find a local application from the EU taxonomy is around the goal of a more holistic approach to sustainable finance. The EU taxonomy seeks to broaden the universe of sustainable finance by focusing on areas of the economy where transition is needed as well as the areas that already have low carbon intensity.
The focus on transition is becoming increasingly prominent in sustainable finance, with the realisation that most environmental goals will only be met by backing industries at the start of their decarbonising journey as well as early movers. This mentality has already flickered in corporate Australia with the emergence of sustainability performance-linked loans.
Eliza Mathews, director, sustainable finance at Westpac Institutional Bank in Sydney, says bringing transition into the equation for sustainable finance is a key piece for Australia given the carbon intensity of the economy. According to Westpac’s climate-change scenario analysis, policies that incentivise early investment will lead to stronger economic growth over the medium and long term.
“Providing clarity on what kinds of expenditures, beyond existing assets, can be included means a broader range of issuers can come to the market with confidence that their financing will adhere to the gold standard of green-bond issuance. This will go some way to addressing the undersupply of product globally while maintaining the integrity of the use of proceeds,” says Mathews.
Broadening the application of the taxonomy across sectors and industries allows investors to see the transition trajectory of a borrower and thus to make decisions on which organisations are best in class, or at least making good progress towards targets.
“It is this holistic approach to sustainable finance which has been a large gap in the market to date. Transitioning carbon-intensive industries so there is transparency around their environmental performance is crucial and Australia should certainly look to align with this,” says Peacock.
The Australian sustainable-finance market, particularly in fixed income, has already come a long way in recent years. Issuance of green, social and sustainability (GSS) bonds in the first six months of 2019 was just under A$5 billion (US$3.5 billion) (see chart), well on course for a third consecutive record year.
Australian issuers to date have had a preference for complying with the green-bond of the Climate Bonds Initiative (CBI). This use of rigorous standards has established the Australian market with high compliance standards. Aligning with the EU standard is a natural extension of this approach, according to Mathews
She adds, though, that the EU taxonomy builds on existing benchmarks and further establishes the European green-bond market as the gold standard, something Australian issuers should continue to strive for.
Market participants are confident that the EU taxonomy will work in conjunction with and build upon the standards that are already being met by the Australian market. “While the CBI looks at specific assets and ensures they comply with strict criteria, the taxonomy goes further and broader to ensure there are no additional negative externalities that issuers and investors should be aware of,” says Peacock.
Source: KangaNews 15 July 2019
Furthermore, while the use of the CBI principles has been consistent in Australian green-bond issuance, market participants say a similar degree of consistency does not permeate throughout the local sustainable-finance industry.
Emma Pringle, head of customer governance and sustainability at BT Financial Group in Sydney, told the audience at the RIAA event on 3 July that one of the main roadblocks for the market in Australia is that there is no consistency of language or delivery when speaking about sustainable investing and outcomes within the industry, let alone when talking to customers.
O’Connor adds that an Australian taxonomy for sustainable finance would help to address a lot of the issues that exist around consistency and disclosure.
Ultimately, the standards being set by the EU’s taxonomy are market responses to political objectives. The fact that the EU’s taxonomy has come about in a progressive and supportive policy setting is inescapable and stands in contrast to the hands-off observatory approach the Australian government has taken through its regulatory bodies.
Peacock says: “It is important to build on the momentum coming from Europe – as there is a huge opportunity to catalyse the market here – while also advocating to policymakers the necessity of implementing something like this to ensure further development in the space”.
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