Materiality of additionality
Increased certainty on the climate alignment of specific activities could be an important input in making sure capital and resources are directed to areas of maximum impact. Market users say it will also help avoid concentrating efforts where no further help is needed.
One of the first rules of comedy is ‘don’t put a hat on a hat’. By the same token, sustainable finance is not optimsed when it is funnelling resources and capital toward activities that are already sufficiently green.
Nicole Yazbek-Martin, the Australian Sustainable Finance Institute (ASFI)’s head of taxonomy, says the local taxonomy makes an important distinction between climate alignment and additionality. “We are defining green as activities that are aligned with a 1.5-degree trajectory,” she says. “We don’t want to be incentivising energy efficiency to the nth degree with no end. Holistically, we want to allocate capital to entice value, including from climate perspectives.”
The two main ways to ensure homes are on a 1.5-degree aligned trajectory, Yazbek-Martin continues, is to build them for optimal energy efficiency and ensure they are all electric. “Once we get to a point in the building code where the energy efficiency of the building is optimised for 1.5-degree alignment, we don’t need to incentivise continually above this. It feeds into additional cost and misallocation of capital when there are other areas to focus on.”
In the draft taxonomy consultation, ASFI asked users if the taxonomy should allow for a 10 per cent energy efficiency uplift on National Construction Code (NCC) requirements, as is required by Climate Bonds Initiative (CBI)’s green star buildings criteria and in the same manner as the EU’s taxonomy requires benchmarking against its “nearly zero energy” building standard.
Given the strength of the NCC standard, Yazbek-Martin says the requirement for an uplift above it may not necessarily be required by the Australian taxonomy criteria.
Once we get to a point in the building code where the energy efficiency of the building is optimised for 1.5-degree alignment, we don’t need to incentivise continually above this. It feeds into additional cost and misallocation of capital when there are other areas to focus on.
In particular, adding this further requirement would likely not produce a significant impact. According to the draft taxonomy, a 10 per cent uplift on NCC requirements would reduce energy consumption in the building sector by 3 per cent in 2050 and greenhouse gas emissions by 0.013 per cent from a 2024 baseline.
“It creates a tiny reduction in emissions but also a lot of potential usability hurdles. We have to ask what the value of this trade-off really is,” Yazbek-Martin explains. “Our proposed criteria use the building code for energy efficiency threshold, which is a 1.5-degree-aligned standard, and eliminates the use of fossil fuels by requiring electrification. This combination makes very strong criteria, which are more climate-aligned than current criteria like CBI and the EU.”
ASFI hopes the taxonomy will become the green criteria for residential mortgage-backed securities. Yazbek-Martin tells KangaNews: “It is highly credible and its linkage to the building code to demonstrate energy efficiency provides a clear and easily identifiable benchmark for banks to use.”
Ché Wall, director at Flux Consultants, says a 10 per cent uplift is largely arbitrary in the case of the EU’s taxonomy. He asks: “What is the science behind 10 per cent – why not 15 per cent or 20 per cent? How much of a difference does it make? When building codes are written, they do a lot of work on societal cost benefits. It may not be perfect, but there is substance. There is no indication that a 10 per cent uplift is in the best interest of the planet.”
