How to Make Australia’s Taxonomy a Success
Industry engagement has been key to getting the classification framework this far, says Nicole Yazbek-Martin, who led the work at ASFI.
When the Australian Sustainable Finance Institute (ASFI) started work on the country’s green taxonomy, back in July 2023, it was very much an industry-led project.
While Anthony Albanese, who took over as Prime Minister in 2022, had much greener credentials than his predecessor, there wasn’t a hard policy push to get a taxonomy up and running.
Instead, this was something that the private sector was calling for. Firms wanted to be able to tap into the green finance revolution they saw taking place elsewhere in the world.
Nicole Yazbek-Martin, ASFI’s Head of Taxonomy and Natural Capital, says that this has been a huge advantage to the way in which the country’s new taxonomy has evolved.
“Right from the beginning we took a very collaborative approach in the design of the taxonomy, with industry initiating and leading in its early stages, and continuing to provide valuable feedback in terms of design recommendations throughout the process,” she said.
“This has helped us focus on specific decarbonisation measures and think about potential future use cases as part of that initial development process.”
The development of Australia’s taxonomy has been overseen by an independent group of industry experts, with separate advisory groups set up to look at specific sectors that are considered crucial to the country’s green transition.
For example, mining – which has been left to one side in many other taxonomies – is so important to the Australian economy that it had to be tackled in detail.
This is distinct from the top-down way in which the EU designed its own taxonomy, one of the earliest attempts by a major jurisdiction to map out what a green classification system should look like.
Europe’s approach to building its sustainable finance infrastructure has caused some challenges. For example, investors have been asked to disclose information before corporate-level data has been allowed to flow through. There have also been issues in aligning the do no significant harm requirements with the technical screening criteria for specific environmental objectives. Now uncertainty lingers over the EU’s net zero strategy, including its taxonomy, as the European Commission gears up to unveil its new omnibus framework.
“I think industry got more involved in the European process as things moved along, and started to provide quite deep and detailed feedback. We made sure that we had that engagement from the very beginning,” said Yazbek-Martin.
It helped that Australia was able to learn from Europe and other jurisdictions that were also in the process of developing green taxonomies.
“A lot of people engaged in our project were able to draw on the experience of the EU, anticipating what they wanted to see and what they didn’t want to see,” said Yazbek-Martin.
One of the areas in which the Australia taxonomy stands apart from the EU is the inclusion of a distinct transition category alongside a pure green one. This addition aims to mobilise capital towards initiatives that facilitate the decarbonisation of hard-to-abate sectors. This meant covering a finite number of carbon-intensive sectors rather than trying to cover them all.
“We see the taxonomy not as an end in itself but as part of the journey to a greener economy,” said Yazbek-Martin. “Facilitating that movement over time is about identifying the right levers along the pathway that will help us get to green. Giving people an indicative pathway about where we want to end up helps them think of the steps they need to take today.”
ASFI has only just today (14 February) submitted its final version of the taxonomy to the government, following the conclusion of a second consultation with stakeholders. It will now be up to the government to decide how the framework is rolled out. Yazbek-Martin says that this should be up and running in the first half of this year.
The taxonomy will initially be voluntary, but the government has said that it could eventually be embedded in Australia’s regulatory framework. Much of this will depend on what happens in the general election due to take place in May. While Albanese proudly flaunts his green credentials, Liberal opponent Peter Dutton swings the other way, having previously said that if elected he would scrap the nation’s legally-binding 2030 climate targets that were introduced in 2022.
Boundary lines
Yazbek-Martin said a key consideration when developing a green taxonomy is how it will work alongside existing or emerging standards and regulations.
“Taxonomies don’t operate very well in a vacuum,” she said. “Where you have standards, processes, protocols, methodologies in place – that is where the taxonomy fits very nicely.”
What this means is that, in designing the taxonomy, ASFI had to be very careful not to stray into those areas of the economy in which the carbon footprint is hard to define or where regulations are likely to change.
“The criteria were designed in such a way that people have to report against these obligations anyway,” said Yazbek-Martin.
For instance, Australia already has in place a National Greenhouse and Energy Reporting scheme, under which firms that meet certain thresholds are required to disclose detailed emissions, energy production and energy consumption.
Furthermore, as of the start of this year, Australia’s companies are now required to report on their climate risks within a separate sustainability report as part of their annual financial disclosures. Entities will be required to disclose information according to the local adaptation of the International Sustainability Standards Board climate standard, IFRS S2.
ASFI has been able to leverage these frameworks for many areas of the economy. But there are others in which boundary lines are not so well established. This is true of certain types of manufacturing where inputs into the finished product may shift over time or where assessing carbon emissions along the supply chain is tricky.
One example is aluminium production, where allocating/attributing emissions between the processing of raw alumina and the finished material is still being defined. The production of steel is another problematic area, with no consensus on how to categorise the use of recyclable scrap metal in the process.
“How do you set your emissions intensity around an activity when you don’t know what the boundary of that activity is?” said Yazbek-Martin. “We’ve come up against many areas where we have foreseen clear usability challenges, prompting us to ask: do we go ahead with crafting an activity or do we leave it and just identify key decarbonisation measures that the industry can invest in in the meantime?
“In some instances we’ve chosen, at this point in Australia’s taxonomy development, not to put forward a full green criteria for the activity because the boundary line is not clear and so the emissions intensity will be disputed. This is a design choice that we have had to make.”
Mining opportunities
There was one sector of the economy, however, that could not be ignored, despite poorly-defined boundary lines: mining.
According to the latest figures from the Reserve Bank of Australia, mining contributed 12.2% of industry output in 2024, marking the sector out as one of the most important for the economy, just below health and education.
At the same time the sector presents some of the biggest risks for sustainability investors. This is one of the reasons why the designers of taxonomies have found it so hard to define criteria for it. Earlier this year the Platform for Sustainable Finance published a report offering recommendations for how the EU’s taxonomy should handle the mining sector.
“We developed and designed the taxonomy so that more capital can flow towards the decarbonisation of the Australian economy, but as we started engaging with the mining sector we found that there was nothing that really told the story from its perspective,” said Yazbek-Martin.
“It’s not included in the green frameworks and, by this very exclusion, it’s being defined as non-green. The mining industry was very interested in the opportunities that a taxonomy presents for unlocking green finance without looking at things through a regulatory lens.”
But how to define this?
“The key trick – and this is coming through in other taxonomies that are now starting to define mining criteria – is that the actual extraction of minerals is often only a very small part of emissions along the supply chain. Can you honestly look at the extraction process as green where most of the emissions contributions happen downstream?” said Yazbek-Martin.
Posing this question meant that Yazbek-Martin and her team had to work closely with industry to determine downstream requirements for different types of mining activity.
“We don’t do this for all minerals. We have a rule of thumb around the materiality of Scope 3 emissions based on SBTi [Science Based Targets initiative] definitions,” said Yazbek-Martin. “For iron ore extraction, 90% of the emissions in the value chain sit outside the mine site, but many other mining processes are quite emissions-intensive in and of themselves, so we don’t need to define downstream requirements.”
Making it a success
Mining is just one example of how the industry-led approach underpinning the development of Australia’s taxonomy has helped shape a segment of the economy beyond regulatory obligations. It is this kind of collaborative engagement that Yazbek-Martin hopes will make the taxonomy a success as people start to use it.
“There is a lot of eagerness to get going with the pilot phase of this project in the second half of this year. The experience of industry working closely with regulators in a voluntary context will lead to an understanding of what works and where more guidance is needed. It will also help all parties to consider how the taxonomy could be integrated into the regulatory architecture, if this is the path that the government chooses to head down,” said Yazbek-Martin
Early industry engagement and strong partnership with government have been crucial for reaching the point that the taxonomy is at today, underscored Yazbek-Martin. The foundations of success have been laid.
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