Can a taxonomy filter greenwashing from the economy?

Australia is on the brink of a significant shift in how it attracts and channels green investment with the development of its first sustainable finance taxonomy. 

By tailoring the framework to Australia’s specific needs, the “green” taxonomy will provide common definitions of sustainable economic activities and enhance the ability to showcase green credentials effectively.

The project is led by the Australian Sustainable Finance Institute (ASFI), in partnership with the Commonwealth Treasury, and is currently in the initial development phase. 

Nicole Yazbek-Martin, head of taxonomy and natural capital at ASFI, explains that its primary aim is to mobilise private capital toward activities in Australia that can significantly decarbonise the economy and support the transition to net zero emissions by 2050. 

She says it will also guard against greenwashing, where companies make unsubstantiated claims about environmental benefits to attract investment, she says.

“The financial services sector identified the development of a sustainable finance taxonomy for Australia as a priority to attract green capital and avoid the cost of greenwashing,” says Yazbek-Martin. 

“They want to be competitive in international markets and they want to start to classify opportunities in the Australian economy as green.

“Without a green taxonomy, many green investment opportunities in the Australian economy would remain invisible to global capital markets, resulting in missed opportunities for inward investment.”

Learning from existing taxonomies

The Australian taxonomy is influenced by international frameworks like the European Union’s (EU) taxonomy, but it will be tailored to Australia's specific environmental, economic and social context to mitigate the risk that European definitions could be applied to the Australian economy.

“We've taken a lot of pride in our early follower status to say that we recognise the EU has the benchmark taxonomy,” says Yazbek-Martin. 

“We are using the lessons that have been learned there, as well as working closely with Singapore and ASEAN [Association of Southeast Asian Nations], who are also emerging as leaders in developing taxonomies for our region.

“But the EU taxonomy focuses heavily on the services sector, while much of our economy is still centred on primary production, such as mining and agriculture. 

“If we don’t develop our own, there is a risk that European definitions would be used to assess green investments in the Australian economy, which may not fully align with our specific environmental and economic context.”

For that reason, Australia’s green taxonomy will initially focus on climate change mitigation across six economic sectors: electricity generation and supply; minerals, mining and metals; construction and the built environment; manufacturing industry; transport and agriculture.

“By following the same framework and scientific approach as the European taxonomy, but tailoring it to local circumstances, Australia can effectively showcase our green opportunities within the parameters of those global standards,” says Yazbek-Martin.

“There is a hope within the global investment community that this will become quite a strong benchmark and that Australia can move from being an early follower to a leadership position.” 

Criteria for a green taxonomy

Sustainable finance taxonomies play an important role in helping investors assess whether an entity — and its investment plans — are meeting robust environmental standards and align with high-level policy commitments such as the Paris Agreement.

This works by providing clear, consistent definitions for green and transition activities, which enhances consistency and assists investors in uniformly evaluating the “green” aspects of investment opportunities.

Geri McMahon, climate change & sustainability partner at KPMG Australia, explains that while the criteria are still in development for the Australian context, the taxonomy is expected to include the Do No Significant Harm (DNSH) principle, which ensures that actions contributing to one environmental objective do not negatively affect others. She says it will consider the life cycle impacts of assets, activities or projects, including supply chain implications.

“Another example of the criteria used is Technical Screening Criteria, which defines the specific, substantive performance metrics and thresholds activities must meet to be classified as ‘green’ or ‘transition’,” she says.

Additionally, the Minimum Social Safeguards Criteria sets out social standards and guidelines for companies to follow in line with taxonomy-aligned activities.

“This might include provisions for corporate governance, human and labour rights, and respecting First Nations Peoples and cultural heritage,” says McMahon.

As Australia moves forward with this critical development, Yazbek-Martin says the success of its green taxonomy will depend on its ability to effectively integrate these criteria, align with global standards and address local needs.

“Information is the biggest currency for the efficient operation of capital markets, so it's pretty crucial at this stage that we put the guardrails in place so that we can channel capital to genuine green investments,” she says.

“When green markets first emerged there was a lot of activity and enthusiasm, but as the market matures, now's the time for everybody to agree on the parameters of what is green and what is not, so we can channel capital efficiently and achieve our net zero goals.”