How will Australia’s new sustainable finance taxonomy impact the mining sector? #IndustryFinance

Following the development of sustainable finance taxonomies in the European Union, ASEAN and other relevant markets, the Australian Sustainable Finance Institute (ASFI) is currently developing an Australian taxonomy. The taxonomy reinforces the Federal Government’s ambition to drive a net zero transition both domestically and internationally through a variety of regulatory tools.

Designed to mobilise private capital towards sustainable economic activities that meet climate change mitigation objectives, the taxonomy is complex, evolving and will be subject to ongoing review. However, an opportunity exists now for mining sector participants to influence the types of minerals, activities and thresholds that will fall within the taxonomy and contribute to a workable framework.

Sustainable finance taxonomies are science-based frameworks that provide guidance to market participants on how to identify projects, assets and activities that are low-carbon or compatible with low-carbon economic development or are environmentally sustainable. Their aim is to direct investments to the activities most needed for the transition to net zero and environmental sustainability. Taxonomies can help align investments with national environment policies and sustainable development plans and are increasingly used as a governmental tool to facilitate compliance with the Paris Agreement goal of limiting global warming to below 1.5 degrees Celsius by the end of the century.

There are currently over 40 sustainable finance taxonomies in place or under development globally, which aim to implement multiple climate, environmental and social objectives. At this stage, however, most focus on achieving climate change objectives as a priority. Key objectives include ‘climate change mitigation’ which focuses on reducing greenhouse gas emissions and achieving decarbonisation of sectors across the economy and ‘climate change adaptation’ which focuses on building the adaptability and resilience of assets and activities across all sectors and helping stakeholders to address the current and expected adverse impacts of climate change.

Taxonomies can be used by financial institutions and corporates as frameworks for reporting, setting disclosure obligations and for ‘labelling’ financial products. They can also provide guidance on parameters for developing and implementing energy transition plans that align with net zero objectives. For example, the EU introduced a taxonomy in July 2020 and under new rules large, listed EU companies have started to report against two of the EU taxonomy’s key objectives – climate change mitigation and climate change adaptation. Initial evidence is that companies, public entities and financial investors are increasingly using the taxonomy for business strategies, transition planning, investing and lending. If implemented effectively and continuously, taxonomies can be a significant driver of change.

Does Australia have a sustainable finance taxonomy?

The Australian Taxonomy Development Project commenced in July 2023. It is a joint industry-government initiative, led by the Australian Sustainable Finance Institute (ASFI) in partnership with the Commonwealth Treasury, to develop an Australian sustainable finance taxonomy. The project has an initial climate change mitigation objective and a significant transparency focus, and is seeking to strengthen transparency, improve financial market regulation and drive growth in sustainable finance markets. It also identifies six priority economic sectors to focus on.

These priority sectors were selected for inclusion in the taxonomy because they provide the greatest potential to contribute to the Federal Government’s net zero ambitions (including its Net Zero Plan) and support the Future Made in Australia strategy. They are a mix of high-emitting sectors, those that are instrumental in facilitating the transition to net zero, and/or those that have a substantial role in a net zero economy based on current technological readiness levels. Importantly, one of these sectors is minerals, mining and metals.

While the taxonomy will initially be voluntary, the Federal Government is considering ‘embedding the taxonomy in Australia’s regulatory architecture’, meaning it may ultimately become interlinked with Australia’s climate-related financial disclosure regime, which will commence on 1 January 2025. It is therefore important for all market participants who engage in (or with) the mining sector (including lenders, equity investors and those engaged in the mining sector more broadly) to build an early understanding of the activities that are considered as contributing to net zero.

Why a focus on minerals, mining and metals?

There are two key reasons for the focus on the minerals, mining and metals sector:

1. Critical and strategic minerals. Large quantities of metals are required for the clean energy infrastructure and technology that supports a global energy transition. As a result there is expected to be significant growth in demand for relevant critical metals including copper, nickel, lithium and cobalt. This creates opportunities for the Australian mining sector. However, the Government wants to ensure that related mining activity is undertaken in an environmentally and socially sustainable way.
2. Iron ore. Steel is a key component of most modern technologies and infrastructure and its principal raw material is iron ore. Iron ore is Australia’s largest resources export, accounting for 41% of total mining export earnings. It is therefore a vital mineral for Australia’s economy. However, there is a recognition that decarbonisation is a key factor in the ongoing sustainability of the iron ore sector and an appropriate area of focus.

In general, once priority sectors are identified for inclusion in a taxonomy, the economic activities within each priority sector are analysed to determine which activities contribute meaningfully to the taxonomy’s objectives (i.e. to climate change mitigation). This task is complex and, in the context of the Australian mining sector, quite novel, as to date, mining activities have only been included in other global taxonomies to a limited extent to date.^[1]

This means there is limited guidance on the types of activities that should be considered as contributing to the energy transition and emissions reduction.

This creates an opportunity for the Australian mining sector and related stakeholders to influence how these activities (and minerals) are perceived globally, and ASFI is encouraging all stakeholders to contribute to the discussion and development of these criteria.^[2]

What activities are eligible for inclusion in the taxonomy?

Two filters apply to determine whether an activity is eligible for inclusion in the taxonomy. These are:

1. Nature of the activity. Each of the minerals selected for inclusion in the initial phase of the taxonomy has been classified as a ‘green’ or ‘transition’ activity because:

   •   they have a role in the global economy post 2025;

   •   the risk of locking in future high carbon emissions is moderate although can be mitigated; and/or

   •   they can be decarbonised across scope 1, 2 and 3 emissions.

2. Performance of the activity. To be classified as green or transitionseparate technical screening criteria (TSCs) also need to be satisfied. These TSCs (still under development and subject to consultation) define the specific substantive performance requirements, thresholds and/or other metrics the activity must meet. In the next phase of development, further social and environment-focused criteria will also be applied.

The proposed TSCs currently apply to operating mines and are slightly different for each mineral. However, as a general rule, to achieve transition status, a mine site must be implementing eligible measures to address more than 50% of its fuel costs and/or 50% of scope 1 emissions (at 2020 baseline) via ‘eligible measures’, including:

• electrifying or powering the vehicle fleet by low carbon fuels;
• switching electricity sources (from grid non-renewables and on-site diesel generation to grid or on-site renewable power generation); and
• deploying energy storage technology.

To achieve green
status, emissions must be reduced under a sliding scale to zero by 2036. Iron ore is treated slightly differently because it has a significantly larger contribution to emissions in Australia. As a result, in addition to implementing eligible measures at the mine site, scope 3 emissions reduction targets must also be met to achieve transition status. This is intended to incentivise less CO2 intensive forms of iron reduction.

Additional targets must be met to ensure green status for iron ore, including a reduction in mine site emissions and scope 3 emissions. The scope 3 reduction requirement can be satisfied by having:

• an offtake agreement in place to supply more than 25% of the current volume of iron ore to a low carbon steel producer (with more than 50% of volume produced at the mine site agreed to be part of the offtake agreement by 2030); or
• offtake agreements with whole entities that are decreasing steel production emissions in line with a 1.5 degrees Celsius pathway.

These emissions reduction targets are acknowledged to be ambitious and to have the objective of accelerating emissions reduction and the growth of low carbon steel production domestically and internationally.

Looking ahead

The development of the taxonomy reinforces the Federal Government’s ambition to drive a net zero transition both domestically and internationally through a variety of regulatory tools, and we can expect to see financiers and companies prioritise investments in activities with green or transition status.

The establishment of a clear set of climate change mitigation criteria to voluntarily perform to and report against will establish a strong foundation for a future mandatory reporting and disclosure regime for entities that use the taxonomy (and we can expect this to follow). Further, the ‘eligible measures’ criteria for reducing scope 1, 2 and 3 emissions at mine sites signals an increased push towards decarbonisation through vehicle fleet electrification, energy storage, renewable energy and low carbon fuels – we can expect to see a proliferation of decarbonisation projects to facilitate this.

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Australia’s sustainable finance taxonomy is complex, evolving and will be subject to ongoing review. However, an opportunity exists now for mining sector participants to influence the types of minerals, activities and thresholds that will fall within the taxonomy and to contribute to a workable framework.

^[1]

The Taxonomy Technical Expert Group (TTEG) is the body tasked with developing the initial phase of the taxonomy in consultation with the Australian Council of Financial Regulators’ Climate Working Group (CWG) and AFSI.

^[2]

The IFC Net Zero Roadmap to 2025 for Copper & Nickel Mining Value Chains and the Climate Bonds CRM criteria provide some guidance. There will be a second round of public consultation in Q4 2024. ASFI is engaging with a range of stakeholders including First Nations people, environmental NGOs and organisations involved in developing international taxonomies.