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This new framework aims to accelerate the flow of capital towards activities that align with Australia's climate ambitions, particularly the legislated target of net-zero emissions by 2050. It is also part of the sustainable finance roadmap from Treasury.
As Australia's mandatory climate disclosure regime comes into effect, the Taxonomy is expected to become a valuable reference for corporate reporting. The ACCC has already greenlit a pilot collaboration for ASFI and its member banks to collaborate on practical feedback on implementation of the ASFT. The Taxonomy can also help entities demonstrate progress towards climate-related opportunities, especially under the Australian Sustainability Reporting Standard AASB S2 Climate-related Disclosures and the potential future Sustainable Investment Product Labelling (for which the first Treasury consultation is closing 29 August 2025).
At its core, the ASFT is a classification system designed support identification of economic activities and investments that contribute positively to key environmental sustainability objectives. The purpose of the ASFT as stated by the ASFI is to support “the credible allocation of capital towards Paris-aligned activities by:
The Taxonomy is expected to develop into a market standard for sustainable finance in Australia, guiding investment decisions, disclosures, and product labelling, even though its current use is voluntary. This initiative was one of ten priority areas of the Australian Government’s Sustainable Finance Roadmap, which seeks to mobilise private capital for the net-zero transition.
Version 1 of the ASFT prioritises performance criteria for climate change mitigation. It sets out technical screening criteria (TSC) for 71 activities across six priority sectors: electricity generation and supply, minerals, mining and metals, buildings, manufacturing and industry, transport, and agriculture and land.
A key differentiator of the ASFT is its inclusion of both ‘green’ and ‘transition’ pathways. While "green" activities directly align with substantial greenhouse gas (GHG) emissions reductions through low-emission substitutes and enabling technologies, “transition” activities are vital for emissions-intensive sectors that need to progressively decarbonise towards a 1.5°C pathway, especially where immediate low or zero-emissions equivalents are not yet available.
To be considered Taxonomy-aligned, an activity must meet three fundamental conditions:
Specific, measurable performance thresholds based on science-based decarbonisation scenarios, such as those from the International Energy Agency (IEA), CSIRO, and Climateworks Centre, tailored to the Australian context using local data.
The activity must not cause significant harm to any of the Taxonomy's five other environmental objectives. These objectives are:
The DNSH criteria are based on Australia's environmental laws and regulations and include both generic and activity-specific requirements.
The entity undertaking the activity must meet minimum standards for corporate governance, human rights, and First Nations peoples’ rights (the Social Pillars). This is assessed at the entity level and is informed by international and domestic legislation and guidelines, including the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct and the United Nations Guiding Principles on Business and Human Rights (UNGPs).
The ASFT has been designed for international interoperability, closely modelling the European Union (EU) and Singapore taxonomies, while incorporating elements specifically tailored to Australia's unique context, particularly in mining, agriculture, and remote energy systems. It is also intended to be a "live document", subject to periodic revisions to incorporate updated pathways, technologies, and expand to other environmental objectives.
Within the Agricultural sector, a wheat farm may have several activities (green and transition) that are eligible for taxonomy alignment. An eligible activity for the farm may be “Green perennial and non-perennial cropping”. The first step is confirming that it meets the technical screening criteria. Under this activity, there are several criteria, one of which is having a documented plan that outlines nutrient management optimisation, sustainable soil management and integration of carbon stock in vegetation.
After confirmation that Technical Screening Criteria have been met, next step is checking the activity meets DNSH criteria. The criteria apply at an activity-level and consider impacts throughout the life of an asset, activity or project. An example of a criterion for Objective 1: Climate change adaptation and resilience, is: “Climate-related physical risks are identified and substantially mitigated”. Within this criterion, if a physical climate risk that may materially impact the activity is identified, such as drought, a Climate Risk Assessment (CRA) should be conducted and documented. Based on the CRA findings, an adaptation plan should be implemented, with the implementation timeline depending on whether it’s a new or existing activity. For each objective, there are around 3-4 DNSH criteria to be met.
The last step is ensuring Minimum Social Safeguards (MSS) are met. Looking at the second pillar of Human rights, the second criterion relates to human rights due diligence in operations and the supply chain. To the wheat farm, this would mean ensuring that all workers on the farm and their working conditions are documented correctly – including responsibility for due diligence of workers that have come through an agency.
Once all the criteria are met and appropriately documented, the activity is considered “taxonomy-aligned”
The development of sustainable finance taxonomies is a global trend, with over 45 national, regional, and international frameworks published or in development. For European Union member states, the EU Taxonomy is used as a classification system for environmentally sustainable activities and providing a common language to direct investments and prevent greenwashing.
Similarities: Both the ASFT and the EU Taxonomy aim to provide clarity and integrity to sustainable finance markets by defining sustainable economic activities based on science-based pathways. They share similar core components, including criteria for substantial contribution to environmental objectives, Do No Significant Harm (DNSH) principles, and Minimum Social Safeguards (MSS). Both recognise the importance of transparency and aim to reduce greenwashing.
The Australian Sustainable Finance Taxonomy is a significant step towards creating a robust, credible, and interoperable framework for sustainable finance in Australia.
While voluntary for now, its influence is set to grow, making it an essential tool for businesses seeking to demonstrate their commitment to climate goals, attract capital, and manage risks in an increasingly sustainability-conscious market. By drawing on the experiences and lessons learned from the EU Taxonomy, Australian businesses and financial institutions can approach its implementation strategically, ensuring a smoother transition and ultimately positioning Australia as a leader in the global sustainable investment landscape.
For further information, please reach out to our sustainability reporting team at Grant Thornton. Our team of specialists are knowledgeable on the nuances of both current sustainability reporting requirements and navigating strategic alignment with frameworks such as the ASFT.
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