Money talks – reporting convergence across project finance and capital raising
Last year we highlighted the impact that ESG initiatives are having on financing Australia’s significant resource and renewable industry. 12 months down the track, and access to capital to fund the next wave of projects and investment continues to be one of the major challenges for Australian project operators, however the new era of reporting frameworks is poised to provide more certainty and stability for project finance.
The Equator Principles are a risk management framework created and adopted by financial institutions for assessing emerging environmental and social risks in financing projects. Since its introduction in 2003, the principles are recognised as the de facto standard for all banks and investors on how to deal with the potential environmental effects of large-scale project financing.
Equator Principles: the lack of conventional debt lending in the resource industry is well understood, as Australia’s big four banks remain cautious in lending to certain projects. The long-standing Equator Principles remain relevant when assessing project debt financing, and more conventional financial institutions and lenders than ever now align with these principles. Compliance with the Equator Principles requires participants to adhere to the ten principles for any new project that meets the specific criteria. Broadly, the Equator Principles serve as a common baseline and framework for financial institutions to identify, assess and manage ESG risks in project finance.
The Sustainable Finance Taxonomy is a set of common definitions for sustainable economic activities that can be used to credibly and transparently define sustainable investments. The taxonomy seeks to provide investors with confidence and assurance of sustainability claims, enabling comparability between Investment products and portfolios and reducing transaction costs. From the Australian Sustainable Finance Institute
Sustainable finance taxonomy: while resource projects will continue to seek alternative funding arrangements beyond debt funding, renewable projects stand to benefit from the proposed ‘sustainable finance taxonomy’ that the Australian Sustainable Finance Institute is developing. The initiative seeks to reduce the risk of greenwashing, facilitating greater confidence in supporting Australia’s energy transition. The initiative, which is supported by the likes of Commonwealth Bank, National Australia Bank, Cbus and the Clean Energy Finance Corporation, is hoped to provide a uniform methodology and framework for assessing a company and its project to ease the investigative process lenders undertake prior to investing in projects.
Currently, much of Australia’s sustainable financing is based on European taxonomy which is less than a perfect fit due to differences in transition commitments, for example, stricter restrictions on oil and gas projects in Europe as opposed to Australia. Until the Australian taxonomy is established, Australia will continue to rely on the European taxonomy. In July 2022, the European taxonomy designated nuclear and gas projects as ‘transition projects’ where credible transition plans can be demonstrated. Gas projects will undoubtedly play an essential role in Australia’s energy transition while Australia remains a significant uranium exporter. Had the European taxonomy gone in a different direction this would have had a strong impact on the Australian economy, highlighting the need for Australia to develop its own taxonomy.
The International Sustainability Standards Board (ISSB)
Unlike debt funding, historically there has been no mandatory standard or uniform framework for assessing projects for capital raising or for ESG-related disclosures. Consequently, investor confidence in capital raising is unsettled as many investors remain concerned about greenwashing, particularly without a consistent and uniform means of assessing it. The International Sustainability Standards Board (ISSB) appears set to address this uncertainty when it releases its global sustainability reporting standards early this year.
The ISSB was created at COP26 on 3 November 2021 by the International Financial Reporting Standards (IFRS) Foundation, and seeks to provide a comprehensive global baseline for sustainability disclosures to satisfy the growing demand for comparable, consistent, and reliable sustainability-related information. The Federal Government has drafted legislation and opened consultation on developing sustainability reporting standards that align with the ISSB’s. There is no conclusion on whether the standards will become mandatory or which entities will be required to report, but they will likely go a way to providing much needed certainty to both industry and investors.
The International Sustainability Standards Board (ISSB) created on 3 November 2021 at COP26 in Glasgow, is developing standards to provide a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial sectors.
The ISSB standards are set to provide comprehensive disclosure guidelines for all material sustainability-related risks and opportunities. The ISSB has indicated that reporting will cover broad reaching ESG matters including climate, biodiversity, human capital, human rights, and relations with local and Indigenous communities. The framework is comprised of two standards: the General Requirements for Disclosure of Sustainability-related Financial Information and the Climate-related Disclosures. Climate disclosure requirements are more extensive than existing reporting standards. For each standard the disclosure requirements centre on four pillars reminiscent of existing frameworks:
- Risk management; and
- Metrics and targets.
Broadening the reporting onus will place a greater burden on Australian companies to comply with the requirements. National Australia Bank, who were invited to comment on the exposure drafts provided feedback that:
- it encouraged the standards facilitating a global standardisation but identified some areas where fragmentation exists between the standards and other frameworks, standards and jurisdictional authorities which it encouraged the ISSB to remedy;
- the ‘climate first approach’ adopted was supported along with the intention to align with the Task Force on Climate-Related Financial Disclosures;
- the speculative nature of forward-looking statements was concerning and there could be difficulty grappling with Australia’s misleading and deceptive conduct laws; and
- a phased implementation should be adopted noting the considerable effort required to implement the standards.
More of the same
Australian project operators, having become accustomed to higher levels of reporting scrutiny in recent years should be poised to transition into such reporting regimes more efficiently than other industries.
Project funding, both through traditional debt lending and ECM is of course critical to the development of greenfield projects across resources and renewable projects alike. While there are continuing challenges and uncertainty following modern and varied stakeholder values, the sector appears poised to stabilise as reporting expectations for both types of financing converge and become more predictable and in turn ascertainable.
In the meantime, Australia’s strong resources and renewable sectors continue to be well supported by a robust financing and lending system and is positioned to continue to thrive in the future.
For more information on this topic, or to explore other articles from our 2023 edition of Emerging Issues for the Australian Energy and Resources Industry, click here.
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