Future of farm finance: Blueprint to access cash on the road to net-zero

The long-awaited sustainable finance taxonomy classifications, developed by Treasury and the Australian Sustainable Finance Institute and intended to be the benchmark for accessing and attracting finance for decarbonisation activities, as well as curbing greenwashing, are being hailed as a "transformative moment" for the green economy.

Plans are in place for the new guardrails to be rolled out following an eight-month road test by Australia's big four banks, superannuation giants Rest and HESTA and the Clean Energy Finance Corporation, following the lead of 47 other countries that have adopted similar rules for green investments after the European Union launched its framework in 2020.

Released without fanfare, the taxonomy reveals the boundaries of eligible activities that the agriculture and land sectors will be assessed on are primarily up to the gate, which encompasses everything that happens within the wires, including planting, harvesting, managing resources and vegetation and energy use and transport.

Activities in the upstream value chain, including the sourcing of inputs and the impacts of land-use changes, will also be considered.

ASFI chief executive Kristy Graham said the rules would set an across-the-board standard for projects to be classified as green or transition activities.

"It is a global race for capital and many countries are a bit ahead of us," she said.

"Australia needs to attract a lot of capital to support our net-zero transition. The taxonomy is a framework that credibly, using a scientific basis, defines those assets and activities that are in line with that net-zero transition so both Australian investors and international investors can identify and channel capital towards those activities."

The six sectors of the economy that will be included in the trial, besides agriculture, are mining, minerals and metals, manufacturing, building and construction, transport, electricity generation and supply.

These are much the same highly-emitting sectors isolated by Labor in its yet-to-be-released suite of sectoral plans to support its push to net-zero by 2050 and contribute to economy-wide goals to curb emissions.

The taxonomy's criteria are also extremely closely aligned with priority decarbonisation pathways for the agriculture and land sector, based on key technologies and land management practices, identified in an Australian Climate Change Authority Sector Pathways Review that is forming a large basis of Labor's ag sector plan.

The highest sources of emissions listed in the taxonomy in relation to agriculture are associated with livestock production, particularly from enteric fermentation, land conversion, manure management and fertiliser, with the largest emissions being methane and nitrous oxide.

On-farm decarbonisation activities will be inconsistent with the taxonomy, for example, if they result in the conversion of natural forests or the draining of wetlands while cropping farmers or livestock producers, on the other hand, would get a green tick for making significant climate change mitigation moves across an entire operation that both drive emissions abatement and increase or maintain carbon stocks.

Other decarbonisation measures identified in the taxonomy include reintroducing Indigenous cultural burning methods, applying enhanced efficiency fertilisers and biochar to soil to sequester carbon, maintaining silvopastoral systems that promote the intentional integration of woody perennials and the use of methane inhibitors with animal production.

Labor has been unable to put a date on when its landmark net-zero emissions reduction blueprint, announced in 2023, will be delivered as pressure piles on farmers to cut their carbon footprints to retain access to markets and finance.

The crunch for agriculture is that, as the electricity generation sector rapidly decarbonises along with other sectors, its share of Australia's national emissions will increase.

This means producers and landholders not working towards net-zero by 2050 carbon targets risk losing access to finance as big banks increasingly tie lending to emissions reduction and trading partners demand verifiable clean, green products.

The situation will be amplified when Labor's Scope 3 rules, targeting emissions at every link in supply chains, come into full effect.

Banks will use it to develop transition plans with their highest-emitting customers under guidelines that encompass mechanisms from batteries and transmission line installation to feed used on farms.

National Australia Bank's chief climate officer Jacqueline Fox said the classification system provided a common language for defining green and transition-labelled economic activities.

"With the economy now aligned to a shared set of definitions and benchmarks, we can credibly deploy sustainable finance to Australia's transition, including to sectors like agriculture, resources and commercial real estate," she said.

The Australian Competition and Consumer Commission and Australian Securities and Investments Commission will also use the guidelines when assessing allegations of greenwashing.

Treasurer Jim Chalmers said the government would work with regulators and industries to action the reforms in a "clear and coordinated" fashion.

"We are mobilising the private capital required for Australia to become a renewable energy superpower and maximise the opportunities of net zero," he said.

Like the EU version, the Australian taxonomy identifies green activities that meet performance thresholds determined by Paris-aligned decarbonisation scenarios and approves activities that directly enable the decarbonisation of another activity and transition activities that contribute to net-zero.

However, for transition activities, Australia's taxonomy makes an important distinction between financing a specific decarbonisation measure, like upgrading technologies or switching fuel sources, and financing an entire economic activity.

It is also the first around the world to include the mining industry.

Clean Energy Finance Corporation chief executive Ian Learmonth said the rules rating and classifying green projects could boost international investment in net-zero projects as the framework was compatible with international standards.

"It is an important step in building further confidence in Australia's transition to net zero in international markets," he said.

The CEFC is an Australian Government-owned green bank that invests in clean energy.

Agriculture in Australia is predominantly managed on large parcels of land that have long management cycles and often coexist with native ecosystems.

Given this variety, the taxonomy recognises the "significant challenges" for the sector compared to other sections of the economy capable of more rapidly and easily decarbonising.

"The sector's complexity, shaped by its interaction with natural environments, diverse management practices, and significant regional variations, adds to the difficulty of implementing consistent and effective mitigation strategies," it said.

These challenges include a wider range of emissions sources and sinks than other sectors, full exposure to the ravages of climate change, having both natural and anthropogenic emissions sources, limited historical and contemporary data and technological solutions and methodological differences.