Financial Sustainability Factors in Australia

What is financial sustainability?

According to IGI Global, an international academic publishing company, financial sustainability can be defined by the following factors:
  • Financial sustainability is the overall assessment of a project as it aims to ensure that a project has sufficient funding to meet all of its resources and financial obligations, whether the fund will be discontinued or not.
  • Financial sustainability is also the capacity and capability of a project to generate the expected return of investments or ROI.
  • Financial sustainability entails charging a price for a good or service that covers costs as well as makes a profit. When facing a financial crisis, it's important to have backup plans in place to pay for your activities.
  • Lastly, financial sustainability also denotes an organisation’s capabilities in terms of obtaining revenues in response to a demand given to maintain productivity at a steady or growing pace to produce desired results.

Attaining Financial Sustainability

According to Deloitte Australia, an international professional services network headquartered in London, United Kingdom, attaining financial stability refers to the acceleration and integration of environmental and social considerations, risks and opportunities into the financial sector.

Hence, certain investors are quickly shifting away from a concentration on monetary gains towards a more comprehensive evaluation of producing and maintaining long-term value, including both societal and environmental consequences.

Businesses are supporting finances by incorporating both social and environmental considerations into routine financial decision-making and funding by utilising financial resources more quickly to achieve social and environmental goals.

On the other hand, private sectors work with organisations on a range of sustainable finance strategies which include the following:
  • Greatly considering the environmental, social and governance aspects in every financial decision-making.
  • Using impact investment to efficiently allocate funds in areas where the impact can be precisely assessed.
  • Seeking opportunities for investment in the transition to both low and zero-carbon energy.
Simply put, businesses are eager in doing ‘greening finance’ by integrating both environmental and social considerations and ‘financing green’ by accelerating the funds given to deliver both environmental and social objectives.

How Does Green Finance Enter Here?

A loan or investment that promotes environmentally friendly activities, such as the acquisition of environmentally friendly goods and services or the construction of ecologically friendly infrastructure, is known as green finance.

Green finance sometimes includes incentives that help make it easier to deal with the expense of switching to electric vehicles or improving the energy efficiency of your house, for example.

Making the required lifestyle and business adjustments to become more environmentally friendly can be expensive. As a result, it may assist individuals and organisations in making wise investments and purchases for both themselves and the environment.

The mainstream has embraced green finance in full. We may assume that as the risks associated with consuming environmentally hazardous products and services increase, investing in and purchasing green alternatives will eventually become the norm.

Making a Big Move in Reshaping Australia’s Finance System

As for the Australian Sustainable Finance Institute (ASFI), their main objective is to reshape and realign Australia's financial services system so more funding will be allocated to activities that promote sustainability, resiliency and inclusivity.

ASFI has been actively showing efforts in driving the implementation as quickly as possible following the Australian Sustainable Finance Roadmap.

Australia has shown its commitment by ratifying the Paris Agreement on climate change, adopting the Sustainable Development Goals (SDGs) and maintaining its long-standing pledges to support the UN's duties concerning human rights and other pertinent international agreements.

Hence, Australia requires a financial system that is in line with these objectives if we are to fulfil these obligations whilst also satisfying the expectations of Australians today and in the future.

There is growing pressure worldwide to better match financing with our requirements for sustainable development.

Around the world, nations and regions are developing sustainable finance roadmaps that lay forth frameworks, policy signals and routes to enable the finance sector to more systematically contribute to the shift to a more resilient and sustainable economy in line with these global objectives.

The High-Level Expert Group on Sustainable Finance of the European Union and the UK's Green Finance Taskforce serve as models for our efforts to align the financial sector with the objectives of a resilient and sustainable economy.

The Financial Sustainability Factors

Since the financial system is at the core of the economy, it plays a crucial role in lowering systemic risks in the near term and facilitating long-term sustainability.

Here are the following factors that the Australian government heavily takes into consideration:
  • Coordination and Leadership

Trust must underpin this shift and cooperation amongst these interrelated parties and stakeholders. Examples of necessary adjustments that must be carried out jointly include: setting performance metrics for funds that account for sustainability risk; asset managers that embrace risk-adjusted sustainability long-term gains; and creating corporate boards’ executive incentive programs with incorporated sustainability results.
  • Consistency and Coherence

Through the use of taxonomy, the EU strategy seeks to harmonise and standardise terminology, classifications and standards related to sustainable finance. A taxonomy defines precisely what constitutes a sustainable economic activity, and this knowledge permeates financial products, indexes, ratings and investments.
  • Transparency and Disclosure

Australian regulators offer a robust system of prudential, market and conduct regulation, which is already being reinterpreted to better include environmental, social and governance (ESG) and longer term goals and concerns.

Participants' stakeholder groups were generally in agreement that ESG reporting and transparency needed to be enhanced for deciding considerations for financial industry products and services.
  • Culture, Behaviour and Responsibility

The duties and obligations of stakeholders in the Australian financial system differ from those in the EU, most obviously in light of the divergent legislative authority between the EC and the Australian Federal Parliament.

Participants from the stakeholder community noted a widespread lack of consumer and professional participation in the advantages of sustainable financing.

Key Takeaways

Sustainable finance refers to all financial services, including banking, accounting, trading and financial reporting that go above and beyond ‘business as usual’ by incorporating ESG considerations into business or investment decisions for the long-term benefit of customers, stakeholders and society at large. The funding and investment actions required to enable the realisation of the SDGs are included in sustainable finance.

Moreover, sustainable finance is an important consideration for the Australian government to lower systemic risks and facilitate long-term sustainability.

A coordinated effort amongst stakeholders is necessary to set performance metrics, asset managers that embrace risk-adjusted sustainability long-term gains and corporate boards' executive incentive programs with incorporated sustainability results. The culture, behaviour and responsibility of stakeholders also need to be taken into account to ensure that sustainable finance goals are met.

Topic revision: r1 - 22 Sep 2022, AnnyDavid
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