NZ Taxonomy second public consultation

Sustainable finance is a process of incorporating Environmental, Social, Governance (ESG) considerations into finance.

Green finance is finance for environmentally beneficial projects or performance (can be labelled and unlabelled).

In contrast, transition finance refers to finance for decarbonising hard-to-abate sectors (typically not labeled and currently not well classified). Transition finance helps high-emitting sectors or entities shift towards low-emissions or net-zero pathways.

All forms:  

• Seek to manage long-term risks related to climate and ESG factors.
• Aim to align financial flows with climate and sustainability goals.
• Require disclosure, transparency, and metrics to demonstrate impact.
• Support the Paris Agreement and UN Sustainable Development Goals (SDGs).

Read more here.

The NZ Taxonomy provides a clear, science-based framework to define which economic activities are aligned to, or enable substantial progress towards, a low-emissions, resilient future in the Aotearoa New Zealand context.

It is designed to enable market participants to direct and mobilise capital into activities that will support building a low-emissions, Paris-aligned future, restoring nature, and upholding the rights and interests of Indigenous Peoples of the land, while avoiding negative consequences to other environmental or social outcomes.

Sustainable finance taxonomies are frameworks to support decision-makers looking to allocate capital to sustainable- or transition-aligned investments. By providing clear definitions, taxonomies help reduce greenwashing risks, lower the cost and complexity of labelling of investments, and build greater confidence for capital providers.

The NZ Taxonomy aims to increase the quantum of finance available for Aotearoa’s transition to a low-emissions, resilient economy.

With climate change mitigation, adaptation and resilience criteria now developed, the Taxonomy currently puts a strong focus on financing activities that:

• Strengthen farmers’ and foresters’ resilience and adaptive capacity to extreme weather events and the impacts of changing temperatures on ecosystems.
• Support substantial emissions reductions in operations not yet Paris-aligned – helping farmers and foresters transition toward a low-emissions future while maintaining economic viability.

As criteria for additional environmental objectives are developed in the future, the Taxonomy can also support activities that advance biodiversity and ecosystem protection and restoration, water/marine resources protection, and other environmental goals.

For your business, this could mean:

• Greater access to capital: If your on-farm or in-forest activities meet the criteria outlined in the NZ Taxonomy, they may be particularly attractive to sustainability-focused investors and lenders offering green or transition financial products.
• Better market positioning: Alignment with the NZ Taxonomy can strengthen your sustainability credentials, helping you access to customers and trade while demonstrating New Zealand’s commitment to its environmental obligations through globally recognised frameworks.
• Improved stakeholder engagement: The NZ Taxonomy provides a clear way to measure and communicate your progress on environmental objectives to insurers, supply chain partners, Government, and more.

Financial institutions can utilise the NZ Taxonomy to identify, assess, and report on financing of green and transitional economic activities. It provides a clear and consistent framework to support a range of potential applications:

• Capital allocation decisions, by providing a standardised classification system that can reduce time and costs when assessing potential green or transitional investments.
• Product development:
  • The NZ Taxonomy can provide a scaffolding to design bonds, loans, and investment portfolios that support/advance a range of environmental outcomes, and to price insurance products based on the environmental performance of underlying assets.
  • Banks have highlighted that the local Sustainable Agriculture Finance Initiative (SAFI) guidance was a key initial step to support increased availability of financial products for on-farm sustainability activities. The NZ Taxonomy’s climate change mitigation criteria build on the SAFI guidance and are complemented by internationally credible technical criteria and a robust transition methodology.
• Risk management: Strengthen environmental risk management by helping institutions align portfolios with national sustainability targets and international commitments.
• Transparency & stakeholder engagement: Enable clear, consistent updates on how an organisation’s financial products and services can support New Zealand’s various environmental objectives – enhancing trust with regulators, clients, and other stakeholders.
• Greenwashing prevention: Provide credible tools to demonstrate the sustainability claims of an organisation’s products and services – be them financial or non-financial – helping prevent misleading claims and strengthen market confidence.

The NZ Taxonomy is one tool that can be used to support and contribute to Aotearoa New Zealand’s transition to a low-emissions and resilient economy.

A credible and interoperable NZ Taxonomy will make it easier for capital to flow into projects and activities that reduce emissions and strengthen resilience to climate impacts, supporting the achievement of both domestic and global climate goals.

That said, meeting New Zealand’s domestic and international targets and contributing to global efforts under the Paris Agreement, and effectively building resilience into our economy and society, will continue to depend on central government policies.

The NZ Taxonomy is intended to operate within a broader ecosystem of national policies, sector-specific emissions reduction plans, emissions pricing mechanisms, national and regional adaptation plans, corporate efforts, and community actions to achieve Aotearoa New Zealand’s climate goals. The NZ Taxonomy is designed to complement – not replace – these wider efforts.

The NZ Taxonomy is designed to support policy only but not drive it. It aims to provide a consistent, science-based framework to guide investment and financing toward activities which support New Zealand’s transition to a low-emissions, resilient future, without prescribing specific policy decisions or economic outcomes.

Delivering on global and domestic targets to meet the Paris Agreement, while effectively building resilience into our economy and society, will require a broad range of actions. Underlying frameworks like the NZ Taxonomy can support this, if deployed alongside national policies, sector-specific emissions reduction plans, emissions pricing mechanisms, national and regional adaptation plans, corporate efforts, and community actions.

The NZ Taxonomy is not intended, nor able, to drive land-use change – it considers the nature of activities undertaken, not comparison between activities. It is also technology agnostic: By setting an approach for assessment and performance thresholds rather than naming specific technologies or equipment, it allows any technology that meets the criteria to qualify.

For climate change mitigation:

• All activities that have a credible path to operate at substantially lower emissions and likely demand given current and credibly predicted future conditions, could be NZ Taxonomy-aligned, if they meet all technical screening criteria.
  • Note: In the initial phase, do no significant harm (DNSH) and minimum social safeguards (MSS) assessments will not be required. Businesses with fewer than 20 employees will always be exempt from DNSH and MSS assessments.
• The activities considered for inclusion in the NZ Taxonomy have been guided by credible international pathways, such as those modelled by the IPCC and IEA. The expert working groups have considered where gaps exist in these international pathways, as well as how they apply in a New Zealand context. Included activities have also been guided by the Climate Change Commission’s high technology high system change (HTHS) pathway and supplemented by sector-specific pathways and performance benchmarks.

For climate change adaptation and resilience:

• Activities that make a substantial contribution to increasing farmers’/foresters’ adaptative capacity or resilience are eligible.
• Climate change adaptation and resilience activities can be taxonomy-aligned in two ways:
  • The activity appears on the NZ Taxonomy’s whitelist of climate change adaptation and resilience measures. Activities on the whitelist are considered NZ Taxonomy-aligned without requiring assessment against the DNSH criteria at any stage.
  • The proponent follows the NZ Taxonomy’s process-based approach to identify and design climate change adaptation and resilience activities. For organisations with 20 or more employees, DNSH and MSS assessments will apply at a later stage. These, together with the process-based approach requirements, must be met for the activity to be considered fully aligned with the NZ Taxonomy.
• All activities that meet the climate change adaptation and resilience technical screening criteria are classified as green.

The NZ Taxonomy has been designed with both green and transition activity categories, based on the design recommendation of the independent technical advisory group (ITAG), and agreed by the Minister of Climate Change. Activities labelled either green or transition can be considered ‘NZ Taxonomy-aligned’, provided they meet all associated technical screening criteria.

The transition category currently only applies to the climate change mitigation objective. For climate change adaptation and resilience, all activities that meet the technical screening criteria are classified as green.

Inclusion of a transition category is intended to facilitate the decarbonisation of hard-to-abate industries such as steel, cement, aviation, agriculture, etc.

Almost all taxonomies globally include transition concepts in some way, and several taxonomies utilise specific transition categories to distinguish these from green activities, including ASEAN, Australia, and Singapore.

The draft NZ Taxonomy climate change mitigation criteria for the agricultural and forestry sectors includes transition activities such as switching to more efficient or electric machinery, purchasing renewable energy generation and storage equipment, planting including riparian and shelterbelt planting, improving data and monitoring efficiency, adopting new technologies and implementing management practices, proper effluent management, etc.

The transition classification has the intent of increasing the visibility and potential finance for credible actions, which substantially reduce emissions beyond business-as-usual.

In time, with the development of further environmental objectives (e.g., biodiversity, water), the NZ Taxonomy could provide a more fulsome suite of options for activities that are considered taxonomy-aligned. This will allow farmers and foresters to be supported with activities that have material benefits to New Zealand’s wider environmental resilience, as well as emissions reductions.

NZ Taxonomy alignment involves assessment against three sets of criteria:

• Substantial contribution (SC): The activity must demonstrate a substantial contribution to at least one environmental objective (e.g., climate change mitigation, climate change adaptation and resilience).
• Do no significant harm (DNSH): The activity must meet both generic, and, where applicable, activity-specific DNSH criteria.
• Minimum social safeguards (MSS): The entity carrying out the activity must comply with the requirements of the MSS framework.

In the initial phase, DNSH and MSS assessments will not be required. Businesses with fewer than 20 employees will always be exempt from DNSH and MSS assessments.

Alignment with the NZ Taxonomy will be likely assessed predominantly by financial institutions. Many of the detailed criteria also provide specific verification expectations – for example, having relevant plans or practices assessed by experts.

Taxonomies are intended to be living documents, updated regularly and able to incorporate evolutions in technology and scientific understanding. The NZ Taxonomy is also intended to be regularly reviewed and updated to reflect evolving science, market developments, and stakeholder input.

As this work is nascent globally, best practices and cadences for reviewing taxonomies are yet to be established.

The NZ Taxonomy is a voluntary framework. It is intended to serve as a reference tool to guide financial institutions, businesses, and policymakers in identifying and supporting economic activities that make a significant contribution to at least one of the NZ Taxonomy’s environmental objectives, without harming others. It is also intended to ensure basic social standards are met by those carrying out the activity.

No, the NZ Taxonomy itself does not impose any new reporting requirements. However, it is intended to support the preparations of existing climate-related disclosure frameworks and could be used voluntarily to that aim.

The members of the independent technical advisory group that made design recommendations on the NZ Taxonomy (the ITAG) unanimously recommended that it reflect New Zealand’s economic advantages and context, by including indigenous rights, interests and knowledge into its design.

The development of the NZ Taxonomy has sought to incorporate iwi/Māori perspectives and knowledge by:

• Promoting equitable Māori participation and representation in NZ Taxonomy governance, and during each phase of its development.
• Engaging with Iwi/Māori experts and stakeholders throughout the development process, including through formal engagement with the National Iwi Chairs Forum, to inform both the values and technical aspects of the NZ Taxonomy.

The criteria available for public consultation include iwi/Māori values where relevant, including:

• Consideration under the SC criteria to support/not-exclude culturally appropriate sustainability practices.
• In the DNSH criteria, where a holistic approach to sustainability has been taken by adapting environmental impact assessments to include consideration of cultural impacts.
• Iwi/Māori rights are recognised as a core pillar—alongside corporate governance and human rights—within the minimum social safeguards’ framework. Consideration for the cultural heritage of all New Zealanders is also included in the MSS.

Taxonomies seek to classify and define economic activities that make substantial contributions to specific environmental objectives, one at a time (each supported by DNSH and MSS).

The overall environmental objectives of the NZ Taxonomy are aligned with those of the EU Taxonomy, the Australian Taxonomy, and other international frameworks. These objectives are:

• Climate change mitigation
• Climate change adaptation and resilience
• Sustainable use and protection of water resources and marine resources
• Protection and restoration of biodiversity and ecosystem
• Pollution prevention and control
• Transition to a circular economy

Criteria for a taxonomy are developed specifically for each of these objectives, one at a time. These criteria for a taxonomy are called the ‘substantial contribution criteria’.

Current direction from the Minister of Climate Change has been to develop, first, criteria for the climate change mitigation and, secondly, climate change adaptation and resilience objectives for the Agriculture and Forestry sectors. This is in line with the global expectations for taxonomy development. 

Criteria for the remaining environmental objectives may be developed in the future.

The work to develop the NZ Taxonomy has been directed by the Minister of Climate Change. The work is overseen by the Ministry for the Environment, with quality assurance of the process being provided by the Council of Financial Regulators.

The NZ Taxonomy has been developed through a robust and credible process that was established in alignment with leading international efforts in designing local taxonomies. This process includes the involvement of a diverse range of expertise, strong governance, regulatory oversight, transparency, opportunity for public input and safeguards against undue political or industry interference.

Two working groups have developed this draft of the NZ Taxonomy:

• Technical Advisory Group (TAG) – this sector-specific group provides technical inputs to develop the substantial contribution criteria for the Agricultural and Forestry sectors, as well as the activity specific DNSH for these sectors. 
• Technical Experts Group (TEG) – this group is overseeing the development of the entire NZ Taxonomy and are focused on usability, interoperability and ensuring the NZ Taxonomy delivers on its intended purpose.

In addition to the 47 members of the TEG/TAG (see pages 4-5 here), and additional 22 organisations provided specific technical inputs on the criteria. A further 74 organisations, including agricultural and foresty industry bodies, key stakeholders, financial sector participants, and environmental NGOs, were also invited to briefings and to provide early input.

Centre for Sustainable Finance: Toitū Tahua (CSF) provides coordination and secretariat functions for the development of the NZ Taxonomy.

To support this work, CSF has engaged the Climate Bonds Initiative (CBI) as the technical partners for the NZ Taxonomy development. CBI have contributed to the development of more than twenty sustainable finance taxonomies globally, including in the EU, Singapore, Brazil and Australia.

We thank everyone who has given time and consideration to the development of the first draft of the NZ Taxonomy.

The NZ Taxonomy is a voluntary framework, intended to assist the market in identifying activities that can, initially, support the transition to a low-emissions, resilient economy. It does not require, prescribe or enforce financing choices. This framework also does not influence strategies or operations of financial market participants; it simply provides a framework for specific information to be presented and used more efficiently and with greater confidence.

The NZ Taxonomy has been developed under a robust governance arrangement, with process oversight from the Government and relevant regulators. The process for development of the NZ Taxonomy has been conducted with careful consideration of the Commerce Commission Collaboration and Sustainability Guidelines.

CSF is mindful of the responsibilities of regulated entities under competition law. Stringent procedures during the development of the NZ Taxonomy have been followed, to protect the process, including agreed terms for all working group members, obligation reminders in each working session, awareness from facilitators in working sessions, and a pathway to raise concerns.

Interoperability between taxonomies is recognised as necessary to leverage the benefits of reduced friction and costs in mobilising local and global capital. The NZ Taxonomy has been designed with this in mind, aligning closely with international approaches while reflecting New Zealand’s unique context.

• Climate change mitigation criteria: The NZ Taxonomy has been developed to strongly align with the Australian Taxonomy. This included reviewing and using the draft Australian climate change mitigation approach and criteria as a starting point, with adjustments made to address New Zealand-specific contexts and implications.
• Climate change adaptation and resilience criteria: As Australia has not yet developed climate change adaptation and resilience criteria, New Zealand drew on the EU Taxonomy’s process-based approach, and used the Climate Bonds Initiative’s list of adaptation and resilience measures as the basis for the NZ whitelist.
• Additionally, review of the UK GAP and the ASEAN, as well as other global jurisdiction’s taxonomies has been a part of the process for developing the NZ Taxonomy.

It is safe to say that the NZ Taxonomy shares environmental objectives, methodological approach, and eligible activities/measures in both sets of criteria with many other global taxonomies, including those of key trading partners.

Key differences between the NZ Taxonomy and others (particularly Australia) are:

• Adjustment of activities to better reflect Aotearoa New Zealand farming and forestry practices (while maintaining activities necessary to ensure global interoperability).
• The inclusion of protections for iwi/Māori rights and cultural heritage in both the MSS and DNSH criteria.
• Specific risk management criteria (across the do no significant harm and substantial contribution criteria) to address environmental risks localised to New Zealand.
• Consideration in the methodological approach to ensure key industries such as agriculture can access transition finance.

Usability is a key concern for taxonomies globally, and we have worked to ensure the NZ Taxonomy is practical for businesses of all sizes.

Based on market feedback – including insights from the first public consultation – the technical groups have made several changes to make the criteria easier to use and reduce compliance burdens, particularly for smaller businesses. For example:

• Wherever possible, the criteria now rely on existing industry schemes, legislation, and regulations for verification, rather than creating extra requirements.
• The do no significant harm (DNSH) and minimum social safeguards (MSS) requirements will be optional at first, and businesses with fewer than 20 employees will always be exempt from DNSH and MSS assessments – we welcome your feedback and suggestions on this approach during this second consultation.
• A whitelist of climate change adaptation and resilience measures has been created to make it easier for smaller entities taking meaningful action to achieve Taxonomy alignment without the admin burden of demonstrating compliance with the full process-based approach.
• Where activities are not covered by the whitelist, the climate change adaptation and resilience process has been streamlined to make it easier for SMEs to demonstrate compliance.

CSF is also working with the Australian Sustainable Finance Institute (ASFI) to learn from their taxonomy use pilots and continue improving usability as the market builds capability.

Longer term, the NZ Taxonomy should be reviewed for usability once use cases have been explored. Digitised and simplified criteria could also provide greater usability, especially for small organisations.

No. In this initial phase, ed, proponents only need to demonstrate that they meet either:

• The climate change mitigation substantial contribution criteria;

OR

• The climate change adaptation and resilience substantial contribution criteria, by either:
  • Undertaking an activity/measure listed in the A&R whitelist – these activities will never need to be assessed against DNSH, even if DNSH becomes a requirement for taxonomy-alignment in the future; or
  • Demonstrating that the identification and design of the adaptive and resilience-building activity follows the process outlined in the process-based approach paper.