Sustainable Finance Taxonomy

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.

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

Sustainable finance taxonomies are frameworks to support decision-makers looking to allocate capital to climate transition aligned investments. Taxonomies increase clarity and reduce greenwashing risks and reduce cost and friction for green labelling of investments. Over time, alignment with the NZ Taxonomy could potentially help New Zealand businesses access a wider range of capital providers and financial products.

For example, if your activities on farm or in forest meet the criteria outlined in the NZ Taxonomy, these activities may be particularly attractive to investors managing sustainability-focused portfolios or relevant for sustainable lending products proposed by lenders.

A credible NZ Taxonomy can also support access to customers and trade by supporting New Zealand’s sustainability story globally, demonstrating New Zealand’s commitment to environmental obligations relevant to trade agreements, and by aiding information flows by using frameworks recognised by regulators and customers globally.

The NZ Taxonomy provides a framework against which businesses can assess progress on environmental objectives and could support engaging with insurers, supply chain partners, or Government programmes.

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 green and sustainable bonds and/or loans, build low-emissions investment portfolios, and 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 builds on the SAFI guidance and is 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 the 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 financial flows to support the achievement of domestic and global climate goals.

However, meeting New Zealand’s domestic and international targets and contributing to global efforts under the Paris Agreement will continue to depend on central government policies.

The NZ Taxonomy is intended to operate within a broader ecosystem of national policy, sector-specific emissions reduction plans, emissions pricing mechanisms and corporate efforts to achieve Aotearoa New Zealand’s climate goals. The NZ Taxonomy is not intended to operate in isolation towards a low emissions economy.

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 the 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 requires a broad range of activities to reduce overall emissions volumes. Underlying frameworks like the NZ Taxonomy can support this, if deployed alongside national policy, sector-specific emissions reduction plans, emissions pricing mechanisms and corporate efforts.

The NZ Taxonomy:

• Does not determine or prescribe New Zealand’s future economy; but is a tool to support New Zealand’s transition to a Paris-aligned future.
• Focuses on emissions intensity, not volume: The Taxonomy does not prescribe how much of an activity should occur in the overall economy. It addresses emissions intensity but doesn’t control activity volume or set emissions caps.
• Is not meant to determine the balance between emission removals and gross emissions reductions.
• Is not intended or able to drive land-use change as it considers the nature of activities undertaken, not comparison between activities.
• Is technology agnostic: By setting an approach for assessment and performance thresholds rather than naming specific technologies or equipment, the NZ Taxonomy allows any technology that meets the criteria.
• Is part of a broader eco-system: The NZ Taxonomy is intended to operate alongside national policies, sector-specific emissions reduction plans, emissions pricing mechanisms, and corporate sustainability efforts.

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.

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.

Which activities are included in the NZ Taxonomy is open for feedback in this public consultation.

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.

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 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 reduce emissions.

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 can be 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 a four-step process: 

1. Eligible activity classification: The economic activity must fall within an overall activity category eligible for alignment under the NZ Taxonomy, as either a ‘green’ or ‘transition’.
2. Substantial contribution (SC): The activity must demonstrate a substantial contribution to at least one environmental objective (e.g., climate change mitigation is the first substantial contribution designed in the NZ Taxonomy development).
3. Do no significant harm (DNSH): The activity must meet both generic, and, where applicable, activity-specific DNSH criteria.
4. Minimum social safeguards (MSS): The entity carrying out the activity must comply with the requirements of the MSS framework.

Only if all four steps are satisfied can an activity be considered NZ Taxonomy-aligned.

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.

We are taking feedback for key considerations for the NZ Taxonomy review process in the consultation.

As recommended by the Independent Technical Advisory Group (ITAG) and agreed by the Minister of Climate Change in 2024, the NZ Taxonomy is initially voluntary, with scope to become mandatory.

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.

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

We are consulting the public for recommendations on if and how the NZ Taxonomy scope should be expanded to those other environmental objectives.

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.

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.

Additionally, throughout the process there has been input from and engagement with a wide range of stakeholders, including government officials, research organisations, industry bodies, real economy participants, iwi and Māori organisations, and environmental NGOs.

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 developed to strongly align with the Australian Taxonomy. This included reviewing and using the draft Australian approach and criteria as a starting point for considering needed changes to address New Zealand-specific contexts and implications.

Additionally, review of the EU Taxonomy, 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.

As a consequence, the NZ Taxonomy shares environmental objectives, methodological approach and activity categories with many other global taxonomies, including 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 DNSH and SC 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. Ensuring criteria are appropriately sized for various operations is a key question we are asking for feedback on in the consultation. Additionally, we are consulting on a proposed innovation to change the MSS requirements based on the size of the business seeking NZ Taxonomy alignment. We welcome your feedback and suggestions on this approach.

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.