Sustainable finance taxonomy on the horizon for New Zealand

In line with jurisdictions overseas, a sustainable finance taxonomy (Taxonomy) looks to be on the horizon for New Zealand. Taxonomies are essentially classification systems that define which economic activities are aligned to a sustainable, low-emissions future, with a view to directing investment to the activities required for the transition.

While the details of any regulation to be introduced are yet to be determined, the introduction of a Taxonomy in New Zealand may require market participants to describe the extent to which relevant economic activities (including, for example, in the context of managed investment products) are sustainable. Potential implications include:  

1. Reducing concerns about greenwashing / greenhushing: If well designed, a Taxonomy has the potential to reduce market uncertainty about the circumstances in which particular labels may be attached to particular financial products. This could reduce both the risk of organisations describing financial products in a way that is accused of being misleading (greenwashing) and the risk of organisations staying silent on sustainability-related matters to avoid being accused of making misleading statements (greenhushing). In turn, this could allow the development of new financial products, such as Kiwisaver products that align (and can be marketed as aligning) with Taxonomy criteria.

2. Potential to attract greater investments: Stakeholders have highlighted that the introduction of a Taxonomy in New Zealand could support investment in New Zealand, by allowing international investors to compare investments here with overseas investments with confidence, using definitional tools that align with international examples.

3. Enhancing access to sustainable finance: To date, sustainable finance products such as green bonds and sustainability linked loans have tended to be available primarily to larger corporates rather than broadly across the market. Again, some stakeholders have suggested that the introduction of a Taxonomy in New Zealand could expand the sustainable finance market by increasing clarity and reducing complexity for lenders and borrowers.

4. Compliance costs: Like any new regulatory regime, the introduction of a Taxonomy is likely to come with compliance costs as organisations grapple with how to meet Taxonomy requirements. However, these compliance costs may well be offset by the regulatory certainty and potential investment benefits achieved by the introduction of a well-designed Taxonomy.

Further details in relation to the aims of a Taxonomy, and next steps on Taxonomy development for New Zealand, are outlined below.

What does a Taxonomy aim to achieve?

Over recent years, there has been a growth in the marketing of investment products and other economic activities as "green", "sustainable" and/or "environmentally friendly". In turn, this has increased concerns about greenwashing and both the Commerce Commission and the Financial Markets Authority (FMA) have highlighted greenwashing as an area of focus.

In response to growing greenwashing concerns, an increasing number of jurisdictions have been developing and adopting sustainable finance taxonomies. For example, the European Union adopted a taxonomy in 2020 (focusing on environmental sustainability in the first instance), and Australia has completed its initial phase of development and will now consult on its ongoing work.

Taking the EU example, the Taxonomy Regulation aims to inform investors on whether an economic activity is environmentally sustainable by setting common EU-wide criteria. Two overarching criteria sit at the heart of what is considered an environmentally sustainable economic activity. Those two criteria are that an activity must:

1. contribute to at least one of six environmental objectives listed in the Taxonomy;¹ and

2. do no significant harm to any of the other objectives (while also meeting minimum safeguards relating to human rights and labour standards).

In New Zealand, the potential development of a Taxonomy was signalled in the first National Adaptation Plan (NAP) released under the previous Government in August 2022. The NAP indicated that the development of a Taxonomy for New Zealand could help protect against greenwashing and (if aligned with best practice) support greater investment in New Zealand's climate-resilient projects, including nature-based solutions.

What work has been done in developing a Taxonomy to date and what are the next steps?

The Centre for Sustainable Finance has convened an independent technical advisory group (ITAG) comprising 15 to 20 experts and market participants. The ITAG's draft recommendations on the Taxonomy's design principles will be published in April 2024, and the consultation period runs from 22 April until 5 May 2024.

Webinars will also be held in April (more information here).

The ITAG will deliver its advice to the Minister for Climate Change in June 2024. Once the advice is delivered, the Government will need to decide how to progress the Taxonomy.

In preparing its advice, the ITAG will be looking to achieve "interoperability" with international taxonomies (in particular, the work underway in Australia), although New Zealand's own Taxonomy will need to take account of its particular circumstances.

If you would like to discuss Taxonomy-related matters, please get in touch with one of our experts below or your usual Russell McVeagh contact.