ITAG Recommendation 1

The Principles of the Taxonomy of Aotearoa New Zealand should be:

Credibility – Mana. Applying an evidence-based approach together with international best practices and standards to attract and direct the flow of international capital towards green solutions. The Taxonomy needs to be transparent in its governance structure, especially in how the Technical Screening Criteria (TSC) are designed to give effect to the Taxonomy’s purpose. Strong safeguards need to be in place to ensure political and industry influence is limited.

Usability - Whakamahi. The Taxonomy should be easy to use and fit-for-purpose. The TSC need to be easily understood by a spectrum of different end users and promote data and metrics that are easy to report against.

Interoperability - Tuhono. As much as possible, the Taxonomy should align with international standards and best practices for the design of its structure, components TSC, Do No Significant Harm (DNSH) and Minimum Social Safeguards (MSS). It should promote interoperability with Australia (Trans-Tasman) as well as with New Zealand’s main trading partners EU, UK and other benchmark taxonomies in the APAC region such as Singapore.

Culture – Ahurea. Human society depends on nature, and nature is not seen simply in monetary terms. Indigenous culture and rights are a core principle underlying the entire Taxonomy. Iwi and Māori leaders will be represented in all governance tiers and their views of nature integrated in the design of the Technical Screening Criteria.

Prioritisation - Whakarite. Prioritisation should determine both the selection of environmental objectives the Taxonomy should focus on at first and the sequencing of the design of the TSC based on what sectors of the economy are a priority for New Zealand.

The main drivers for the development of the Taxonomy of Aotearoa New Zealand are:
1. Mobilising and directing international and domestic capital flows to build the type of infrastructure, systems, products and services required for a low-emissions future with nature at the center of the economy
2. Alignment with the goals of the Paris Agreement to keep temperature well below 2-degrees and pursue efforts to limit warming to 1.5 degrees – with a focus on climate mitigation and adaptation and resilience as per Agreement


ITAG Recommendation 2
The purpose statement of the Taxonomy of Aotearoa New Zealand is:
“The sustainable Taxonomy of Aotearoa New Zealand is a classification system for mobilising and directing capital flows to build a low-emissions, Paris-aligned future, restore nature and uphold the rights and interests of indigenous people of the land”.

ITAG Recommendation 3
There is formal and increasing international recognition of the contribution and rights of indigenous peoples and local communities as custodians of biodiversity and as partners in its conservation, restoration and sustainable use. To reflect the culture of Aotearoa New Zealand, the ITAG recommends that the rights and knowledge of iwi/Māori are embedded into the design of the Taxonomy.

A taxonomy’s objectives are a key part of its interoperability with other benchmark taxonomies. Climate change mitigation is generally the most common environmental objective because it is easier to determine the substantial contribution economic activities make to it (i.e. existing best practices, interoperable criteria and thresholds, robust and credible approach).

Adaptation and Resilience (A&R) is a key priority objective for Aotearoa New Zealand, but there is still lack of international consensus around what substantial contribution to A&R means given its highly contextualised nature.

ITAG Recommendation 4
In line with international best practices, the environmental objectives of Aotearoa New Zealand will include iwi/Māori understanding and knowledge related to each objective and be (not in order of priority):

• Climate change mitigation

• Climate change adaptation

• Sustainable use and protection of water resources and marine resources

• Protection and restoration of biodiversity and ecosystems

• Pollution prevention & control

• Transition to a circular economy

The coverage or boundaries of the Taxonomy is the sectors and subsectors for which TSC will be developed and proposed. While a taxonomy can, in principle, cover any number or types of sectors, most countries prioritise sectors that are most relevant to their economy based on a range of factors, such as:
- Relevance to the economy as measured by GDP or other metrics
- Materiality of sector to GHG emissions – e.g. % of emissions represented by sector
- Relevance to jobs/employment statistics
- Proportion of FDI/ trade
- Ease of developing criteria measured by appearance of in other taxonomies
- Importance to green bond issuance as measured by green bond issuance statistics
- Potential for innovation – presence in a future economy
- Importance sector for Māori empowerment and/or needs for capital flows to promote growth
- Other New Zealand specific factors/ features
- Importance of external capital to the sector and its value chain

ITAG Recommendation 5
A survey was organised amongst the members of the ITAG, which resulted in the following key priority sectors for the Taxonomy. The sectors have been ranked according to the % of respondents that selected the sectors as priority:

1. Agriculture, Forestry & Fishery
2. Transport
3. Construction & Real Estate activities
4. Energy
5. Industrial Manufacturing

The Australian and New Zealand Standard Industrial Classification has been developed for use in the compilation and analysis of industry statistics in Australia and New Zealand. It is the primary classification system used by the government, financial institutions, and corporations for collecting, analysing, and reporting economic activity data.
ANZIC is comparable internationally by aligning the classification, as far as possible, with the International Standard Industrial Classification of All Economic Activities (ISIC).

ITAG Recommendation 6
The Taxonomy of Aotearoa New Zealand should adopt ANZSIC as its classification system in order to align with other benchmark taxonomies such as Australia and the European Union’s. When ANZSIC codes are not available at the granular activity-level, the ITAG recommends the Taxonomy to build ad hoc activity-specific codes.

Usability is the phrase used to define how well a taxonomy can be applied and integrated into a market. Given that a taxonomy can be both a technical document/tool as well as a policy tool, usability refers to the ability of a taxonomy to be used as both or either of these tools – i.e. how practical the criteria are to measure and report on (as a technical tool) as well as how practical the reporting requirements are (as a policy tool).

Usability is a major topic of discussion around the world, but it is epitomised in the EU where the regulated nature of the Taxonomy has meant that usability remains a challenge that is in the process of being resolved. To resolve usability issues and challenges, the EU Platform of Sustainable Finance (PSF) has put forward an extensive paper which provides a set of recommendations to improve the usability of criteria, DNSH tests and the Taxonomy regulation and how it is applied.

The technical and regulatory usability of a taxonomy are heavily interlinked - e.g. if a taxonomy is not in regulation, then other features of usability become less critical because they do not ‘have’ to be met or measured. As in many jurisdictions where taxonomy use will not be mandated, the design aspects are even more critical as the simplicity and technical usability of the taxonomy become key drivers of its take-up.

Interoperability is the term used to describe the ability for the taxonomy to be used and understood across borders. If taxonomies differ substantially from each other and interoperability is low, this will negatively impact the ability for the taxonomy to be used as a tool to facilitate cross border capital flows.


ITAG Recommendation 7
To enhance usability in New Zealand, it is important to connect to existing data, national and international labels and criteria while also growing relevant capacity and increasing the availability of new information over time.

ITAG Recommendation 8
The Taxonomy also needs to be linked to existing disclosure requirements – e.g. Aotearoa New Zealand Climate Standards.

ITAG Recommendation 9
The Taxonomy developers should ensure that the Taxonomy is fit-for-purpose across a range of key stakeholders in New Zealand including regulatory agencies, the public sector, iwi/Māori, and capital market stakeholders.

The application of a taxonomy refers to how the taxonomy is used within a market.

In particular:
• Who should use it? e.g. corporates and borrowers, banks, investors, governments etc.
• What should it be used for? e.g. classifying bonds, consistency in corporate disclosures and transparent reporting, etc.
• Is it mandatory or voluntary?

This is the ‘ruleset’ around the taxonomy and goes beyond the taxonomy as a technical document and into its uses within the market.

 
Voluntary or Mandatory application

The decision over whether or not the Taxonomy will be voluntary, or mandatory is beyond the remit of the ITAG. Despite this, the relative merits and pitfalls of voluntary or mandatory use of the Taxonomy was discussed at length by the ITAG.

The merits of mandating the Taxonomy included that it would create comprehensive data that could be a decision-making tool useful for a range of stakeholders. It would also create a level playing field across users and ensure consistent take-up of the Taxonomy among the core user groups.

The downsides of mandating it included that it may be costly to comply, particularly in the short term, and that mandating is a means to an end that could be achieved with other solutions. Furthermore, there are advantages to putting the Taxonomy out for implementation by users and allowing time to assess its usability before it is mandated.

Moreover, in recent years there has been a noticeable lack of New Zealand companies listing on the stock exchange and a trend towards some opting to list in other countries instead. The cost of taxonomy regulation, whether perceived or actual, may further exacerbate this problem and, therefore, it might be more beneficial to design a phased-in approach with limited mandatory requirements for companies with sufficient size and resources to undertake the necessary measurement and reporting of data against the Taxonomy.

ITAG Recommendation 10
It would not be expected to mandate the use of the Taxonomy in its initial phase, but it could become mandatory over time following a phase-in approach or grace period.

Use cases: debt markets, corporate disclosure or other uses

A taxonomy is, at its core, a technical document that could be applied across a range of uses including:

Green bonds as a document defining what is exactly included in a green bond (its underlying projects and assets) i.e. beyond the broad Green Bond Principles

Investment fund alignment - demonstrating how investment funds such as Kiwisaver are invested in taxonomy activities
Corporate disclosures - as a document defining how corporate define green business lines
Green labels - helping to evidence the green/sustainability labels of financial products, fund etc.
Policy tool to define which types of activities receive incentives relating to green growth etc.

While the Taxonomy can be used across a range of applications, the development process can be facilitated by knowing what the intended use of the Taxonomy will be.

ITAG recommendation 11
The Taxonomy of Aotearoa New Zealand should be designed for a broad range of applications, not just debt markets.

ITAG Recommendation 12
Following the example of benchmark taxonomies such as the ASEAN, Australian and Singaporean taxonomies, the Taxonomy should have a role in facilitating transition finance.

As per the EU Taxonomy, there is a difference between taxonomy eligibility, alignment and compliance.

Taxonomy eligibility refers to whether an economic activity falls within the scope of the taxonomy i.e. the activity substantially contributes to one of the environmental objectives.

By contrast, taxonomy alignment refers to whether an economic activity and its underlying assets (use of proceeds) fulfil the relevant Technical Screening Criteria so that it can be labelled as green.

Similarly, taxonomy compliance means that the economic activity and its underlying assets (use of proceeds) fulfil the relevant Technical Screening Criteria as well as the DNSH and MSS components of the taxonomy.

An activity can be aligned with a taxonomy in three different ways:

1.Substantial contribution – the activity provides substantial contribution to one of the environmental objectives of the taxonomy

2. Enabling – the activity might not substantially contribute to one of the environmental objectives per se, but it is critical to enable other activities to substantially contribute to one of the taxonomy’s environmental objectives. For instance, the manufacturing of electric batteries has a relatively high level of GHG emissions throughout its lifecycle analysis but, it enables other economic activities to decarbonise, such as private land transport (i.e. electric vehicles).

In addition, according to the EU Taxonomy definition, enabling activities “must not lead to lock in of assets that undermine long-term environmental goals and their environmental impact must be positive over the life cycle (i.e. the benefit that is enabled must be larger than the impact of the enabling activity) ”.

3. Transition – the an activity for which there is currently no technological or economically feasible low carbon alternative and is therefore not currently aligned with the taxonomy’s objectives (e.g. climate change mitigation) but can support the transition by being decarbonised along a science-based pathway as technologies are developed. For instance, cement manufacturing is transitional because cement production is a necessary activity and there are no currently available large-scale replacement/alternative material that is net zero (Please see the Transition section below).

 
According to the EU Taxonomy , the criteria to determine the alignment of an activity under the taxonomy can be subdivided into three main categories:

1. Technical screening criteria – they generally refer to numerical thresholds that allow for a simple binary assessment– the activity either meets the threshold or it does not. Thresholds-based criteria are relatively easy to use and allow for very little room for interpretation so that, in practice, they reduce the risk of greenwashing. However, they tend to be more data intensive.
2. Whitelists – are lists of automatically aligned technologies or measures that are prescribed by the taxonomy. They tend to be very easy criteria to use when data availability is a hurdle because the deployment of those technologies essentially act as a proxy for decarbonisation. Whilst usable, whitelists do not prescribe how the technologies included in a whitelist need to be used and, therefore, they provide less safeguards against greenwashing compared to the threshold-based approach.
3. Principles-based – taxonomies that features principle-based criteria tend to be quite high-level and not very prescriptive. The idea is that the taxonomy is flexible to accommodate a broad spectrum of users. Whilst easy to use, principle-based criteria leave a lot of room for interpretation to the end user and may easily allow for greenwashing and inconsistency of application.

ITAG recommendation 13
The Taxonomy of Aotearoa New Zealand should adopt an alignment approach based on technical screening criteria that are binary, credible and internationally-recognised.

ITAG Recommendation 14
The technical screening criteria can be complemented by whitelists (technologies or measures) where deemed necessary.

Transition indicates the movement of an economic activity towards minimum emissions aligned with the long-term temperature goal of the Paris Agreement over a specific period of time. While it is clearly an aim of transition-related policies, incentives, regulation and taxonomies to support and facilitate ambitious movements towards or below net zero, the key challenge for a taxonomy is how to recognize this movement with criteria or thresholds that are static at a point in time.

According to the EU Taxonomy , a transitional activity qualifies as substantially contributing to climate change mitigation if it:

“Supports the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels, including by phasing out GHG emissions, in particular emissions from solid fossil fuels, and where that activity:
a. Has greenhouse gas emission levels that correspond to the best performance in the sector or industry;
b. Does not hamper the development and deployment of low-carbon alternatives; and
c. Does not lead to a lock-in of carbon-intensive assets, considering the economic lifetime of those assets.”

In practice, there are some sectors of the economy that are difficult to rapidly decarbonise with currently available technologies (also called hard-to-abate sectors). Therefore, transition finance label seeks to move capital towards those activities that currently generate substantial emissions but are driving ambitious emissions reductions (towards a Paris-aligned pathway) within a specific period of time. A transition label can facilitate the decarbonisation of high-emission industries such as steel, cement, aviation, agriculture, etc.

While almost all taxonomies include hard to abate sectors and transition concepts in some way, several taxonomies utilise specific transition categories to distinguish these from green / Paris-aligned activities. These include Australia, ASEAN and Singapore while Canada has developed a methodological approach to transition . The most commonly used approach to label transition activities is the traffic light system where activities are subdivided into three categories:

Green: these are activities that currently substantially contribute to one of the environmental objectives of the taxonomy. This does not mean that all green activities are necessarily net zero or below zero now but rather that they are following a science-based pathway aligned with the long-term temperature goal of the Paris Agreement.

Amber: these are activities that currently still operate at substantial emissions and have no low carbon alternative but that are a necessary part of the economy and societal well-being at present and that are:
• Moving rapidly towards a green transition pathway within a predetermined time period (sunset date); or
• In the short-term, encouraging significant GHG emissions reductions within a specific sunset date.

Red: these are activities that are not currently compatible with a net zero future in 2050. Generally, the only way for them to be aligned with a 1.5-degree future is for them to be phased out because their GHG emissions cannot be reduced such as in the case of most fossil fuels (including Scope 3 emissions).

An amber label transition cannot last indefinitely. As amber transition activities are not yet aligned with a 1.5-degree trajectory, at some point, they will need to be on a trajectory consistent with the Paris Agreement. To ensure this, most taxonomies propose a sunset date for the amber category whereafter, it ceases to exist, and the activity is either aligned with the green category or it becomes ineligible/excluded. A sunset date is determined at the sector and activity level.

The EU Taxonomy does not explicitly label activities as transitional or employ the traffic light system. However, it does use the best-in class approach for activities where low-carbon alternatives are not widely available (for instance, cement manufacturing). This is done by identifying the top 10% or 15% of the best available performers within a sector or activity and then, using their GHG emissions level as a baseline, drawing a trajectory towards zero by a specific sunset date.

ITAG Recommendation 15
The Taxonomy of Aotearoa New Zealand should focus on defining 1.5 degree aligned ‘green’ activities as a priority but consider the use of a separate transition category. The category should encourage substantial movements towards a 1.5-degree pathway for a defined and limited list of sectors/activities that are material and relevant to Aoteroa New Zealand. This transition category should be for activities within a predetermined period of time.

ITAG Recommendation 16
The Taxonomy of Aotearoa New Zealand should consider adopting a traffic light system to label transitioning activities that is based on a robust methodology to ensure that any transition category or label is used to drive material step changes to emissions beyond business as usual.

A robust governance structure is key to ensure the success and credibility of a taxonomy. It should safeguard the transparency and scientific rigour of the way the TSC, DNSH and MSS are designed as well as ensuring that the taxonomy is maintained and periodically updated. The governance structure and its rules are generally confirmed at the preparatory stage of the taxonomy design phase.

Based on existing models, taxonomies are often developed as a partnership between experts or industry-led groups and the government of a specific country or jurisdiction. In addition, the process of developing a taxonomy should be highly consultative both in terms of how its different components are designed (TSC, DNSH and MSS) as well as in terms of how the general public is involved in the provision of feedback through consultations.

Generally, the governance structure of a taxonomy is focused on the interaction and clear demarcation of responsibilities between different groups. Terms of Reference (ToR) are created in order to clearly describe the tasks and responsibilities of each group whilst their membership is made publicly available. It is therefore crucial that the governance structure is transparent and collaborative in order to ensure effective checks and balances amongst the different groups.

ITAG Recommendation 17
The Taxonomy of Aotearoa New Zealand should adopt a three-tiered governance structure to ensure the transparency and credibility of its development process and with formal roles for iwi/Māori across all tiers.

This would include:
Tier 1 - An overseeing body responsible for the endorsement of the Taxonomy and for the provision of strategic direction to it
Tier 2 - A coordinating group consisting of members with relevant expertise from within government, industry and civil society responsible for coordinating the design and development of the Taxonomy
Tier 3 - A group or set of technical working groups responsible for the design or co-design of the content of the Taxonomy

ITAG Recommendation 18
As an integrity safeguard, government funding for the Taxonomy should be provided from a different agency/source than the government oversight group (Tier 1).