- Increasingly, countries around the world are developing sustainable finance taxonomies to classify environmentally friendly economic activities and prevent false claims of sustainability (“greenwashing”).
- Europe has taken the lead in establishing a green taxonomy, and other countries like Australia are also making progress in this area.
- New Zealand is beginning to explore the possibility of implementing its own sustainable finance taxonomy, with initial efforts underway by the Government and the sustainable finance industry.
The Environmental, Social and Governance (ESG) investment space is often criticised for the increasing number of acronyms and complex terminology, leading to confusion for investors. The introduction of sustainable finance taxonomies could help alleviate this problem through providing a system to classify environmentally and socially sustainable activities and facilitate the allocation of capital to them. This article explores the experience in Europe, recent developments in Australia and the implications for Aotearoa New Zealand.
Europe’s experience
European Union (EU) countries are commonly viewed as global leaders in the ESG movement, particularly when it comes to introducing associated regulation. The EU Taxonomy is a key example, which started back in 2018 with work carried out by a Technical Expert Group on sustainable finance and culminated in the final taxonomy in 2020.[1] The taxonomy involves technical screening criteria to distinguish between investments that contribute to one of the following environmental objectives:
- climate change mitigation,
- climate change adaptation,
- transition to a circular economy,
- protection of water and marine resources,
- pollution prevention,
- and the protection and restoration of biodiversity.
To be eligible, activities must also meet minimum social safeguards and not cause significant harm.
For example, Volkswagen Group’s manufacture of electric vehicles is a taxonomy-eligible activity that contributes to the objective of climate change mitigation. The amount of revenue generated, operational and/or capital expenditure related to this activity is then tallied to determine the taxonomy-aligned figures. These figures are then reported to investors typically in company annual or sustainability reports. For Volkswagen Group in 2022, 9.4% of total sales were taxonomy-aligned to climate change mitigation whilst complying with the criteria on social safeguards and not causing significant harm.[2]
Despite the intentions of the taxonomy to provide clarity on green investments, it has not come without controversy, with the inclusion of gas and nuclear power classified as sustainable for example. [3]
Progress across the Tasman
In Australia, an industry body known as the Australian Sustainable Finance Institute (ASFI) has been active in developing a green taxonomy that is intended to mirror best practice from existing taxonomies whilst also ensuring it is fit for purpose in Australia.
This project has been reinforced by the Australian Government in its recent budget where A$1.6 million has been allocated to co-fund the next phase of the taxonomy’s development. This will involve ASFI convening a new Technical Expert Group (following in the footsteps of Europe) that will oversee the development of the technical screening criteria and methodology that would underpin the framework.
This second phase is expected to take place over the next 12 to 18 months with close collaboration between other countries that have developed or are developing a taxonomy to ensure international alignment and inter-operability.
What about New Zealand?
The international developments and growing focus on sustainable finance in New Zealand raises the question of whether a taxonomy should be developed and implemented here as well. This is a rapidly evolving issue with work already underway to answer this question. This has started with a commitment from the New Zealand Government as part of the National Adaptation Plan published last year to support the development of definitional tools to encourage more investment in ‘green’ projects.[4]
Toitū Tahua, The Centre for Sustainable Finance, has also been involved by collaborating with the Ministry for the Environment in early design discussions and through facilitating a series of educational webinars with both domestic and international experts to explore the merits of an Aotearoa New Zealand sustainable finance taxonomy.[5] There will no doubt be further developments in this space as New Zealand continues down this path.
Concerns to navigate
At Harbour, we believe that a sustainable finance taxonomy could be a beneficial tool to help classify investments according to environmental and social criteria, but we also acknowledge there are important barriers that should be considered. These include the perceived ‘red tape’ that may deter foreign investment, any inconsistencies with international taxonomies leading to misalignment and further confusion, and the regulatory fatigue that businesses and investors in New Zealand are already facing with many new ESG-related regulations introduced in recent years.
We will continue to monitor how the work on a sustainable finance taxonomy evolves here and contribute to any associated industry consultations to promote the best interests of investors.
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This publication is provided for general information purposes only. The information provided is not intended to be financial advice. The information provided is given in good faith and has been prepared from sources believed to be accurate and complete as at the date of issue, but such information may be subject to change. Past performance is not indicative of future results and no representation is made regarding future performance of the Funds. No person guarantees the performance of any funds managed by Harbour Asset Management Limited.
Harbour Asset Management Limited (Harbour) is the issuer of the Harbour Investment Funds. A copy of the Product Disclosure Statement is available at https://www.harbourasset.co.nz/our-funds/investor-documents/. Harbour is also the issuer of Hunter Investment Funds (Hunter). A copy of the relevant Product Disclosure Statement is available at https://hunterinvestments.co.nz/resources/. Please find our quarterly Fund updates, which contain returns and total fees during the previous year on those Harbour and Hunter websites. Harbour also manages wholesale unit trusts. To invest as a wholesale investor, investors must fit the criteria as set out in the Financial Markets Conduct Act 2013.
[1] EU taxonomy for sustainable activities (europa.eu)
[2] Nonfinancial_Report_2022_e.pdf (volkswagenag.com)
[3] EU faces legal action after including gas and nuclear in ‘green’ investments guide | Energy | The Guardian
[4] Urutau, ka taurikura: Kia tū pakari a Aotearoa i ngā huringa āhuarangi | Adapt and thrive: Building a climate-resilient New Zealand (environment.govt.nz)