Seven years after it was first proposed, Canada is taking the first steps to create an official classification system to guide the financial industry in identifying investments that will move the country toward a net-zero future.
Canada’s “sustainable finance taxonomy” — named after a similar classification system in the European Union — will function as a label for green and climate-transition investments. Approximately 60 countries around the world have implemented similar taxonomies or are in the process of developing them.
“To stay competitive and attract investment, Canada needs to send clear signals of our climate-readiness to capital markets,” said Marlene Puffer, chair of a new governance council that is overseeing the initiative. Announcing the council last week, she said the goal is to help Canada attract an additional $115 billion annually in capital needed to finance its low-carbon transition.
The council — made up of representatives from the financial industry, universities and climate advocacy groups — will be federally funded but will operate on an arm’s-length basis from Ottawa. It’s scheduled to finalize taxonomy details for three as-yet-unnamed economic sectors by the end of 2026, and three more next year.
The two-year timeline means the taxonomy likely won’t have significant impact in the immediate future, including for investment decisions on infrastructure projects under review by the federal government’s Major Projects Office. But its usefulness is expected to grow as the climate and energy transition takes hold in the late 2020s and early 2030s.
Patricia Fletcher, chief executive officer of the Responsible Investment Association, the Canadian trade group for sustainable investment, says the taxonomy will help to ease greenwashing suspicions over climate claims by investment funds and asset managers. “It will make it easier for Canadian investors to understand what is green, what is not, and what is transition,” she says. “It’s ultimately going to be one of the tools that dispel concerns about greenwashing.”
Mitigation for oil and gas [such as carbon capture and storage] is almost by definition carbon lock-in.
– Matt Price, executive director, Investors for Paris Compliance
The European experience shows that taxonomies can help to raise climate-friendly capital. EU taxonomy-aligned investment reached €273 billion in 2024, bringing total capital to €742 billion since 2022. An academic study published last year found “robust evidence” that European stock of taxonomy-aligned companies traded at a premium over non-aligned companies.
The Canadian taxonomy was first proposed in 2019 by the Trudeau government’s expert panel on sustainable finance. A second consultative group produced a taxonomy roadmap in 2022. Two years later, the government completed preliminary work and last December handed over the project to the non-profit Canadian Climate Institute and the independent council. It was that council that was named last week.
How will the taxonomy work?
According to a 2024 Canadian government backgrounder, green-labelled investments would include low- or zero-emitting activities aligned with a 1.5°C increase in global warming as mandated by the Paris Agreement. Examples would include green hydrogen, wind and solar projects, electricity transmission lines and hydrogen pipelines. Transition-labelled investments would include activities that are currently emission-intensive but can convert to low-carbon technologies. Steel plants moving from coal-based production to natural gas, hydrogen or electricity would be an example.
The backgrounder cited six sectors crucial for the Canadian low-carbon transition: electricity, transportation, buildings, agriculture and forestry, manufacturing, and extractives (mining, processing and natural gas).
The new council is not bound by these green and transition definitions or specific sectors, although it’s expected it will use these sectors as the basis for its taxonomy.
Natural gas has been a contentious area. The EU taxonomy treats natural gas and nuclear energy as transitional investments if they meet certain conditions. It deems gas as a transition fuel because it is an alternative to higher-emission fuels such as coal. The EU taxonomy has assigned a transitional label to gas projects with the proviso that there are established phase-out periods for gas plants.
In an interview with Canada’s National Observer, Puffer said she would not speculate on whether the Canadian council would include liquefied natural gas (LNG) or carbon capture and storage (CCS) systems in its definition of transition activities. Climate advocacy groups maintain that LNG development can lead to additional long-term carbon emissions, known as carbon lock-in. CCS projects also pose a lock-in problem and have often failed to meet their ambitious carbon-dioxide-storage targets.
Taxonomy should be science-based: climate action groups
In a joint statement released last month, more than 30 non-governmental organizations and climate action groups outlined a set of basic principles they believe are essential for a credible taxonomy. The signatories contend that eligible activities under the taxonomy should be based on the Paris Agreement goal of limiting global temperature rise to between 1.5°C and 2°C. “This requires the rapid and systemic replacement of oil, gas and coal with clean energy,” according to the statement.
The signatories contend that the transition label should be restricted to high-emission activities for which there are no commercially available alternatives. Examples of these would include cement and steel, says Matt Price, executive director of Investors for Paris Compliance and a lead author on the document. “Mitigation for oil and gas [such as carbon capture and storage] is almost by definition carbon lock-in,” he said in an email. “LNG isn’t even mitigation unless a specific contract exists between that investment and closing a coal plant, and even that’s disputable on a life cycle basis.”
The group has also called for eligible investments to “do no significant harm” (a feature of the EU taxonomy) to ensure protection of important social and environmental considerations such as biodiversity preservation and labour rights. Additionally, the group calls for eligible investments to uphold Indigenous rights, including the free, prior and informed consent of Indigenous communities on projects affecting their resources.
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The group also recommends that the taxonomy be written with simple, clear language, making it interoperable (consistent) with other taxonomies. This would enable companies to use interchangeable reports from their disclosures under other taxonomies, easing their reporting burden if regulators eventually require public disclosure of their information.
Ralph Torrie, research director at Corporate Knights, says the taxonomy council should look to the Australian sustainable finance taxonomy released last year as a potential model for Canada. It’s a clear Paris-aligned classification system for green and transition investments, reflecting the needs of a similar resource-based economy. “People are paying a lot of attention to the Australian taxonomy,” he says.
Council begins work at a critical time
The council is beginning its work at a time of significant turmoil in energy markets, as the war in Iran has driven up oil and gas prices. This is creating expectations that Canada can benefit by building additional infrastructure for LNG export or CCS projects to expand oil-sands production, adding to carbon lock-in. Conversely, the energy crisis is also creating calls for Canada to electrify its economy to reduce dependence on increasingly expensive fossil fuels.
This issue is going to play a central role in the work of the council over the next two years. It will need to determine the boundaries for green and transition investments at a time when there are calls for expanding both clean and fossil fuel energy.
By flashing a green light on net-zero activities and a cautious amber on transition investments, the taxonomy should help to steer the capital markets of the 2030s into a more sustainable direction.
Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).
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