Two separate open letters released over the last week are calling on the federal government to pick up the pace on a sustainable finance taxonomy to align investments with a 1.5°C climate target, with one of them urging Ottawa to keep fossil fuel investments out of the rulebook.
The taxonomy has been under development since 2019, and delays in getting it done are “already holding Canadian companies back from taking urgently needed climate action,” 230 members of Canada’s Clean50 told Finance Minister Chrystia Freeland, Environment Minister Steven Guilbeault, and Natural Resources Minister Jonathan Wilkinson in an open letter released Monday. The slow pace is “putting our emerging cleantech and transitioning carbon-intensive sectors at increasing competitive disadvantage.”
“We encourage the government to quickly deliver a taxonomy to define sustainable investments,” wrote 55 climate groups, in an eight-page submission to the same three ministers coordinated by Environmental Defence Canada. “But not if it includes fossil fuel-related investments as eligible for the sustainability label.”
[Energy Mix Publisher Mitchell Beer is a member of Canada’s Clean50 and signed on to the Clean50 letter on behalf of Energy Mix Productions.]
Recommendations for a Canadian taxonomy were published in 2022 by the federally-appointed Sustainable Finance Action Council, which disbanded in disappointment last month after its three-year term ended with implementation still stalled. The 25-member council “developed a framework for a made-in-Canada taxonomy of climate-focused investments, which would categorize them as either ‘green’ or ‘transitionary’ depending upon the levels of greenhouse gas emissions they produce and whether they are likely to continue to be used well into the future,” the Globe and Mail wrote in early April.
“The group also recommended a speedy move to mandatory climate-related financial disclosure for private companies.”
The Clean50 letter picks up on that approach. “We are concerned that Canada has become an outlier amongst its G-7 peers and most of our other trading partners, and is falling further behind with every passing day,” it states. “A Canadian taxonomy can make Canada a more attractive global investment destination, accelerating much needed transition finance and facilitating the deployment of new climate innovations,” while helping companies to “finance their transition plans and decarbonize operations at a faster pace.”
While the Clean50 said the taxonomy will also “help combat greenwashing and support our collective desire for enhanced transparency in corporate disclosures,” that’s one dimension of the concerns raised in the Environmental Defence Canada submission. “There are key criteria which are necessary for [the taxonomy] to be credible, and for it to receive support from environmental and climate experts,” the climate groups write. “A Canadian taxonomy must: be consistent with keeping warming below 1.5°C; exclude fossil fuel-related projects; respect a just transition and Indigenous rights; and formally include balanced expertise in the next stages of governance and decision-making, including independent climate representatives.”
The two submissions agree that Canada is lagging dozens of other countries that have already introduced their own taxonomies. “This stuff isn’t new,” said Barbara Zvan, president and CEO of Ontario’s University Pension Plan (UPP), who instigated the Clean50 letter. “Having disclosure and a taxonomy is now the recognized infrastructure that you need to have sustainable finance. This is not experimental anymore.”
“In the absence of clear rules, financial flows are not yet moving in the right direction,” the 55+ climate groups write. “The majority of people in Canada support new regulations to clear up greenwashing in the financial sector. Yet Canadian financial institutions face regulatory complaints for making untrue sustainability and net zero claims.”
A taxonomy would hold the financial sector accountable for its climate claims by defining “which projects and investments are ‘sustainable’ and which are ‘not’,” the climate groups’ letter adds, “but only if it is credibly aligned with ambitious climate action.”
The groups’ criteria for a credible taxonomy included exclusion of expanded oil, gas, or coal production, and of carbon capture technology attached to fossil fuel projects, alignment with the 1.5°C temperature threshold in the Paris climate agreement, and assessing company-wide alignment, not just individual projects.
Zvan said the taxonomy doesn’t include natural gas extraction, but it does have room for carbon capture and storage (CCS) attached to existing gas production. “It’s not exploration and production,” she said. “It’s how do I decarbonize and reduce methane.” Given the outsized share of emissions that come from the fossil fuel sector, “you can look at the challenges in Canada. If we’re going to meet our 2030 targets, we have to deal with the sector.”
Independent analysts have long questioned whether CCS systems can consistently capture as much carbon as their proponents claim, consistently and affordably enough to help countries decarbonize. Last fall, the industry itself admitted the technology won’t be ready for prime time by 2035, much less a 2030 deadline. Zvan said that level of technology assessment is an important part of the taxonomy.
“For CCS, it’s absolutely pertinent,” she told The Energy Mix. “There’s risk associated with it,” and “that’s where the taxonomy comes in,” providing thresholds that then trigger a risk assessment.
“Then it’s up to investors to decide their risk appetite. Today, the investor is making those choices without the right information,” despite the large volume of emissions the sector produces.
The climate groups’ letter still calls for a more expansive standard.
“Excluding an activity or project from the taxonomy would not deprive it of funding—but the definition of ‘sustainable’ investments must truly align with the name,” the groups say. “There should not be a Canadian taxonomy unless it credibly aligns with the overarching goals of the Paris agreement.”
