The architects of Canada’s ‘green taxonomy’ rule book say it will unlock billions in new cleantech investments

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A new Canadian rule book setting out what can qualify as green investments should go a long way to removing uncertainty in the market and help fill what the authors say is a $115-billion-per-year shortfall in spending needed for the country to meet its goal of net zero emissions by 2050.

The first edition of a much-anticipated green taxonomy, written by a panel of financial-industry experts under Ottawa’s direction, is expected to be released soon. As The Globe and Mail reported in December, the “Taxonomy Roadmap Report” recommends two categories of investments: green, for those that are known to have the least environmental impact, and transitional, for those designed to advance the shift to low-carbon energy from fossil fuels.

That structure, developed by the Sustainable Finance Action Council (SFAC), has been greeted enthusiastically by members of the investment community as the way to make sure their money is directed at effective climate-related technology. But it’s been sharply criticized by environmental activists, who say it gives cover to the oil and gas industry rather than helping wean the country off fossil fuels.

The taxonomy is designed for a Canadian economy that is still heavily dependent on resource extraction and that requires vast sums of money for the technology necessary to decarbonize, said Barbara Zvan, chief executive officer of University Pension Plan Ontario and the leader of SFAC’s taxonomy group.

She compares it to the Energy Star rating for home appliances.

“You look at it, you trust that label, you don’t question it. You can move on to other factors of the purchase. And, really, what we’re trying to do here is develop a really credible tool that is science-based for industry, finance, as well as others, to use with everyone having a common definition,” Ms. Zvan said in an interview.

SFAC, led by former insurance executive Kathy Bardswick, submitted the 77-page first phase of the taxonomy to Finance Canada last autumn, after it garnered sign-off from all the group’s members – including representatives of most major Canadian financial institutions, insurers and pension funds.

Ottawa has yet to release it, even as the European Union and other jurisdictions have put their own taxonomies into effect. Federal Environment Minister Steven Guilbeault said on Tuesday the government is reviewing the recommendations before it takes the next step. “SFAC is headed by leading financial institutions and experts, and the very creation of this report shows the private sector understands the importance of net-zero objectives and wants to create a plan to align investment,” he told The Globe.

In Canada, investment in clean technologies is climbing, but not fast enough to fill what the report tallies as a $115-billion-a-year shortfall in what’s necessary to meet the country’s climate commitments, said Jonathan Arnold, clean growth research lead at the Canadian Climate Institute and a contributor to the report. Meanwhile, the risk of greenwashing – false or exaggerated environmental claims – remains.

“Just small errors in that capital allocation today can have very large impacts over time, for many reasons, but carbon lock-in is certainly one,” he said, referring to new projects that would emit greenhouse gases for years into the future. “So it’s very important to get this right out of the gate in terms of the transition market in particular.”

He pointed out that Canada has a “mature” market for green bonds, and even sustainability-linked bonds, but virtually no debt instruments that specifically target the energy transition. Putting a definition to that will help remove risk for investors and issuers of the securities.

The transitional label is meant for projects that cut emissions in carbon-intensive industries, including fossil fuels, steel, cement and chemicals, without identifying them as fully green. To qualify, oil-and-gas investments – such as the installation of methane-capture technology for natural gas production, and carbon-capture technology in the oil sands – would have to meet a specific set of criteria. They would require “well-defined lifespans” in line with decreases in consumption required to hit climate-change mitigation targets. Purported sustainability investments that involve “new oil and gas extraction projects” will be ineligible.

Environmental groups have complained that industries were “privileged actors” in the process. They say the effort should be led by government officials, rather than industry members, with non-governmental organizations and others at the table.

The taxonomy “muddies the waters” of what can be considered sustainable finance, and includes activities that are not aligned with the Paris Agreement goal of limiting temperatures to 1.5 degrees above pre-industrial levels, said Julie Segal, senior manager, climate finance, at advocacy organization Environmental Defence.

“It’s 25 financial institutions making recommendations for public policy that will affect them. It’s a significant conflict of interest. It doesn’t bring the right expertise to the table,” Ms. Segal said. “This is a public-policy issue – it should not be led by private actors. It should be an open consultation, like what we’ve seen in the EU.”

Ms. Bardswick said the taxonomy, and a planned governance structure around it, will become more detailed over the coming months through consultations with various sectors. The first phase was developed with SFAC’s current membership to arrive at a starting point and avoid disagreements that scuttled a previous attempt led by the non-profit CSA Group, she said.

“This is an area that is going to need some more work and we have been in continuing conversations with a broader group of stakeholders associated with how this governance would eventually be stood up,” Ms. Bardswick said.

The taxonomy will not, on its own, attract all of the capital needed to put the economy on a path to net zero, but it will play a big role in removing uncertainty for climate-conscious investors, said Priti Shokeen, head of ESG research for TD Asset Management.

“It provides a more balanced and level playing field, and it may remove a lot of greenwashing concerns. Directionally it provides all investors with the same definition and clarity in terms of economic activities and how they are classified,” she said. “Right now, it’s all over the place in the industry.”