Canada’s finance sector to publish ‘short-form’ taxonomy by mid-2023

Canada’s Sustainable Finance Action Council framework to cover ‘priority sectors and activities’ and lay the groundwork for green and transition taxonomies.

canada

Canada’s financial sector is preparing to publish a “short-form taxonomy” in the next few months that will cover “priority sectors and activities” and serve as a “starting point” for the country’s taxonomy framework.

On Friday, the Sustainable Finance Action Council (SFAC) – the body mandated by the Canadian government in 2021 to establish definitions around green and transition investments – published its taxonomy roadmap report.

SFAC is made up of representatives from 25 Canadian financial institutions, including banks, pension funds and insurers. A subset of the body’s members makes up the Taxonomy Technical Experts Group (TTEG), which is chaired by Barbara Zvan, president and CEO of the University Pension Plan Ontario (UPP).

Its report, which was submitted to the government in autumn 2022, lays out 10 recommendations addressing the merits, design and implementation of a green and transition finance taxonomy for Canada.

Work on Canada’s long-overdue “transition taxonomy” stalled in early 2022. At the time, the body overseeing it – Canadian standard setter CSA Group – told Responsible Investor that efforts had been paused owing to “fundamental differences of opinion” between committee members, which included representatives of Canada’s finance and natural resource sectors.

SFAC took over responsibility for the taxonomy work shortly after.

While the Canadian government mulls its suggestions, SFAC stated in the report that it would direct the TTEG to develop the taxonomy architecture introduced in their report, “with a focus on establishing voluntary issuance requirements and green and transition criteria for an initial set of priority sectors and activities, identified through a risk- and needs-based assessment”.

This work would constitute a first phase in the development of Canada’s green and transition finance taxonomy. The second phase would involve the “full implementation of the taxonomy initiative and publishing a substantially more complete and detailed taxonomy by end-2025 at the latest”, SFAC recommended.

Three-tier system

Work on the long-term taxonomy should be governed using a three-tier system, SFAC stated, with the establishment of a taxonomy council at the top “jointly governed by the federal government and financial sector”. The council would be responsible for the “overall strategic direction, design and funding of the initiative”.

Below that, a “custodian” would be appointed to develop the “taxonomy proposals and technical criteria”.

The third tier would comprise technical working groups and a “stakeholder advisory forum” to provide expert input to the work of the custodian.

Details of SFAC’s work were leaked to the Canadian press earlier this year over concerns that the group was looking to label projects such as installing carbon capture, utilisation and storage (CCUS) on oilsands production as transition-eligible.

Such an example is included in the report from SFAC, demonstrating how an oil and gas project might reduce its emissions enough to be considered transition-eligible.

SFAC notes that the examples are purely illustrative and are “not meant to bind future work and decisions”.

It also stated that transition eligibility of projects will require “well-defined lifespans that are approximately proportionate to the expected decline in global demand in representative 1.5C pathways”.

Speaking as a member of SFAC, Bertrand Millot, head of sustainability at Canadian pension fund CDPQ, was asked if activities such as CCUS are transitional, given that they mitigate the impacts of oil and gas rather than move away from them.

He told RI that there is an urgent need to reduce both the “use and production footprint” of hydrocarbons. “Reducing the latter could represent significant CO2 emissions that would not accumulate in the atmosphere while we continue to consume these products.”

Millot said the transition label is “strictly limited to existing installations/fields and has to be seen in a 1.5C alignment context”. Such “safeguards” should be sufficient “not to condone a delayed transition”, he added.

‘Not entirely clear’

Jamie Bonham, director of responsible investing and ESG services at Canada’s NEI Investments, told RI it was “not entirely clear” how the proposed investments in CCUS will align with a net-zero trajectory or how they will remain viable in a low-carbon economy.

“But perhaps the requirements of the taxonomy will help companies articulate how these capital-intensive projects make sense in a world of declining demand for traditional uses of fossil fuels,” he added.

Bonham also stressed that the most important driver will be regulation rather than a voluntary taxonomy. “As long as the regulatory environment is consistent and robust, the taxonomy will be a complementary tool that will hopefully speed up the investments that we desperately need,” he said.

SFAC also recommended that the taxonomy initiative in the second phase should consider developing a methodology and criteria so that issuances connected to green and transition projects can be differentiated further according to their “relative transition opportunity and risk”.

“For example, an aluminium manufacturer investing to electrify its operations to dramatically lower its Scope 1 and 2 emissions faces different transition opportunity (and risk) than an existing oilsands facility investing in carbon capture, utilisation and storage,” SFAC wrote.