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Canada’s transition taxonomy paused due to ‘fundamental differences of opinion’

Suspension of work on taxonomy comes as Canada’s public sector pension fund PSP Investments launches own bespoke green one as part of inaugural climate strategy.

Work on Canada’s overdue “transition taxonomy” has been paused following “fundamental differences of opinion” between committee members working on the framework, a spokesperson for CSA Group, the Canadian standard setting body overseeing the initiative, has told RI.

The CSA Group’s Committee for Transition and Sustainable Finance, which includes representatives of Canada’s financial and natural resource sectors, has been working on the draft for more than two years. It was expected to be released at the end of 2021 but failed to materialise.

The taxonomy was one of a number being developed around the world by different jurisdictions – but unlike the EU’s green taxonomy, for instance, which aims to use climate science as the basis for its definitions of sustainable economic activities, the plan was for Canada’s to be more tailored to the needs of its resource-intensive economy.

Speaking on a panel on the topic at the RI Canada conference last September, Peter Johnson, director of sustainable finance at Scotiabank and chair of the CSA Group’s taxonomy committee, told delegates: “[We] have a very different definition of transition in Canada than perhaps the Europeans or other groups… Our definition of transition that we’re working from is the reduction of greenhouse gas emissions.”

In 2020, Jason Taylor, then director of sustainable finance at Scotiabank and its representative on the committee, wrote bullishly in RI: “Canada is on the cusp of having its own transition-focused taxonomy, a very welcome, important tool that will help the burgeoning sustainable finance market to develop and grow.”

But a spokesperson has now told RI that CSA Group “has paused our facilitation activities for the development of a document outlining foundations for a transition finance taxonomy in Canada”.

Based on feedback received through March 2022, they continued: “It is clear that fundamental differences of opinion remain among committee members, and consensus on the draft foundations document was not achieved.”

The spokesperson added that CSA Group “intends to work with the Sustainable Finance Action Council (SFAC) and government stakeholders in the coming days and weeks to determine next steps”.

The news comes as Canada’s public sector pension fund PSP Investments has released its own “bespoke” green taxonomy as part of its inaugural climate strategy.

The “Green Asset Taxonomy” will be used by the C$204 billion ($159 billion; €149 billion) fund to quantify its emissions exposure across its long-only public equities, real estate and private equity portfolios, setting a baseline from which it can monitor reductions over time.

Not covered in PSP Investment’s new framework are its fixed income holdings, investments in exchange traded funds (ETFs), funds of funds and credit investments.

The taxonomy was announced on the same day that PSP Investments unveiled its first climate strategy, which included a raft of commitments including ramping up green investments to C$70 billion by 2026 from a C$40 billion baseline in 2021. The fund also pledged to reduce holdings in carbon-intensive assets that lack transition plans by 50 percent by 2026 from a $7.8 billion baseline in 2021.

PSP Investments states that the taxonomy was developed to help it address the pressing need to understand its climate risk exposure in an environment where emissions data “remains sparse”.

The new framework, which was developed in 2021, relies on a traffic lights system dividing the fund’s portfolio into four buckets: green assets (green), transition assets (amber), carbon intensive assets (red) and rhe rest of the fund (grey). This last category includes assets where “carbon emissions are not a relevant consideration or where data is unavailable”.

Each of the traffic light coloured categories have sub-categories – under green sits: “dark green”, “light green” and “enabling”. Under transition are: “early” (have some non-science-based targets) and “mature” (have long and short science-based targets). Finally, under red are: “high carbon” and “hard to abate”.

To be considered dark green, assets must have “low GHG performance” and be “aligned to third-party low-carbon taxonomies and/or PSP’s green bond framework”.

Light green assets are those that “achieve 30 percent better GHG performance than a relevant sector benchmark” and “enabling” are activities that aid the transition to low carbon. To qualify as enabling, the majority of revenues must be “derived from one or more low carbon activities”.

The fund added that it will look to eventually include companies’ Scope 3 – full value chain – emissions to the taxonomy but stated that at present: “Scope 3 data collection methodologies are not standardised across the market.” Such data will only be added to the Green Asset Taxonomy, it continued, when a “sufficient critical mass of such information exists”.