Canada’s green investment roadmap

What happened: The federal government signed off on plans to create a guide (or taxonomy) for sustainable investments. The taxonomy aims to give investors clarity on which investments are aligned with limiting warming to 1.5 degrees or play a role in the transition.

The taxonomy includes a “green” label for projects with little or no emissions and a “transition” label for projects that decarbonize emissions-intensive sectors (e.g. installing electric furnaces for steel production). Beyond emissions, the guide also considers whether the market that the project depends on will grow or decline in a 1.5 scenario.

Finance Minister Chrystia Freeland also said the government plans to require climate-related financial disclosures for large companies. Large banks and insurance companies already need to disclose their climate risks at the end of this year following new rules by OSFI, Canada’s financial regulator.

Why it matters: The new guide is a critical step for the transition to net-zero. It can direct capital into projects that are aligned with scientifically-credible paths to net-zero by giving investors more clarity and confidence that they’re investing in the right assets. That could close the $115 billion shortfall in annual spending needed to get Canada to net-zero by 2050, from clean energy projects to building retrofits to sustainable agriculture. 

What’s the context: Sustainable finance is gaining more attention globally, and is a critical bottleneck (or accelerant) for the transition to net-zero. Canada has a particularly important role to play, as it’s home to some of the biggest fossil fuels financers and is the fourth-largest producer of oil. 

But the feds have been slow to move - this announcement comes two years after the taxonomy was developed by the Sustainable Finance Action Council (SFAC) and is still at least another year away from implementation. In that time, other countries have stepped up and adopted parts of the SFAC report for their own frameworks. 

Sticking point: A key issue is the role of “transition” investments like decarbonizing fossil fuel generation or heavy industry. Too loose, and it doesn’t offer the certainty investors are looking for, essentially becoming greenwashing. But too tight, and it cuts off funding that could be used to clean up sectors that are producing a huge proportion of Canada’s emissions. 

A prime example is natural gas. The gas industry and western provinces pushed to include it, while others argued that including fossil fuels would undermine the taxonomy’s credibility. Under the announced framework, new gas production is “unlikely” but projects that reduce emissions could be eligible.

What’s next: The announcement essentially is a plan to make a plan. The taxonomy will go to an arms-length organization to be built out, and the feds want to see the guidebook covering “priority industrial sectors” within the next year. 

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