Market Anticipates Detail on Canadian Taxonomy
Handling of development process by independent group praised, as country gears up for further political turmoil.
Further details on the next steps to progress Canada’s sustainable finance taxonomy are expected any day now, following years in limbo for the long-awaited tool.
Last October, the Canadian government announced its intention to deliver a national taxonomy and introduce mandatory climate-related disclosures for large, federally incorporated private companies.
Development of the taxonomy is due to be handed over to an independent, arm’s length organisation to thrash out its details over the course of a year. Further details on the body were meant to be unveiled in Q4 2024 and have not yet arrived, but they are expected to be confirmed imminently.
“The process was supposed to kick off in the fall, but we’ve had a lot of political turmoil and foot dragging from the federal government, and they still have not released the exact details of the plan,” Adam Scott, Executive Director at campaign group Shift, told ESG Investor. “We’ve been told for months that it’s any day they’re going to announce a council which will oversee it, and the path forward for actually having technical detail.”
Scott said a great deal of effort was made to ensure that the independent group was not led by industry, who could decide the direction of regulation impacting them. The organisation is expected to include climate experts, representatives of civil society and external consultants, which Scott said was key to creating an “independent and credible” taxonomy proposal.
He also welcomed the decision to take the taxonomy out of the hands of government, describing this as “helpful because it won’t be reliant on the fickle political cycles that we’ve been stuck with”.
Canada is set to have a federal election this spring, and four of the five major federal parties have already mentioned the topic of sustainable finance regulation as something that they want to run on. “There’s quite a bit of detail that still needs to be added. We expect to see this become a political issue, and that will drive this as priority to the top of the ladder,” said Scott.
To support rapid decarbonisation, the taxonomy will outline criteria for green and transition activities for five sectors: electricity; transportation; buildings; agriculture and forestry; and heavy industry – including both manufacturing and extractive industries.
Green and transition eligibility criteria for two or three of these priority sectors is expected to be released within 12 months of the launch of the taxonomy’s oversight body. This will probably be sometime in Q1 2026.
While the taxonomy will initially be voluntary, Scott said he hopes that its guidelines will eventually be incorporated into regulation down the road. “If the taxonomy is done well. I think that’s quite likely,” he added.
Policy push
Referred to as the ‘Made-in-Canada’ taxonomy, the idea was first mooted in 2019 in response to the EU taxonomy. In May 2021, the Canadian government convened a 25-member Sustainable Finance Action Council (SFAC) to develop a plan for the taxonomy to mobilise private capital to support the country’s sustainability goals. The council included several institutional investors.
In March 2023, the government released a taxonomy roadmap report by the SFAC, based on ten recommendations across design, governance and future development. This was followed in November 2023 a commitment from government to develop a sustainable finance taxonomy identifying green and transition investments.
Based on advice from the SFAC, which included several institutional investors, Canada’s taxonomy will separately label green and transition activities, with the latter defined as emissions-intensive processes and services essential for sectoral transformation of the Canadian economy, consistent with a scientifically credible net zero pathway.
Barbara Zvan, President and CEO of University Pension Plan, also acknowledged that clarity on the taxonomy’s governance “remains limited at this stage”. However, she stressed that Canada’s efforts to introduce a sustainable finance taxonomy and mandatory disclosure plans are “vital for building a credible and transparent sustainable finance ecosystem”. Zvan led the SFAC’s Taxonomy technical expert group.
“The ongoing development of Canada’s taxonomy in 2025, with potential alignment to global standards like the EU taxonomy, offers a crucial opportunity to streamline regulatory requirements and drive economic activity,” said Zvan. “Policymakers should prioritise finalising the taxonomy to enhance Canada’s economic competitiveness and support global trade and investment.”
The taxonomy’s green and transition activities will be assessed against ‘do no significant harm’ criteria to ensure they are not detrimental to other ESG objectives. However, there has been controversy around the potential inclusion of high-emission sectors such as liquified natural gas against the SFAC’s recommendations on transition activities, with the Canadian government previously arguing for gas as a transition fuel under its planned sustainable finance taxonomy.
“We’ve been very concerned all the way through this process that a ‘Made-in-Canada’ taxonomy is really about finding a loophole that would allow gas to be labelled as sustainable in some way in the finance world,” said Scott. “We’ve been working hard to avoid that and have managed to get the minister to say gas will not likely have any role.”
Last week, a report from Shift revealed that some of Canada’s largest pension funds are exposed to significant financial risks and climate impacts through multi-billion-dollar investments in gas infrastructure companies.
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