Since Mark Carney was sworn in as prime minister of Canada, environmentalists have gone from dismay to indignation. Not only is his government promoting pipelines to export Alberta oil, but it now hopes to expedite large-project reviews through newly tabled legislation.
To avoid going down in history books as “oil man Carney,” the prime minister is betting on renewable energy, electrification and a homegrown sustainable finance taxonomy. Unfortunately, this last initiative may not live up to its lofty expectations.
First, a primer.
Though it sounds like an unpleasant medical exam, a taxonomy refers to the science of classifying groups with shared characteristics. In sustainable finance, a taxonomy specifically defines which economic activities qualify as “green” using rigorous, science-based criteria.
This label is typically destined for low- or zero-carbon activities that move a country or region toward net-zero emissions by 2050, such as renewable-energy production or electric transportation. As Barbara Zvan, president and CEO of the University Pension Plan Ontario, aptly put it, you can think of a taxonomy as an Energy Star system that has gone from appliances to investments.
While most taxonomies stop at a “green label,” the architects of Canada’s taxonomy have gone further by proposing two additional labels. A second label is for “transition” activities that could help decarbonize, at scale, high-emission sectors such as cement or steel.
A third and more controversial label, called “abatement measures,” is meant to describe economic activities that reduce direct emissions in upstream oil and gas production, refining and distribution as those activities are phased out on the road towards net-zero. This addition is a diplomatic bid to appease Canada’s oil patch – which didn’t go unnoticed. In the feedback to the draft taxonomy received this summer, the mere mention of oil production in a taxonomy was viewed by some as an oxymoron.
Canada is late to the taxonomy game. According to the Organisation for Economic Co-operation and Development (OECD), there were more than 50 national and regional (European Union, Association of Southeast Asian Nations) taxonomies in use in 2025, in advanced economies as well as emerging markets such as the Dominican Republic, Zambia and Sri Lanka. No wonder Canada’s sustainable finance community is green with envy.
Why a taxonomy?
Indeed, a taxonomy offers clear advantages. First, it provides a common language in the corporate and financial sectors, notably for institutional investors such as the Public Sector Pension Investment Board, also known as PSP Investments. This Canadian Crown corporation has gone to great lengths to develop a bespoke classification system for what is green or greenish. With a taxonomy, there is no need to reinvent the wheel.
Second, by identifying what is green or aligned with a net-zero trajectory, a taxonomy reveals which economic activities don’t make the cut. This makes it harder to portray non-aligned activities, such as converting a power plant from coal to natural gas, as sustainable, whether the greenwashing is intentional or not.
Finally, the clarity offered by an official taxonomy gives credibility to the companies and governments that wish to raise money by issuing green or transition bonds – fixed-income debt instruments whose proceeds are earmarked for climate-positive projects. In turn, this reassures investors big and small that aim to finance sustainable projects.
Taxonomy trouble
From there, it’s an easy leap to conclude that a taxonomy increases overall investments in sustainable economic activities. That’s one of the main objectives of the whole endeavour. For instance, Canada hopes to bridge the massive investment shortfall between what the country requires to build a net-zero economy by 2050 and what is currently funded – an annual $115-billion gap, according to Ottawa’s estimates.
Unfortunately, that is where sustainable investment taxonomies run into trouble, because that causal relationship has never been demonstrated conclusively. The EU’s taxonomy, which has served as a template for other taxonomies around the world since it came into force in 2020, is a good case in point. In its recent Review on Aligning Finance with Climate Goals 2026, the Paris-based OECD notes that proving that a taxonomy adds sustainable investments “is difficult to demonstrate” as you may simply be relabelling existing investments or funds that were already active in this area.
Poor tracking is one culprit. Currently, it is hard to ascertain whether an investment would not have occurred in the absence of a taxonomy. This will be even more challenging in Canada, where the use of the taxonomy is voluntary.
Beyond measurement, several obstacles prevent the EU’s taxonomy from directing more capital toward environmentally friendly activities, according to PwC, which has analyzed the mandatory taxonomy disclosures of European financial institutions since 2023. According to the firm, while data quality in disclosures has improved, knowing that, say, 35% of a firm’s revenues are taxonomy-aligned has rarely influenced strategic decisions.
“Without strong political commitment and genuine market demand, the [EU] Taxonomy risks remaining a mere regulatory checkbox – missing the opportunity to influence strategic investment decisions that are crucial for achieving long-term societal and environmental goals,” notes Géraldine D’Argembeau, a partner at PwC Belgium who advises on risk, compliance and sustainability.
Can Canada’s taxonomy increase sustainable investments? Can it even help mitigate the climate impact of the currently proposed pipelines without further entrenching the country’s existing oil production activities? This may well be a pipe dream.
Sophie Cousineau is a corporate director and business columnist with extensive experience in sustainable investment strategies, impact investing and corporate social responsibility. She is based in Montreal.
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