The accelerating transition away from fossil fuels and toward electrification and renewable energy presents both risks and opportunity to investors. For those with significant fossil fuel holdings, returns are imperilled by demand risk, as energy consumption trends toward electrification. Investors have an opportunity to take advantage of this realignment by focusing on sectors and assets that are likely to grow as the energy transition accelerates.

The global investment firm Brookfield has established some of the largest private equity funds claiming to do so with its two “Global Transition Funds” and its “Catalytic Transition Fund.” The funds claim to offer investors exposure to climate-transition opportunities by directing capital toward the decarbonization of high-emitting assets, and by investing in clean energy.

Clear guidelines and adherence to best practices would offer stakeholders confidence that their bets into the transition economy are being placed accordingly.

– Michael Sambasivam and Adam Scott

Transition funds are an important investment class, as they can help supply some of the trillions needed to achieve net-zero by 2050 or sooner, while offering savvy investors a venue through which to access transition opportunities. But transition investing also requires rigorous due diligence: not all investments labelled as such legitimately contribute to the transition, and not all assets can be transitioned.

Fuzzy criteria could mislead investors

Brookfield’s funds currently lack the transparent guidelines that are necessary for transition investments to work. Clear definitions of “green” and “transition” investments would ensure that investors – both in the funds and in Brookfield itself – are getting what they were sold. Brookfield has opted instead to rely on vague language that suggests it adheres to external guidances that define credible, science-based transition investments, but without specifying the guidances involved or how they are applied.

Brookfield is not alone in this. Last year, we filed a complaint with the Ontario Securities Commission on the basis that Canada’s banks labelled investments as “sustainable” even though they resulted in increased greenhouse gas emissions. Each of Canada’s “big six” banks were involved in sustainably labelled transactions that financed the expansion of fossil fuel infrastructure.

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As Brookfield deploys transition capital on behalf of pensions and other clients, it is paramount that it ensures that it does not similarly mislead its investors. Comments from Brookfield Infrastructure CEO calling LNG a “leading transition fuel,” paired with Brookfield’s substantial and growing gas portfolio, led us to file a shareholder proposal asking for clarity.

Our proposal asks that Brookfield disclose the criteria used to determine asset eligibility in its transition-labelled funds. Clear guidelines and adherence to best practices would offer stakeholders confidence that their bets into the transition economy are being placed accordingly.

Methane gas has no place in transition investing

The Canadian financial sector’s systemic unwillingness to properly define the terms “transition” and “sustainable” shows the need for Canada’s upcoming green and transition taxonomy to adhere to strict best practices.

A Canadian green and transition taxonomy would serve as a classification system for which activities are aligned with Canada’s climate target of achieving net-zero emissions by 2050. Where Canada’s financial sector lacks the incentives or willingness to regulate itself, investors and the general public alike would benefit from guardrails that ensure that green and transition finance are not simply buzzwords.

We know what is needed to successfully transition the economy toward net-zero and to avoid cementing further transition risk into Canada’s finances. The International Energy Agency’s and the Intergovernmental Panel on Climate Change’s net-zero pathways make clear that financing new development of fossil fuel infrastructure is misaligned with net-zero by 2050. Suggestions that methane gas be labelled as transitional are not rooted in science but rather an attempt by fossil fuel companies to displace capital allotted to transition investments.

The fossil fuel sector’s newest campaign, in which liquefied natural gas is being falsely sold as a “bridge fuel” to allow developing economies to replace one fossil fuel (coal) with another (gas), is unfounded in both economics and climate science. LNG’s high life-cycle emissions make it a marginal emissions-reduction tool at best, while new gas investments of any type would lock in carbon emissions for decades, blocking transition.

LNG is not a transition fuel, and either Brookfield’s transition funds or Canada’s taxonomy would be undermined by pretending that it is.

A science-based and climate-aligned taxonomy would not prevent Canada’s financial institutions from managing capital as they see fit. Instead, it would mandate honesty, prevent greenwashing, create trust and ensure that transition capital is deployed in alignment with its mandate.

If Canada’s financial institutions earnestly stand by their green- and transition-labelled investments and investment vehicles, we should see them asking for the same.

Michael Sambasivam is a senior analyst at Investors for Paris Compliance, a shareholder advocacy organization holding Canadian companies accountable to their net-zero commitments.

Adam Scott is the executive director of Shift Action for Pension Wealth and Planet Health, a charitable project working to align Canada’s financial sector with climate goals.

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