We have been living in the wild west of “sustainable finance” definitions, with everyone interpreting them as they see fit. Globally, billions of investment dollars are flowing toward projects considered green, clean and environmentally aligned. Now, efforts are underway to define “sustainable” through the creation of detailed rulebooks known as “green taxonomies.”
By their very nature, taxonomies are supposed to provide clarity and certainty. But a taxonomy being developed to help Canada’s financial sector transition to a more sustainable future is in danger of doing the opposite.
Transition finance is an emerging subset of the rapidly growing sustainable finance movement. The idea stems from a concern that restricting financing to companies that are already sustainable will slow the required transition for high-carbon industries. In theory, companies that aren’t yet sustainable will also need financing to become so in the future. It’s a good idea, but it creates a significant danger of greenwashing if we get it wrong.
The Canadian Standards Association (the CSA Group), a non-profit industry body, is developing a taxonomy for transition finance, which in theory should prevent greenwashing. However, the project could instead keep the door open for fossil fuels at a time when we need to transition away from them.
In fairly stark contrast, the European Union (EU) has developed a comprehensive “EU taxonomy for sustainable activities” to create a consensus on financial standards backed by the legitimacy of financial regulators. This draft taxonomy is in the process of being adopted by the European Parliament.
The EU taxonomy isn’t perfect, but it creates a specific definition of transition finance, dealing squarely with the danger that it can lead to carbon lock-in if defined as simply making incremental changes to practices that ultimately need to be replaced. The EU taxonomy defines transitional activities as ones for which no low-carbon alternatives are available and that have emissions profiles considered best in sector; those that don’t hamper the development and deployment of low-carbon alternatives; and activities that do not lead to lock-in of carbon-intensive assets.
Under those logical safeguards, an oil company could receive transition financing to install electric vehicle chargers in its gas stations or invest in renewable energy, but not for upgrades to a refinery, even if those upgrades marginally reduce emissions. The whole point of transition finance, then, is to support the wholesale transition away from fossil fuels to clean energy that’s required to reach zero emissions by mid-century.
So what about Canada? A growing list of Canadian financial institutions have recently committed to align their strategy with what is required to address the climate crisis. Some actors in the country’s finance sector have rejected the EU taxonomy approach, however, in an apparent effort to preserve the deep entanglement between governments, financial institutions and the oil and gas industry. In 2019, Canada’s Expert Panel on Sustainable Finance released its final report, firmly renouncing the clear EU transition finance definition because it would largely shut out Canadian oil and gas producers. It’s not a mystery why. Canada is home to the oil sands, producing some of the highest-cost and highest-carbon oil in the world. This is an industry long facilitated by Canada’s political and financial establishments. Bending the rules to protect this industry is a hard habit to quit.
At the urging of fossil fuel companies and some of the Canadian financial institutions backing them, the expert panel argued that Canada should go it alone or work with countries “with similar resource endowments” and develop a taxonomy that would accept activities that others won’t. This attempt at creating a “made in Canada” green taxonomy amounted to a cynical effort to insert loopholes into sustainable-finance definitions to allow Canadian banks and institutional investors to continue financing oil and gas. If adopted, the CSA’s definition of transition finance could throw efforts to avoid carbon lock-in out the window, taking the “transition” out of “transition finance.”
The proposed taxonomy would grant the “transition” label to investments that increase access and use of natural gas to replace coal. That’s not decarbonization; it’s merely switching dependency from one fossil fuel to another. The proposed rules would also allow for the exploration and development of new oil and gas reserves, but no amount of creative accounting or qualification can credibly align financing for new fossil fuel expansion with climate science.
Any credible transition taxonomy should exclude the exploration and development of new oil and gas reserves, full stop.
The committee that the CSA Group struck to tackle the issue is composed only of financial actors, natural resource companies, governments, and industry stakeholders, while excluding climate experts, civil society and Indigenous groups. Why anyone would think this process to date won’t result in controversy and deeper uncertainty is hard to imagine. Canada is pursuing a pathway that lowers the bar and allows high-carbon activities to be labelled “sustainable” at a time when the International Energy Agency and United Nations are telling us to move rapidly away from fossil fuels. Canada is developing this behind closed doors with actors from the financial sector and the oil and gas industry, with the hope that the public, international financial institutions and our trading partners will somehow accept both the substance and the process.
Adopting a weakened taxonomy could stem financial flows into Canada, as major European investors will lack confidence in Canada’s compliance with international standards. It could also create headaches for internationally invested Canadian financial institutions like pensions.
A better approach would be for Canada to hit reset and move to adopting standards aligned with the EU, ensuring that Canada’s valuable progress on sustainable finance isn’t undermined.
Canada is well positioned to thrive as sustainable finance gains momentum. We can still get this right. Keeping the “transition” in “transition finance” is our best hope for a safer and more prosperous future.
Adam Scott is the director of Shift Action for Pension Wealth and Planet Health, a charitable project that works to protect pensions and the climate by bringing together beneficiaries and their pension funds on the climate crisis.
