Canada’s “sustainable finance taxonomy” – named after a similar classification system in the European Union – will function as a label for green and climate-transition investments. Approximately 60 countries around the world have implemented similar taxonomies or are in the process of developing them.

“To stay competitive and attract investment, Canada needs to send clear signals of our climate-readiness to capital markets,” said Marlene Puffer, chair of a new governance council that is overseeing the initiative. Announcing the council last week, she said the goal is to help Canada attract an additional $115 billion annually in capital needed to finance its low-carbon transition.

The council – made up of representatives from the financial industry, universities and climate advocacy groups – will be federally funded but will operate on an arm’s-length basis from Ottawa. It’s scheduled to finalize taxonomy details for three as-yet-unnamed economic sectors by the end of 2026, and three more next year.

The two-year timeline means the taxonomy likely won’t have significant impact in the immediate future, including for investment decisions on infrastructure projects under review by the federal government’s Major Projects Office. But its usefulness is expected to grow as the climate and energy transition takes hold in the late 2020s and early 2030s.

Patricia Fletcher, chief executive officer of the Responsible Investment Association, the Canadian trade group for sustainable investment, says the taxonomy will help to ease greenwashing suspicions over climate claims by investment funds and asset managers. “It will make it easier for Canadian investors to understand what is green, what is not, and what is transition,” she says. “It’s ultimately going to be one of the tools that dispel concerns about greenwashing.”

Mitigation for oil and gas [such as carbon capture and storage] is almost by definition carbon lock-in.

– Matt Price, executive director, Investors for Paris Compliance

The European experience shows that taxonomies can help to raise climate-friendly capital. EU taxonomy–aligned investment reached €273 billion in 2024, bringing total capital to €742 billion since 2022. An academic study published last year found “robust evidence” that European stock of taxonomy-aligned companies traded at a premium over non-aligned companies.

The Canadian taxonomy was first proposed in 2019 by the Trudeau government’s expert panel on sustainable finance. A second consultative group produced a taxonomy road map in 2022. Two years later, the government completed preliminary work and last December handed over the project to the non-profit Canadian Climate Institute and the independent council. It was that council that was named last week.

How will the taxonomy work?

According to a 2024 Canadian government backgrounder, green-labelled investments would include low- or zero-emitting activities aligned with a 1.5°C increase in global warming as mandated by the Paris Agreement. Examples would include green hydrogen, wind and solar projects, electricity transmission lines and hydrogen pipelines. Transition-labelled investments would include activities that are currently emission-intensive but can convert to low-carbon technologies. Steel plants moving from coal-based production to natural gas, hydrogen or electricity would be an example.

The backgrounder cited six sectors crucial for the Canadian low-carbon transition: electricity, transportation, buildings, agriculture and forestry, manufacturing, and extractives (mining, processing and natural gas).

The new council is not bound by these green and transition definitions or specific sectors, although it’s expected it will use these sectors as the basis for its taxonomy.

Natural gas has been a contentious area. The EU taxonomy treats natural gas and nuclear energy as transitional investments if they meet certain conditions. It deems gas as a transition fuel because it is an alternative to higher-emission fuels such as coal. The EU taxonomy has assigned a transitional label to gas projects with the proviso that there are established phase-out periods for gas plants.

In an interview with Canada’s National Observer, Puffer said she would not speculate on whether the Canadian council would include liquefied natural gas (LNG) or carbon capture and storage (CCS) systems in its definition of transition activities. Climate advocacy groups maintain that LNG development can lead to additional long-term carbon emissions, known as carbon lock-in. CCS projects also pose a lock-in problem and have often failed to meet their ambitious carbon-dioxide-storage targets.

Taxonomy should be science-based: climate action groups

In a joint statement released last month, more than 30 non-governmental organizations and climate action groups outlined a set of basic principles they believe are essential for a credible taxonomy. The signatories contend that eligible activities under the taxonomy should be based on the Paris Agreement goal of limiting global temperature rise to between 1.5°C and 2°C. “This requires the rapid and systemic replacement of oil, gas and coal with clean energy,” according to the statement.

The signatories contend that the transition label should be restricted to high-emission activities for which there are no commercially available alternatives. Examples of these would include cement and steel, says Matt Price, executive director of Investors for Paris Compliance and a lead author on the document. “Mitigation for oil and gas [such as carbon capture and storage] is almost by definition carbon lock-in,” he said in an email. “LNG isn’t even mitigation unless a specific contract exists between that investment and closing a coal plant, and even that’s disputable on a life cycle basis.”

The group has also called for eligible investments to “do no significant harm” (a feature of the EU taxonomy) to ensure protection of important social and environmental considerations such as biodiversity preservation and labour rights. Additionally, the group calls for eligible investments to uphold Indigenous rights, including the free, prior and informed consent of Indigenous communities on projects affecting their resources.

RELATED STORIES

Canada’s finance regulator says up to $1 trillion in lending could be unlocked

Five sustainable finance predictions for 2026

Can Ottawa convince Canada’s pension giants to invest at home?

The group also recommends that the taxonomy be written with simple, clear language, making it interoperable (consistent) with other taxonomies. This would enable companies to use interchangeable reports from their disclosures under other taxonomies, easing their reporting burden if regulators eventually require public disclosure of their information.

Ralph Torrie, research director at Corporate Knights, says the taxonomy council should look to the Australian sustainable finance taxonomy released last year as a potential model for Canada. It’s a clear Paris-aligned classification system for green and transition investments, reflecting the needs of a similar resource-based economy. “People are paying a lot of attention to the Australian taxonomy,” he says.

Council begins work at a critical time

The council is beginning its work at a time of significant turmoil in energy markets, as the war in Iran has driven up oil and gas prices. This is creating expectations that Canada can benefit by building additional infrastructure for LNG export or CCS projects to expand oil-sands production, adding to carbon lock-in. Conversely, the energy crisis is also creating calls for Canada to electrify its economy to reduce dependence on increasingly expensive fossil fuels.

This issue is going to play a central role in the work of the council over the next two years. It will need to determine the boundaries for green and transition investments at a time when there are calls for expanding both clean and fossil fuel energy.

By flashing a green light on net-zero activities and a cautious amber on transition investments, the taxonomy should help to steer the capital markets of the 2030s in a more sustainable direction.

Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).

The post A clash over natural gas is brewing as Canada readies more action on green investing appeared first on Corporate Knights.

However, Canada’s climate-data landscape remains fragmented, limiting the country’s ability to manage the transition effectively. Without clear rules and consistent data, companies are reluctant to act, policymakers cannot create the enabling conditions, and investors and other stakeholders lose confidence.

The recent anti-greenwashing law and the subsequent withdrawal of sustainable finance commitments by a Canadian bank and pension fund highlight the fault lines in our climate-information system.

To move forward, Canada needs better data and a better system – a climate-information architecture – for using it.

What is a climate-information architecture?

Today, climate-related information such as a business’s physical risk exposure or the extent to which its spending aligns with a low-carbon transition is often incomplete, inconsistent or inaccessible. Without trustworthy data, companies cannot track their progress, financial institutions cannot assess climate risks from their assets, and regulators cannot enforce credible standards. The result is uncertainty and delayed action.

To fix this, Canada needs a national climate-information architecture: a system for generating, aligning and sharing climate-related information across the economy. It is a decision-making system built on five essential building blocks: transition plans, scenario analysis, disclosures, taxonomy and data and analytics.

It is important to recognize that each building block supports the others. Together, they create a shared foundation of useful information that boosts market confidence and safeguards financial stability across the economy. Without alignment, the whole system falters.

Progress is happening, but it is slow and misaligned

Canada has made headway, developing a taxonomy governance structure, piloting scenario analysis exercises and introducing made-in-Canada reporting standards. But we’re falling behind on coordinated implementation.

One key barrier is fragmented leadership. Implementing a national architecture requires coordination across federal and provincial governments, regulators, standard setters and industry. Each operates under different mandates and timelines.

RELATED

A new plan to kick-start the energy transition at Canadian companies

How climate risk disclosure became a battleground for the clean economy

Can Canada be a clean energy superpower? Not without tax credits.

For instance, the Office of the Superintendent of Financial Institutions (OSFI) has issued climate-risk-management guidelines for federally regulated financial institutions. Yet progress on climate disclosure requirements has stalled for public and private companies after the Canadian Securities Administrators paused efforts to mandate consistent reporting. This type of misalignment creates data gaps, weakens accountability and slows momentum.

Removing misalignment can reduce the cost of doing business

Removing impediments to the functioning of the climate-information architecture can reduce the cost of doing business and enhance the economic transition. For example, regulators like the Competition Bureau need clear benchmarks to define what counts as a green or transition-friendly activity to enforce green marketing claims. A government-backed taxonomy would support that objective while allowing companies to navigate the rules more effectively, thus reducing costs associated with doing business during the transition.

Similarly, with credible transition planning and scenario analysis, financial institutions can evaluate the vulnerability of their holdings to climate risks. Regulators like the OSFI can get the information to stress-test climate-related shocks and protect the financial system against systemic risks. According to a study from the University of Oxford, better disclosures of plans and scenarios translate into lower costs of loans for borrowers.

These examples underscore the urgent need for alignment and coherence across Canada’s climate-information system.

Align the architecture through coordinated leadership

To build climate-information architecture as a connected system, not a patchwork of disconnected tools, Canada needs to standardize and mandate key tools such as disclosures and transition plans where necessary. It also needs to foster public–private partnerships in areas such as the taxonomy and scenario analysis to ensure system-wide integration.

Governments, regulators, standard setters, industry groups, civil society and academia all have a role to play. They need to recognize their role, collaborate on addressing challenges and jointly build these tools to finalize and implement the national climate-information architecture.

A stronger information system will lead to better policy outcomes

Alignment is the first step to bringing high-quality climate data into the mainstream of policymaking and investment decisions, where it belongs. For example, the taxonomy could serve multiple uses such as defining benchmarks for clean-economy investment tax credits and green procurement practices and guiding issuances of green and sustainability-linked bonds. Transition plans could provide forward-looking insights to monitor systemic climate risks in the financial system.

By establishing a coherent climate-information infrastructure, Canada could reduce implementation cost, accelerate the transition and reinforce trust, thus laying the foundations to become a climate-resilient, competitive and prosperous nation.

Anik Islam is a senior research associate at the Smart Prosperity Institute.

The post Canada’s clean economy needs better data appeared first on Corporate Knights.

From the perspective of the urgency of the climate crisis, progress toward real transition plans has been agonizingly slow. CDP, a prominent climate disclosure platform, has found that while a quarter of the companies it tracks have 1.5°C-aligned transition plans, only 2% provided enough information to judge their credibility. And that number “falls to less than 1% when all companies reporting environmental data are considered,” Bloomberg reports.

Transition planning has been hampered by the slow rollout of two key regulatory components: mandatory climate-risk reporting by companies, or “disclosures,” and official definitions for all the relevant terms, or what is sometimes called a “green taxonomy.” Each are required not only to prevent greenwashing, but also to give investors, lenders and insurers the information they need to keep pace as economies evolve with the changing climate.

Delays create need for a new approach

After years of debates about what counts as sustainable or what should be included in a transition fund, the Canadian government announced last October that it would build and implement a taxonomy for transition investments. During his election campaign, Prime Minister Mark Carney promised that his government would finalize and implement the guidelines by fall 2026.

Mandatory climate reporting, meanwhile, suffered a major setback in April when the Canadian Securities Administrators (CSA) opted to pause work on developing the regulations, following a similar move by the U.S. Securities and Exchange Commission (SEC) in March.

We’ve been focused on the data on emissions, not the plans on how to reduce those emissions.

– Marie-Josée Privyk, ESG disclosure coach

Climate-risk disclosures are nonetheless in high demand, and Gary Gensler, the former U.S. SEC chair, has called them the “bare minimum” to help investors. Canada already has voluntary disclosure standards, which the Canadian Sustainability Standards Board (CSSB) finalized in December, and which many expected the CSA to make compulsory.

“These standards are there for companies to adopt . . . And that’s a crucial step. But that takes us only so far. For the benefits of the hard work that was done to develop these standards, we really do need to see adoption across the country,” CSSB chair Wendy Berman said at the Sustainable Finance Summit in Montreal in May.

Marie-Josée Privyk, an ESG disclosure coach in Montreal, says broader change won’t happen without mandatory requirements. “We have gotten as far as we were going to get with voluntary disclosures,” she says.

The Business Future Pathways strategy

Not wanting to wait even longer for companies to make serious transition plans, leading organizations and key figures from Canada’s sustainable finance sector have formed Business Future Pathways, a program to make transition planning an authentic reality, despite insufficient regulatory support.

We’re trying to take transition planning from what is currently seen as a compliance exercise to one that is centred more on creating an engine of future growth and prosperity for each company.

– Jonathan Arnold, director of sustainable finance, Canadian Climate Institute

Rather than lobbying or shareholder activism, the initiative focuses on providing concrete steps to help businesses pick up the pace and move past the hurdles. Barbara Zvan, president and CEO of the University Pension Plan Ontario (UPP), is leading the effort.

There are two parts to achieving this, says Jonathan Arnold, director of sustainable finance at the Canadian Climate Institute, which is responsible for the bulk of the research that will underpin guidance provided by Business Future Pathways.

The first is to get Canadian financial institutions on the same page about what good, credible transition plans look like. This matters because companies need to be properly recognized for reducing their greenhouse gas emissions and detaching from fossil fuels, as significant investment and financing opportunities will be tied to those changes. “This won’t involve creating a new standard but rather will boil down the essential components from existing international frameworks to what matters most to Canadian investors,” Arnold says.

While mandatory disclosures have been delayed for most companies, Canada’s financial institutions are already required to report on their exposure to climate risks, as well as their contributions to emissions, under rules from the Office of the Superintendent of Financial Institutions that come into effect this year.

By agreeing on what information they want and how it should be shared, the big banks, pension funds and insurers can create the stable ground that companies need to ensure that their transition plans are credible enough for investors who don’t want to be overly exposed to climate risks in their portfolios.

Once that piece is in place, the next step is convincing Canadian businesses to accept the help that’s offered by Business Future Pathways and then go ahead and do their transition plans with confidence, Arnold says.

Related

How climate risk disclosure became a battleground for the clean economy

‘ESG tourists’ are leaving, but sustainable funds are still growing in Canada

RBC’s climate retreat sparks debate over anti-greenwashing law

The arrival of Business Future Pathways has not been universally celebrated in sustainable finance circles, and it will still have to prove its worth. Some see it as yet another think tank, though Arnold denies that the term applies. Think tanks create more delay than value, according to Chris McDermott, a former Canadian climate negotiator at the United Nations. “Shareholders have far more clout in pressing for reporting than some think tank does,” he argues.

A forward-facing mindset

While efforts to establish mandatory climate-reporting rules have preoccupied the sustainable finance sector, transition planning presents a different outlook on climate mitigation and adaptation. “We’ve been focused on the data on emissions, not the plans on how to reduce those emissions,” Privyk says.

Disclosure is a backward-looking accounting exercise where companies report their historical data, Arnold explains. While disclosure is considered foundational for transition plans, it doesn’t do the work of strategizing how to pivot businesses toward sustainable models.

“We’re trying to take transition planning from what is currently seen as a compliance exercise to one that is centred more on creating an engine of future growth and prosperity for each company,” Arnold says. The work of Business Future Pathways is to shift the conversation more toward profitability and competitiveness, he argues. Credible transitions will have “a material impact on a business’s ability to survive and remain profitable.”

Mark Mann is a Montreal-based journalist and the associate editor at Corporate Knights.

The post A new plan to kick-start the energy transition at Canadian companies appeared first on Corporate Knights.

Energy security has become an overriding concern in the last two years as oil and gas prices have shot up, and sustainable finance has faced an increasingly hostile political environment in the United States. A consequence of this pushback came on New Year’s Eve, when global financial behemoths Bank of America and Citigroup left the Net-Zero Banking Alliance, one of the investment industry climate coalitions championed by the United Nations.

What does this mean for the year ahead? Will financial allocators support the energy transition of the future or capitulate to the demands of the present? Here are seven predictions for the world of sustainable finance in 2025, and its related tool kit of environmental, social and governance (ESG) investing.

In the United States, sustainable investors will face attacks on three fronts

Paul Atkins, Donald Trump’s choice to chair the Securities and Exchange Commission (SEC), is an ESG skeptic with a bent to streamlining securities regulation. While not considered a hard-right ideologue, he will reverse ESG-friendly regulations championed by the Biden SEC.

1. Shareholder rights. One of Atkins’s first targets will be Biden-era SEC guidance that makes it easier for investor activists to present shareholder proposals on environmental and social issues at corporate annual meetings. Expect Atkins to reverse the Biden policies and return to guidelines under Trump’s first administration that allow companies to reject ESG proposals if they don’t substantially affect operations.

Expect the Republican-controlled Congress to also weigh in, proposing legislation that would give corporations broad powers to reject shareholder proposals. That said, it’s not clear whether such a law could pass in the next two years, when the 2026 mid-term elections are expected to turn against the Republicans.

2. Climate disclosure. Atkins will also revoke a Biden-SEC regulation requiring publicly listed companies in the United States to disclose their Scope 1 and 2 (operational and energy) carbon dioxide emissions. The impact of this reversal will be muted, however, as climate disclosure rules take effect in California and in Europe, where about 3,000 U.S. companies operating in Europe will have to comply with climate disclosure rules under its Corporate Sustainability Reporting Directive (CSRD).

3. ESG fiduciary rights. And expect the Trump administration to reverse a Biden Department of Labor rule expressly permitting pension trustees to consider ESG issues in investment decisions. But the Trump rule will be contested in the courts, as sustainably invested pension funds make a legal case that ESG is fundamentally about improving financial assessment of financial risks and returns.

The takeaway: The Trump administration’s attack on shareholder rights will discourage investors from exercising their rights to file investor proposals on ESG issues. But on climate disclosure and fiduciary rights, this will create regulatory confusion more than a firm barrier to sustainable investing.

Shareholder proposals on ESG issues will drop in number and support

Shareholder collaboration on ESG issues will take a hit in 2025. Collaborations like the Climate Action 100+ shareholder network will lose clout, as policy changes and the chill from the Trump administration take hold. In 2024, large U.S. asset manager Franklin Templeton joined other managers Nuveen, Goldman Sachs Asset Management and AllianceBernstein in leaving the network, which coordinates shareholder pressure on corporations on climate issues.

According to Morningstar data, the number of ESG resolutions at U.S. companies rose sharply between 2021 and 2024, although overall support was 27% in 2024, down from 37% in 2021. The decline was largely due to lower levels of support from the three largest asset managers: BlackRock, Vanguard and State Street, together known as the Big Three. There has been some pushback from at least one asset owner – PGGM – which has dropped some managers that are not meeting the Dutch pension fund’s expectations for ESG engagement.

The takeaway: In 2025, look for fewer but better-focused ESG proposals that can command larger support from asset owners and managers.

Long-term ESG-focused investors will stay the course

 Despite these negative trends, 50% of long-term ESG-oriented investors – including asset managers, funds and owners employing sustainable finance strategies – said they plan to maintain their current level of ESG activity in 2025, while 29% said they plan to increase it moderately and 10% plan a significant expansion, according to a survey by the U.S. Sustainable Investment Forum (US SIF).

Many Republican-led states are dropping companies with ESG policies as eligible managers for their pensions funds. But large managers like the Big Three have substantial accounts with Democratic-led states and European clients that are under their own stakeholder and regulatory pressure to meet climate and ESG targets. US SIF reported that sustainable assets under management at the end of 2023 were US$6.5 trillion, representing 12% of total investment assets in the United States.

The takeaway: ESG strategies have become embedded in a large proportion of the long-term asset-owner and -management sectors. Expect continued growth of sustainable finance assets by these investors in 2025, especially by pension funds weighing the evolving risks of heat, floods and storms and economic transformations from climate change.

Related

Sustainable investors are split on just how bad Trump will be for the green economy

Death of ESG is greatly exaggerated, say pension managers

Why this investor advocate quit filing oil and gas shareholder proposals

Shorter-term mutual fund and ETF investors will cautiously re-enter the sustainable funds market

Unlike core ESG investors committed to long-term sustainable strategies, interest by small institutions and individuals with shorter investment horizons has waned in recent years. Inflows in sustainable mutual funds and exchange traded funds (ETFs), two products popular with these investors, hit US$160 billion in the fourth quarter of 2021, triggered by low interest rates and climate-friendly policies in the European Union. But these dropped precipitously starting in 2022, when central banks ramped up interest rates, the Ukraine war drove up energy prices, and Europe established more stringent anti-greenwash fund-disclosure rules.

By the second quarter of 2024, Morningstar estimates that net inflows had dropped to US$6.3 billion, with the United States registering net outflows. Not surprisingly, Morningstar estimates there were 246 new sustainable funds launched in the first three quarters of 2024, down from 444 in the same period in 2023.

But there are early signs this outflow is beginning to turn around. Global flows into sustainable mutual funds and ETFs hit US$10.4 billion in net new money in the third quarter of 2024, driven largely by reduced outflows from the United States. It appears investors are gaining comfort with the new European rules and longer-term prospects for green stocks, although there was a sell-off of clean energy immediately after the U.S. election.

The takeaway: Expect sustainable mutual fund and ETF inflows to bottom out in 2025 and investors to return to these products, as long-term interest rates improve conditions for green bonds and climate-friendly stocks and European investors become more familiar with ESG fund-disclosure rules.

Europe will simplify, not throw out, ESG disclosure rules

European Commission President Ursula von der Leyen has proposed an “omnibus” reform of corporate and finance disclosure rules aimed at simplifying the complex web of ESG reporting requirements imposed by the European Union. “The questions we are asking, the data points we are collecting – thousands of them – is too much,” she said at a meeting of EU heads of state last year.

The political balance at the European Parliament shifted to conservative parties in 2024 elections, sparking a fear of wholesale disclosure deregulation. But with thousands of companies investing in resources to meet the stringent rules this year, the European Commission would invite significant blowback and market confusion if it threw out the reporting regime.

The takeaway: Look for the European Commission to overhaul the information requirements in 2025, in a spirit of getting to the core of sustainability outcomes, not tossing out the whole framework in a U.S.-style attack on ESG.

Canada will become a leader on transition investing

Canada is expected to appoint an arm’s-length council in 2025 to oversee a new green and transition taxonomy, an official standard for banks, funds and asset managers on green and transition investments.

One of the big questions is whether gas projects like liquefied natural gas infrastructure will qualify for the “transition” label. Guidelines set by the federal government in 2024 rule out new gas production for the transition label. Existing natural gas production displacing coal could be transition-eligible but would have to be aligned with a global temperature rise of no more than 1.5°C. These are important marching orders for the arm’s-length council, which will likely follow the federal mandate to rule out projects with significant carbon lock-in.

The takeaway: The taxonomy will help Canada to become a leader in transition projects in areas such as green steel and cement and the gradual phaseout of fossil fuel power with clean energy. That is, if the taxonomy is even finalized under the precarious situation facing the current government.

Canada will impose mandatory full-scope carbon emission reporting – but it won’t come in 2025

In December, the Canadian Sustainability Standards Board (CSSB) adopted international accounting rules calling on Canadian corporations to report the full range of their carbon emissions. That is, not only Scopes 1 and 2 emissions from operations and energy, but also Scope 3 emissions from end uses.

However, the rules include a two-year delay for Scope 1 and 2 reporting and a further year for Scope 3 reporting. It’s now up to the Canadian Securities Administrators, the umbrella organization for securities commissions, to decide whether to follow through on the CSSB recommendation and make full carbon-emission disclosure mandatory.

The takeaway: Alberta will almost surely fight full disclosure, since the oil and gas industry is responsible for about 30% of Canada’s total emissions, particularly on Scope 3. But I’m going to go out on a limb here and predict that the other provinces will win this battle, backing the CSSB’s carefully crafted consensus to bring Canada into alignment with Europe and many other jurisdictions in 2027 and 2028.

The big picture

Stronger-than-expected anti-ESG attacks in the United States or Europe could put a very cold chill on green investing in 2025, but right now it looks like sustainable investing has built sufficient strength in the last decade to withstand the growing conservative backlash against it.

Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).

The post Seven sustainable finance predictions for 2025 appeared first on Corporate Knights.

When Finance Minister Chrystia Freeland took the main stage to announce long-anticipated policy measures, expectations were high. New financial rules are desperately needed, as Canada is already listed by the United Nations as a “low-regulation jurisdiction” on sustainable finance while providing cover for financial institutions with the highest levels of financing for oil, gas and coal.

What we heard was a welcome, yet inadequate, attempt to draw level with global climate finance leaders.

The speech – accompanied by an official backgrounder on the new sustainable investing guidelines – included two main themes: progress on a green labelling taxonomy and movement to formalize corporate climate disclosures for major companies in federal law. These are important and positive steps, but they amount to meeting the basic standard, not climate leadership.

The first piece provides a path for finally rolling out a voluntary, made-in-Canada sustainable investment taxonomy, focused on setting detailed science-aligned climate labelling standards for electricity, transportation, buildings, agriculture, forestry, manufacturing and extractive industries, including mineral extraction and processing and natural gas.

That last category raises a major red flag for climate experts, as scientifically credible transition pathways require, by definition, the replacement of fossil fuels in our energy system, not merely marginal emission reductions. Gas cannot be transitioned.

The long, difficult process to develop taxonomy rules has been continually undermined by aggressive oil and gas industry lobbying to distort the rules to keep the finance taps open. Canada might have simply adopted EU taxonomy rules, which exclude most fossil fuel activities. This threat sparked an industry push to create a made-in-Canada approach, on the flawed premise that a pathway for science-based 1.5°C alignment could somehow be changed in consideration of “Canada’s economic makeup.”

This distortion of reality is very much in evidence in the backgrounder, albeit in coded terms. The text describes “a broad range of eligibility criteria for existing natural gas production,” so long as companies align with “limiting global temperature rise to 1.5°C above pre-industrial levels.”

The government provides an example of such an eligibility criterion: “displacing more polluting fuels internationally.” This is just an oblique and perverse reference to industry attempts to force the exporting of liquefied natural gas into the transition label against the advice of experts.

Natural gas is a major cause of the climate crisis and cannot, regardless of Canada’s current economic makeup, align with limiting temperature rise to 1.5°C on any reasonable time scale. LNG export is an expansion of fossil fuels – the literal opposite of a transition investment.

The backgrounder also contained an important acknowledgement that new oil or gas projects are inconsistent with a safe climate. Clearly, given the contradictions on display, the hard work on labelling is not over.

Ensuring that these rules earn global credibility and adhere to climate science in a politicized environment will require committed follow-through. The next step in the process is for detailed labels to be ironed out by an independent stakeholder working group over 12 months, the makeup of which has yet to be announced.

Canada needs these labelling rules, and many well-intentioned people have worked hard for years to make them a reality. The government must deliver on promises to ensure that civil-society representatives, climate experts and Indigenous rights-holders are all part of the decision-making process.

At the event, the government also promised to codify climate disclosure rules for Canada’s largest federally regulated corporations. This is an equally important, but also incomplete, policy.

Once adopted, these disclosure rules will form a foundation for future rules to require credible climate transition plans across the financial sector, but a clear policy direction for where we need to end up is still lacking. The EU is already much further ahead with such policies, like the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive.

Aligning Canada’s financial sector with a science-based climate transition pathway isn’t optional. The work to achieve this necessary calibration needs to pick up the pace. The international community wants to see Canada leading, not catching up.

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.

The post Canada’s new sustainable finance rules don’t go far enough appeared first on Corporate Knights.

The government has started to take action, but more is needed. Last week, in the fall economic statement, the federal government promised action on sustainable finance. It committed to a green and transition taxonomy (a classification system for investments) and mandatory climate-related disclosure from large private companies. It also proposed to tackle greenwashing by strengthening competition law. If done well and implemented quickly, these policy promises would make the financial sector more sustainable and help Canada reach its 2030 emission-reduction commitments.

Canada can succeed on its global climate commitments only if financial institutions move in the same direction and allocate money to climate solutions instead of climate pollution. Yet many Canadian banks, pension funds, insurers and large companies still underinvest in clean energy and disproportionately invest in oil, gas and coal. Earlier this year, Canada was recognized as a “low-regulation jurisdiction” on sustainable finance by a UN sustainable investment group.

Recent polling by conducted by Pollara Strategic Insights shows that more than two-thirds of Canadians want new rules from the government to ensure that financial institutions invest sustainably. In general, respondents to the poll said they want the long-term good of society to be prioritized over short-term profits.

In other words, Canadians have connected the dots: a safe planet means a better quality of life with less volatility and more affordability. Regulating climate finance, as esoteric as it may seem, would make investments work in people’s best interests.

Some policy-makers have stepped up to the plate.

Last year, independent Senator Rosa Galvez introduced the Climate-Aligned Finance Act (CAFA), a comprehensive legislative proposal that would align the financial system with climate action. The proposal moves beyond traditional frameworks, which consider only how the financial sector is affected by climate risk, to also tackle how investments in polluting industries can make climate change worse.

The bill is finally being debated in the Standing Senate Committee on Banking, Commerce and the Economy. Last week was the first hearing of what is expected to be a many-session study of CAFA. Independent climate experts are expected to be called to discuss why this bill is important for Canada to meet its climate commitments.

If passed, CAFA would ensure that financial institutions reduce the emission footprints of their investments and invest in climate resilience. This would bring transparent reporting and clarify which institutions are taking real climate action versus which are counterfeiting their green credentials. The bill would create a duty for leaders of financial institutions to consider – and take – climate action.

Climate finance policies like CAFA have support. More than 120 organizations, climate experts and academics endorse the bill, even writing to other senators to encourage them to support it too.

Some banks have taken issue with parts of climate-aligned financial policy, in particular with the elements that would be most effective at stymieing fossil fuel investments. But others have endorsed the bill. In support of the bill, Vancity notes that “it is imperative to transform our economy into one that protects the earth and guarantees equity for all,” and Desjardins Caisse d’économie solidaire applauds the bill for its ability to “upgrade our federal financial system in the face of climate change.”

Climate-aligned financial policy is key to spurring new green activity across the economy, meeting the best interests of Canadians and enabling Canada to succeed on its climate commitments. The key policy: credible climate transition plans should be required across the economy, in which financial institutions and large companies publish plans to reduce their investments’ emissions in line with a safe climate. To have a scientifically credible climate plan, an institution would have to show how it would reduce its investments’ emissions by half by 2030 and achieve net-zero by 2050 or sooner.

People in Canada want regulation for a more sustainable financial system that aligns with climate action. What is needed now? Quick progress on the Climate-Aligned Finance Act and for the federal government to turn its policy promises into policies.

Julie Segal is senior manager of climate finance at Environmental Defence Canada.

Melanie Snow is the federal legislative affairs specialist at Ecojustice.

The post Most Canadians want their investments to align with climate action appeared first on Corporate Knights.

In a September French parliamentary report, Jean-Paul Mattei of the MoDem group, part of President Emmanuel Macron’s ruling majority, spoke favourably of a such a tax to finance the ecological transition. At the beginning of the summer, Social Democrat MEPs Aurore Lalucq and Paul Magnette submitted a request to the European Commission for a “European citizens’ initiative” on the subject. If it gathers a million signatures in at least seven countries within a year, it could lead to the drafting of a European directive introducing an “ecological and social wealth tax” targeting the 1% richest households. In July, the commission gave the green light to the collection of signatures.

A study commissioned by the Green Group in the European Parliament and carried out by the NGO Tax Justice Network looked at the potential impacts of such an initiative. It found that a European tax on the 0.5% richest households would bring in 213 billion euros a year, anything but insignificant.

This is all the more remarkable given the virtual disappearance of wealth taxes within the member states of the EU. In 2023, only Spain still has one, with a threshold of 700,000 euros and rates that vary from one autonomous community to another. While it seems unlikely that such a tax will be reinstated at national level in France and Germany – the two countries that were the subject of our work – the debate seems very different at European level when climate issues are involved.

Ended in France, suspended in Germany

One of French president Emmanuel Macron’s early measures was the abolition of the impôt de solidarité sur la fortune (ISF), a “solidarity tax” on wealth enacted in 1981 by François Mitterand’s government. To plug the budgetary hole, Macron replaced it with a tax on property wealth, the IFI. Despite the new tax, the change considerably reduced revenues: the ISF brought in 4 billion euros to public coffers in 2017, the IFI only 2.35 billion euros in 2022. The impact of the change on reducing the tax exile rate or improving the country’s competitiveness remains unproven.

In Germany, a wealth tax is still part of the country’s Basic Law (which acts as the country’s constitution) although it has not been levied since 22 June 1995, when the Federal Constitutional Court ruled that it didn’t respect the principle of equality before the tax – property was assessed on the basis of 1964 property values, while financial assets were assessed at market value. As property was taxed less heavily than financial assets, the court asked Helmut Kohl’s government to revise the property values on which wealth tax was based. As the Kohl government chose not to do so, the tax was automatically suspended – though not abolished – on 1 January 1997.

An unlikely return to the national level

In the two countries often described as the “engines of Europe”, the question of a return of capital taxation has frequently arisen. In Germany, all the left-wing parties put it on their manifesto at every legislative election, but with the exception of die Linke, none is taking action.

Interviews we conducted with SPD and Green Party members of parliament between 2010 and 2016 show that the defence of wealth tax is just a façade. Its main purpose seems to be to rally electoral, association, and trade-union support rather than be included in the various coalition contracts negotiated over the years. For example, in 2021 the SPD and the Green Party joined forces with the Liberal Party (FDP, right-wing) to form a new government. While they were in a strong position to reintroduce a tax on society’s richest, even through a temporary measure, the possibility was quickly dismissed, and without any real surprise.

Various strategies to reintroduce the wealth tax in France have been uniformly rejected by Emmanuel Macron, with Economy Minister Bruno Le Maire saying that creating such a tax “is not the solution”.

This situation is largely due to how opponents of a wealth tax have reframed the debates. While originally conceived as a solidarity measure in France and as a budgetary resource for the Länder in Germany, opponents have successfully emphasised their supposed effects on businesses](https://link.springer.com/article/10.1007/s11211-021-00383-y). Although business assets have been excluded from the tax base, the tax was decried as a disguised corporate tax. The claim was that the ISF would lead to an exile of the wealthiest in a context of tax competition between states, a flight of capital and thus job losses.

A European solution?

Caught in this impasse, the advocates of a wealth tax have shifted the battle to the EU level and linked it to a new issue – the environment.

An analysis of parliamentary archives for the period 2010-2016 shows that no party in France or Germany, including ecologists, used this political framing. The issue of reducing social and economic inequalities through taxation has therefore given way to a potentially more consensual issue that is likely to attract wider support. A similar strategy has already been observed in the case of other public policies such as the reform of the labour code in Portugal.

By moving to the European level, the supporters of a wealth tax can bypass the criticism that individual nations’ firms are being weakened in European economic competition. It is certainly this dimension that has led France’s Ministry of Economics to keep open the possibility of a European wealth tax.

If the European Citizens’ Initiative reaches the required number of signatures, it would enable supporters of the wealth tax to mobilise European public opinion. In many countries, including Germany, public opinion seems to be in favour of such a measure.

While a wealth tax still has a long way to go to make a major comeback in Europe, there is movement in Brussels. Such a tax would also lay the foundations for a common tax system that would strengthen the EU as a whole, at a time when the continent’s far-right Eurosceptic parties, in advance of the 2024 elections, are seeking to weaken it.

The post Should we bring in a wealth tax to finance the green transition? appeared first on Corporate Knights.

Canada’s Sustainable Finance Action Council (SFAC) is trying to spur more private-sector investment to bridge this gap with a made-in-Canada approach to a green and transition taxonomy, as outlined in SFAC’s recent Taxonomy Roadmap Report. But timeliness is essential. It is increasingly argued that moving quickly on this issue, alongside needed data and disclosure requirements, is important to support capital investments in green and transition activities now, especially in high greenhouse-gas-emitting sectors.

Lost in this discussion to date, however, is that a green and transition taxonomy is urgently needed not only to support new private investment. It can also be a critical step to supporting Canadian competitiveness and driving broader clean-growth outcomes while meeting our net-zero targets – thus ensuring we achieve a truly smart economic transition.

An important tool for financing a smart transition

Taxonomies are classification systems that detail the actions and activities that will help to deliver on Canada’s sustainability goals. For climate change mitigation, taxonomies are needed to provide standardized, science-based approaches to identify and define low-carbon or net-zero “green” activities as well as “transition” activities that ambitiously reduce emissions in high-emitting sectors. Together, a combined green and transition taxonomy can support a holistic approach to achieve a low-carbon transition.

Developing Canadian green- and transition-oriented taxonomies was a key recommendation of Canada’s Expert Panel on Sustainable Finance to ensure we expand green investments while setting standards for what counts as transition-oriented financing. Most of the G7 and G20 countries are moving ahead with their taxonomies, which speaks to their importance in a clean-growth toolbox.

The urgent need for these taxonomies was recently emphasized by the large public investments offered to support the Volkswagen and Stellantis battery plants in St. Thomas and Windsor, Ontario. The fact that the government poured billions of dollars of public investment into these two manufacturing facilities highlights the challenge for Canada to keep pace with the large public incentives being made in key sectors by the United States through the Inflation Reduction Act and the European Union through the Green Deal Industrial Plan. Canada will remain competitive only if we have the policy frameworks in place to encourage private-sector investments that help us match the scale of investment being made by our trading partners.

A taxonomy can also drive broader clean-growth outcomes

Finalizing and implementing made-in-Canada green and transition taxonomies will have broader impacts beyond incentivizing investment in green- and transition-oriented activities. Well-designed taxonomies will support existing government policies, regulations and financing programs in driving clean competitiveness for Canada.

For example, green and transition taxonomies can be used to structure credit rates and timelines for clean-technology investment tax credits and help define eligibility for green public procurement of goods and services. They can also sharpen strategic financing tools – such as the Canada Growth Fund and the Canada Infrastructure Bank – by helping to identify and monitor green and transition investments to ensure that the right projects and entities are receiving capital and to evaluate progress.

The taxonomies will help further identify and bring attention to key enabling sectors – those sectors where we must align competitiveness and sustainability in order to facilitate the reduction of greenhouse gas emissions elsewhere in the economy – in addition to the sectors that have higher emissions. For example, Canada must have circular economy standards and policies in place to ensure that production of the critical minerals required for battery manufacturing is done responsibly and sustainably while limiting the environmental impact of exploration and development and meeting the material requirements for a low-carbon energy system.

Similarly, if Canada is to meet its commitments for nature conservation, it could apply the experience gained through developing a green and transition taxonomy to nature financing. This would put Canada on a fast track to a truly sustainable finance system that ensures that climate, circular economy, and nature targets and commitments evolve together.

Completing and applying a green and transition taxonomy for Canada will help knit together different government policies, regulations and funding to amplify their impact while ensuring that green and transition activities are easily understandable and interpretable for the financial sector. However, government support is crucial, and failure to move quickly will not only lead to Canada losing private-sector investment to other countries that are moving ahead of us, but also slow our progress on broader outcomes that will be needed to remain competitive in the future.

Anik Islam is a senior research associate at the Smart Prosperity Institute. Caelan Welch is a research associate at the Smart Prosperity Institute. Geoff McCarney is senior director of research at the Smart Prosperity Institute.

The post If we want to compete, Canada needs a green and transition taxonomy ASAP appeared first on Corporate Knights.

The taxonomy will eventually serve as a guide for companies and investors about what investments are considered “green” or “transition.” And the potential breakthrough comes thanks to a proposal by the Sustainable Finance Action Council (SFAC) contained in the Taxonomy Roadmap Report, released Friday by Finance Canada.

The SFAC compiled the report after it assumed responsibility for creating a green taxonomy after the Canadian Standards Association, a non-profit industry body, failed to reach consensus among fossil-fuel and investment-industry representatives in 2020.

The European Union, China, the United Kingdom and about 20 other countries are developing such taxonomies as a way of discouraging greenwashing and channelling investment to the climate transition. The EU’s taxonomy has been particularly controversial because of its inclusion of natural gas and nuclear as “green investments.” SFAC says the taxonomy is a critical tool in helping Canada to raise $115 billion annually in green and transition financing, the amount it estimates is needed for Canada to meet its climate goals.

The SFAC report includes criteria for a “green” label, which would include renewable energy and cleantech projects with no significant emissions from their own operations (Scopes 1 and 2) or end-use emissions (Scope 3).

For CO2-emitting industries, the report distinguishes sectors that have significant Scope 1 and 2 but not Scope 3 emissions (steel or cement, for example) from sectors that have significant emissions in all three scopes (oil and gas, for example).

To qualify for a “transition” label, projects with Scope 1 and 2 emissions would need to demonstrate significant greenhouse gas reductions in line with Canada’s climate goals for 2030 and 2050.

In addition to reductions from their own operations, oil and gas projects would need to phase out end-use emissions in line with the expected decrease in demand for their products (gasoline, for example, as electric vehicles become more popular). Further, the phase-out would need to be consistent with a science-based approach in line with a global temperature rise of no more than 1.5°C.

“Projects must have well-defined lifespans that are approximately proportionate to the expected decline in global demand,” the report says.

Coal projects and new oil and gas projects would be excluded from the transition label, and companies would not be able to rely on carbon offsets to count against their emissions.

Critics have seized on the fact that the report leaves the door open for oil sands companies to label carbon capture, utilization and storage (CCUS) projects as “transition” investments even though they could potentially contribute significant and open-ended Scope 3 releases, which make up 80 to 95% of fossil fuel industry emissions.

But this is where the “well-defined lifespans” condition comes in. By making the transition label conditional on an established end date for fossil fuel projects, the green taxonomy can provide some assurance to investors that their capital will not be used to finance an indefinite period of carbon emissions.

Projects must have well-defined lifespans that are approximately proportionate to the expected decline in global demand.

For oil sands producers, the prospect of having to achieve significant 2030 Scope 1 and 2 reductions as well as a phase-out date in line with climate science and market demand could render decarbonization projects like CCUS uneconomic. If this is the case, they likely won’t qualify for the transition label (and should not proceed in any case).

But how much assurance will investors really have that these projects will close according to schedule?

On this point, the report is weak, and more work needs to be done. Fossil fuel companies will need to assure investors that they mean what they say about a phase-out date. This might include well-documented plans for mothballing facilities and timelines for staff retirements or reassignments. Or companies could use financial mechanisms such as decommissioning bonds that would be payable if the projects continue past the closure date.

There is another potential loophole in the report. One of the recommendations is that companies publish preliminary net-zero transition plans within 12 months after they issue a transition investment and a comprehensive, science-based plan within 24 months. This would open the possibility that companies could offer transition investments and then only later disclose they don’t meet the standards. Companies should be required to publish a comprehensive plan before issuing a transition investment.

Despite these weaknesses, the proposal deserves to move forward to the next step, which is to establish a joint federal government–financial industry governance council to approve the green taxonomy and to finalize details with independent standard-setting bodies.

The taxonomy itself won’t ensure placement of the vast amount of capital needed to achieve Canada’s climate transition.

But together with other climate tools such as a cap on oil and gas emissions and a rising price on CO2, the green taxonomy holds potential to help the investment community mobilize the billions of dollars necessary for Canada to meet its greenhouse-gas-reduction goals.

Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance.

The post Green taxonomy proposal may overcome Canada’s climate finance impasse appeared first on Corporate Knights.