Category: Economy

Source: Government of Canada News

Backgrounder

The Government of Canada supports the development of voluntary Made-in-Canada sustainable investment guidelines (otherwise known as a taxonomy) that would categorize investments based on scientifically determined eligibility criteria that are consistent with the goal of reaching net-zero emissions by 2050 and limiting global temperature rise to 1.5°C above pre-industrial levels.

October 9, 2024

The Government of Canada supports the development of voluntary Made-in-Canada sustainable investment guidelines (otherwise known as a taxonomy) that would categorize investments based on scientifically determined eligibility criteria that are consistent with the goal of reaching net-zero emissions by 2050 and limiting global temperature rise to 1.5°C above pre-industrial levels.

This is a high standard that will be important for building and maintaining the credibility of a Canadian taxonomy, which will mobilize private capital for low- or non-emitting activities with a “green” category.

Importantly, the Canadian taxonomy would also establish a “transition” category to identify, and boost funding for, scientifically credible pathways to rapidly decarbonize Canada’s emissions-intensive sectors. Canada’s leadership in the transition aspect of taxonomy will be a notable and valuable contribution to the international dialogue on transition finance.

The development of the metrics-based Canadian taxonomy would first focus on the following sectors for the Canadian economy: electricity, transportation, buildings, agriculture and forestry, manufacturing, and extractives, including mineral extraction and processing, and natural gas. A taxonomy for two to three priority sectors will be released within 12 months of the arm’s-length, third-party organization(s) beginning its work.

Once finalized, the Canadian taxonomy would be available for entities such as financial institutions, lenders, and companies to use on a voluntary basis. It would not be mandatory.

Details of the Canadian Taxonomy

This backgrounder outlines the government’s expectations for the development and implementation of the Canadian taxonomy, including:

1. Guiding Principles
2. Defining green and transition investments
3. Priority Sectors
4. Company-level expectations
5. Governance and Funding

Background on Taxonomy

To close the climate financing gap, financial market participants, including banks, insurers, pension plans and asset managers, have indicated that they need clarity about what economic activities are considered “green” or “transition.” A taxonomy is a tool that can provide this clarity by promoting a shared understanding or classification system that defines or categorizes these activities.

Like the proposed Canadian taxonomy, many international taxonomies also use detailed eligibility criteria, anchored in climate science, to support the taxonomy’s credibility among international investors. These eligibility criteria often involve the use of performance-based metrics and thresholds to demonstrate what economic activities are aligned with pathways to limiting global temperature rise to 1.5°C above pre-industrial levels, in line with the Paris Agreement. These taxonomies likewise aim to preserve interoperability with other jurisdictions to reflect the global nature of financial and capital markets.

A taxonomy supports a wide range of use cases. For example, taxonomies can be used to set standards for classifying climate-related financial instruments (e.g., bonds or loans), and/or to evaluate the green or transition credentials of financial instruments and issuers.
The aim of the Canadian taxonomy would be to mobilize investment in support of Canada’s net-zero transition by enabling investors to understand and communicate which key activities and investments will deliver a Canadian net-zero economy.

Over 40 jurisdictions worldwide are developing or have implemented taxonomies, which generally are calibrated to a particular country’s domestic economic reality and priorities. This is an opportunity to develop a Made-in-Canada taxonomy that aligns with Canada’s net-zero pathways and drives transformational investments within Canada’s economy that will also create good-paying, sustainable jobs.

The Sustainable Finance Action Council (SFAC), which was composed of 25 of Canada’s leading deposit-taking institutions, insurance companies, and pension funds, was launched by the Government of Canada in May 2021 to help lead the Canadian financial sector towards integrating sustainable finance into standard industry practice. The SFAC’s recommendations on taxonomy, including its Taxonomy Roadmap Report, have been important inputs for informing the Government of Canada’s next steps on taxonomy. The Government of Canada thanks the SFAC for its advice on taxonomy and its valuable contribution to building a sustainable finance market in Canada throughout its mandate, which concluded on March 31, 2024.

i. Guiding Principles

The Canadian taxonomy would be developed and maintained in accordance with the following principles (Guiding Principles), which draw from the recommendations of the SFAC and international organizations, as well as from international taxonomy precedents.

These Guiding Principles are intended to ensure that the Canadian taxonomy fulfills its objective of being a credible and usable tool for financial market participants and others to identify green and transition investments.

Guiding Principles

• Usable

  Mobilize capital toward the net-zero transition.

• Credible

  Clear, rigorous, and credible science-based criteria that align with limiting global temperature rise to 1.‍5°C above pre-industrial levels, with no or low overshoot and all relevant emissions scopes considered.​ Any activity which receives the green or transition taxonomy label must be scientifically defensible as being aligned with this.

• Comprehensive

  Cover transition and green activities that make a material positive contribution to climate change mitigation, addressing high-emitting sectors.

• Interoperable

  Be interoperable and broadly compatible with other major science-based taxonomies and frameworks globally, while reflecting Canada’s own economic context.

• Transparent

  A governance structure that is transparent, efficient, adaptive, and results-oriented; safeguards scientific integrity; and engages with key stakeholders, including provincial and territorial governments, civil society, financial market participants, industry, and Indigenous partners.

• Dynamic

  A built-in review process to ensure the Canadian taxonomy is updated as the landscape evolves.

• Holistic

  Do-No-Significant-Harm criteria addressing environmental, social, and Indigenous objectives.

ii. Defining green and transition investments

At a high level, the Canadian taxonomy would define which economic activities are green or transition in line with SFAC recommendations, as follows:

• Green: low-or zero-emitting activities, such as green hydrogen, solar, and wind energy generation, or those that enable them, such as electricity transmission lines and hydrogen pipelines; and,
• Transition: decarbonizing emission-intensive activities that are critical for sectoral transformation and consistent with a net-zero, 1.5°C transition pathway, such as installing lower-emitting (electric) furnaces to produce steel.

Activities are expected to be classified according to a categorization framework to be confirmed and operationalized. The figure below shows an example of such a framework proposed by the SFAC.

For clarity, in this framework:

iii. Priority Sectors

The initial phase of taxonomy development would focus on developing eligibility criteria for the following priority sectors. A taxonomy for two to three priority sectors will be released within 12 months of the arm’s-length, third-party organization(s) beginning its work. The final determination of eligible activities would rest with the third-party organization(s) which will develop, implement, and maintain the Canadian taxonomy, and align with the guiding principles, including scientific credibility and alignment with limiting global warming to 1.5°C:

These important sectors of the Canadian economy have been prioritized based on the following criteria:

• Anticipated future levels of green and transition investment opportunity, including as assessed by market participants;
• Importance of their decarbonization for decarbonizing the Canadian economy, based on current sectoral emissions and projections of future emission reductions; and
• Economic significance to Canada, including current levels of investment and economic activity.

Further below is a list of examples of activities within these sectors that may be eligible for a green or transition taxonomy label, subject to the development of activity-specific performance criteria and Do-No-Significant-Harm requirements.

iv. Company-level expectations

The Government of Canada supports the adoption of net-zero targets, credible transition plans, and robust climate disclosures by Canadian companies. These are key infrastructure elements of a robust sustainable finance market and are essential to achieving net-zero goals, fostering transparency, and enabling informed decision-making.

The Government of Canada has committed to moving towards mandatory climate-related financial disclosures across a broad spectrum of the Canadian economy. Mandatory disclosure requirements are already in place for federal Crown corporations and federally regulated financial institutions. The Government of Canada intends to bring forward amendments to the Canada Business Corporations Act to enable climate-related financial disclosure requirements for large, federally incorporated private companies.

The Government of Canada encourages the developers of the taxonomy to consider including these company-level requirements as part of the eligibility criteria for green and transition labelling in the Canadian taxonomy, in line with SFAC’s recommendations.

Potential Company-Level Actions for Taxonomy Users

• Net-Zero Targets

  A commitment to reach net-zero emissions by 2050 or earlier, usually with interim targets.​

• Credible Transition Plans

  A strategy that lays out the company’s targets, actions, and/or resources for its transition toward a lower-carbon economy, including actions such as reducing its greenhouse gas emissions.​

• Robust Climate Disclosure

  The provision of information about a company’s climate-related governance, risk management, strategy, and metrics and targets.​

v. Governance and Funding

Developing a taxonomy requires significant climate science and sectoral expertise and engagement with stakeholders, including financial market participants, industry, civil society, governments, regulators, and Indigenous partners. In addition, good governance practices are needed to oversee the development and implementation of a Canadian taxonomy that safeguards scientific integrity and meets market needs. The guiding principle of scientific credibility will ensure that the taxonomy’s green and transition labels are only applied to activities that are in line with the goal of limiting global warming to 1.5°C with no or limited overshoot.

The Canadian taxonomy would be developed, implemented, and maintained at arm’s length to the Government of Canada by an organization or organizations external-to-government.

The final determination of guiding principles, eligible activities, priority sectors and company-level expectations would rest with the external-to-government organization.

The Government of Canada would contribute funding to support the technical work to develop the eligibility criteria for the taxonomy.

Examples of Potential Taxonomy Eligible Activities

Under the Canadian taxonomy, a range of economic activities that contribute to Canada’s net-zero transition will be eligible for a “green” or “transition” label, which, for example, could be used in the context of labelled bond issuances. Not all economic activities will be eligible.

Through a survey of international taxonomies, the following examples of activities in priority sectors that may be eligible for a green and/or transition label were identified. These examples are in no way intended to direct the work of the arm’s length organization or organizations who will develop, implement, and maintain the Canadian taxonomy, who would make final determinations with respect to the inclusion of and criteria for these example activities, in line with the guiding principles, including alignment with limiting global warming to 1.5°C. As such, these examples should be considered indicative only, not prescriptive.

It is expected that activity-specific performance criteria would be developed for each activity included in the Canadian taxonomy along, with Do-No-Significant-Harm requirements, to define the circumstances under which that activity would be eligible for green or transition labelling. That is, only some forms of a given activity might be eligible while other forms of the same activity might be ineligible. Some forms of an eligible activity may be green-eligible while other forms would be transition-eligible. As such, the examples below show activities that may  be eligible, subject to activity-specific criteria and Do-No-Significant-Harm requirements.

These examples are not intended to be exhaustive. The international taxonomies surveyed to identify these examples reflect the economic and net-zero transition needs of other jurisdictions, which may be different from those of Canada, so it is to be expected that the Canadian taxonomy could break new ground and include sub-sectors or activities not covered in these examples. For example, it could include green and transition activities in the agricultural sector such as certain forms of crop and livestock agriculture.

In consideration of Canada’s economic makeup, the taxonomy could potentially include activities that significantly reduce the emissions of existing natural gas production and/or the emissions associated with a limited buildout of existing production sites. The technical drafters may also consider a broad range of possible eligibility criteria for existing natural gas production, such as the displacement of more polluting fuels internationally, provided they are aligned with limiting global temperature rise to 1.5°C above pre-industrial levels. Based on the Guiding Principles, the Government does not anticipate new natural gas production to be eligible. The final determination of eligible activities across all sectors will be made by the arms length, external organization(s).

In the electricity sector, examples of potentially eligible green or transition activities include:

• Co-generation of heating or cooling and electricity from solar energy;
• Electricity generation from bioenergy;
• Electricity generation using concentrated solar power (CSP) technology;
• Electricity generation from geothermal energy;
• Electricity generation from hydropower;
• Electricity generation from ocean energy technologies;
• Electricity generation using solar photovoltaic technology;
• Electricity generation from wind power;
• Storage of electricity; and,
• Transmission and distribution of electricity.

In the transportation sector, examples of potentially eligible green or transition activities include:

• Low carbon transport infrastructure, such as electric vehicle charging.
• Zero-emission and low-emission operations of the following modes of transportation:
• Air transport, including ground handling operations;
• Freight transport by road;
• Inland water transport;
• Road passenger transport;
• Sea and coastal water transport;
• Railway transport; and,
• Urban and suburban passenger land transport.

In the buildings sector, examples of potentially eligible green or transition activities include:

• Acquisition and ownership of low-emitting and energy-efficient buildings;
• Construction of low-emitting and energy-efficient new buildings;
• Installation of energy efficiency equipment;
• Installation of renewable energy technologies; and,
• Renovation of existing buildings to reduce emissions and/or improve energy efficiency.

In the agriculture and forestry sectors, examples of potentially eligible green or transition activities include:^{Footnote 1}

• Afforestation;
• Conservation, restoration, and maintenance of natural forests; and,
• Sustainable forest management.

In the heavy industry sector, examples of potentially eligible green or transition activities include:

• The low-emission or energy-efficient manufacturing of:
  • Aluminum;
  • Basic chemicals, such as ammonia, aromatics BTX, carbon black, chlorine, nitric acid, and soda ash;
  • Cement;
  • Hydrogen;
  • Iron and steel; and,
  • Plastics in primary form.
• The manufacturing of:
  • Batteries;
  • Energy efficiency equipment for buildings, such as energy-efficient appliances and light sources, energy-efficient HVAC systems, heat pumps, and energy-efficient building automation and control systems;
  • Equipment for the production of hydrogen through electrolysis;
  • Low-carbon technologies for household sector;
  • Low-carbon technologies for transport, such as low-carbon vehicles that meet transportation sector criteria; and,
  • Renewable energy technologies.
• The mining of:^{Footnote 2}
• Copper;
• Iron ore;
• Lithium; and,
• Nickel.

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