Canadian Sustainable Finance Taxonomy: Methodology Report - Draft for Public Comment

Canadian Sustainable Finance Taxonomy: Methodology Report – Draft for Public Comment

August 4, 2026

Canada’s sustainable finance taxonomy will be a voluntary tool to identify opportunities for climate aligned investment in Canadian projects, sectors, and economic activities, and will help drive investments that align with Canada’s clean growth and decarbonization priorities. Developing Canada’s own national taxonomy strengthens credibility and interoperability (i.e. harmonization) of investments with global peers while also reflecting Canada’s unique economy and geography. This draft for public comment provides the foundation of Canada’s sustainable finance taxonomy, informing its future development and implementation.

Additional Information and Resources

FAQ

Governance and Process

What is the role of the Federal Government in the development of the sustainable finance taxonomy?

Canada’s federal government provided two years of seed funding for the sustainable finance taxonomy’s development, specifically for the delivery of sustainable investment guidelines for six Canadian sectors by the end of 2027. While the government has issued the initial mandate and timeline for the taxonomy work, the Council operates independent of the government and is the sole approver of the taxonomy’s methodologies and guidelines.

How will various sectors–e.g. finance and industry–be engaged in the development process to ensure the taxonomy is usable? At the same time, how will the Council make sure that the process is open, objective, and that feedback about usability doesn’t outweigh or undermine the taxonomy’s credibility?

Credibility and usability are the first two design principles of the taxonomy, and striking the balance between these two equally important goals is critical to our work.

Ongoing engagement with the financial sector and with industry is key to usability. We are integrating this in multiple ways. Our Financial Sector Advisory Group represents approximately 50 financial institutions across the country, including major banks and pension funds. This group provides direct advisory feedback to the Council on every document before it is publicly shared. Similarly, we are in the process of assembling Sector-Specific Technical Working Groups, which will bring industry experts together to inform the technical screening criteria for sectoral guidelines, as those are developed. We also strongly encourage those representing the financial sector and industry to participate in our public comment periods, which will happen at every major milestone.

To be usable, the taxonomy must be credible, i.e. transparently developed and science-aligned. Our process ensures both. First and foremost, the taxonomy is anchored in the science-based imperative to achieve net-zero emissions by 2050. Research for the taxonomy is led by the Canadian Climate Institute, Canada’s leading climate policy research organization. Our Technical Advisory Group, which includes foremost experts on climate science and policy, provides input on every Council decision. We are also committed to a transparent process, which includes maintaining a public Engagement Registry, publicly sharing all feedback submissions on our website, and ensuring all interested parties have access to the same information. Our public comment periods are open to all and broadly promoted. We strongly encourage climate experts, scientists, and members of civil society to participate.

Taxonomy’s Ambition

What does it mean for the taxonomy to be anchored in the Paris Agreement but operationalized through Canada’s legislated target of net zero emissions by 2050? And what happens if emissions in Canada become farther off track from this target?

Every taxonomy needs a goalpost, a firm marker of ambition that we can develop quantifiable measures against, to determine how different activities align (or do not align) with the emission reductions required by climate science.

The Paris Agreement sets out a global goal, based on the best available climate science, to limit warming to “well below 2° C above pre-industrial levels” and to pursue efforts “to limit the temperature increase to 1.5° C above pre-industrial levels.” To be internationally credible and interoperable, Canada’s taxonomy must align with that goal.

But using the Paris Agreement as a goalpost for Canada’s taxonomy poses some practical challenges around measuring activities’ impacts and progress. That’s because achieving the Paris Agreement’s goal requires a collaborative effort from all signatories. Further, determining whether a specific asset or facility is aligned with the Paris Agreement requires making assumptions about the apportionment of global emissions across countries, within countries, and within sectors. For this reason, we are operationalizing the taxonomy using Canada’s legislated 2050 emissions target. This target was developed as Canada’s response to the Paris Agreement and enables us to quantify the impact of activities in the taxonomy in a clear, measurable way. This means that technical screening criteria will be set based on sectoral pathways to achieving Canada’s net zero by 2050 target.

Whether Canadian emissions are on track with net zero is important to addressing climate change but does not materially affect the taxonomy’s goalpost. The taxonomy is designed to show what investments and projects are credibly aligned with climate science. While geopolitical contexts and policies may change, a credible, effective taxonomy will always use the best available climate science to determine its goalpost.

Priority Sectors

How is the oil and gas sector being addressed through this process? Why exclude it from the initial “priority sector” list? Why include it at all?

In determining the six priority sectors, we looked at four factors: historical emissions, potential to decarbonize, potential to enable decarbonization across other sectors, and investment potential. The key was identifying sectors where the taxonomy could have an immediate impact: encouraging investments that help transform Canada’s economy and position it for long-term economic growth in a net zero world. This approach also allows Canada to quickly adopt and adapt best practices from its trading partners, ensuring baseline interoperability.

The draft report includes a proposed plan to address the oil and gas sector, with work starting in 2027. It is important to acknowledge that this sector has always been the most challenging piece of Canada’s taxonomy puzzle. There are few examples globally of how to do this right; most international taxonomies exclude this sector entirely. However, with oil and gas contributing close to 30 per cent of Canada’s emissions, the proposal is to classify investments in technology that reduces emissions in this high-emitting sector in the short to medium term into a new “abatement” category, subject to strict guardrails (see below).

Category Definitions

Why have any other category than green? If activities aren’t net zero aligned today, why include them at all in this taxonomy?

As the Climate Bonds Initiative writes: “meeting global agreements such as the Paris Agreement requires a systemic transition: a shift from high-emission, resource-intensive activities to climate-aligned, low-carbon alternatives as well as finance to support that shift.” However, without a common definition of what counts as “transition”, it’s hard to discern credible opportunities to lower the impact of high-emitting sectors from greenwashing. Even more challenging is discerning if and how to invest in decarbonizing oil and gas activities in ways that do not prolong their lifespan and emissions. These are the problems that the proposed transition and abatement categories are designed to help solve. They provide clarity on which activities, under which specific conditions, reduce emissions in alignment with net zero by 2050.

What’s the difference between the proposed “transition” and “abatement” categories? And how will the taxonomy address sectors where future demand pathways are uncertain or contested?

As the diagram below illustrates, there are three major differences between the transition and abatement categories. (1) Sectors addressed by the transition category have the potential to achieve net zero alignment by 2050 and eventually align with the taxonomy’s “green” category. Sectors addressed by the abatement category are not able to achieve this level of decarbonization and alignment. (2) Relatedly, activities categorized as transition can achieve lasting, long-term life cycle greenhouse gas (GHG) emission reductions. Those addressed by the abatement category cannot, primarily because of high downstream (i.e. Scope 3) emissions. (3) Given 1 and 2, it is anticipated that activities addressed by the transition category will continue to see stable or growing global demand on the path to net zero by 2050. Activities targeted by the abatement category are highly likely to experience declining global demand on the path to net zero by 2050.

The purpose of the taxonomy is not to predict which path the global economy will take. Rather it is to clarify which economic activities are compatible with a path to net zero by 2050. The taxonomy’s evaluation of future demand is premised on science-based scenarios where the world transitions away from burning fossil fuels in order to limit global warming to well below 2° C. As the IEA explains, “In a scenario that hits global net zero emissions by 2050, declines in [oil and gas] demand are sufficiently steep that no new long lead-time conventional oil and gas projects are required.”

Based on climate science, sectors or industries that are unable to transition away from burning of fossil fuels are not compatible with a net zero by 2050 path.

Where do negative emission technologies and practices (e.g. direct air capture) fit into the taxonomy’s category framework?

These activities would be evaluated in the same way as other technologies and activities, using the category definitions and sectoral technical screening criteria. Some of these technologies (those that are zero to near-zero emissions or that offer negative emissions) could fall into the green category. Those that are used to address emissions related to high-intensity sectors could fall into the transition category. This will be specified in the sector-specific taxonomy guidelines, soon to be developed.

Criteria and Eligibility

Would a nuclear plant, CCUS project, or critical minerals mining project be eligible for the taxonomy? What category would each be eligible for?

It is too early to say what specific projects would be eligible for the taxonomy and in what ways. The answers to these questions will come through the development of sector-specific guidelines and technical screening criteria, which is the next phase of this process. That said, the draft Methodologies report outlines clear considerations that may apply to projects like these:

The taxonomy’s Do No Significant Harm and Minimum Social Standards criteria are designed to provide safeguards to reduce the risk of harm to people and nature, which is particularly important for mining and nuclear projects.
A CCUS project’s eligibility would be evaluated based on how, and to what, that technology is applied. Its eligibility would also likely depend on quantifiable emission reduction measures and may be timebound.

Which companies would be eligible for taxonomy alignment? Do companies need to be headquartered in Canada for their projects or activities to be considered? Does a company have to meet certain standards in order for their activities to be eligible?

The taxonomy assesses activities (e.g. projects, technologies, processes), not companies (or other users). The taxonomy can be used to assess any activity or project taking place in Canada, no matter where the owner or company is based.

While the taxonomy guidance strongly encourages users to adopt net-zero targets, disclose climate-related risks, and develop transition plans, these are not requirements for activity eligibility into the “green” or “transition” categories. Further, every activity would be assessed on its own merits. Some of a user’s activities could be taxonomy aligned, while others are not. This approach aligns with Canada’s international peers, and addresses potential barriers to usability.

As part of ensuring the viability of the proposed “abatement” category, some company-level requirements (e.g. a credible transition plan) could be required. This would be determined by further research and engagement in 2027.

Abatement Category

Why propose a third “abatement” category, especially if no other taxonomy has one?

The proposed abatement category could help answer highly relevant questions around if, when, how, and under what conditions select investments in decarbonizing existing oil and gas activities could materially reduce emissions without locking in further emissions.

This is particularly important in Canada because close to 30 per cent of our country’s emissions come from the oil and gas sector. Creating a separate and distinct category for these measures could ensure that Canada’s “green” and “transition” categories remain fully aligned with those of our international peers, and address short and medium term emissions from the oil and gas sector.

Does the “abatement” category include direct investment in fossil fuel production?

No. This category would only apply to a very specific (and yet-to-be-determined) whitelist of technologies and processes that deliver meaningful emissions reductions when applied to existing upstream oil and gas activities. Only allowing specific technologies and processes ensures that taxonomy-aligned investments cannot go to the general activity itself. For example, it could apply to a technology that detects and helps repair methane leaks in existing oil and gas infrastructure.

The test for this category is: can these investments meaningfully lower emissions from Canada’s highest emitting sector in the short and medium term without increasing emissions in the long term?

Are the proposed guardrails for the “abatement” category realistic? Would they actually work?

Questions about if and how the proposed guardrails for this category would work are valid and deserve careful consideration. It is important to note that although the report outlines potential guardrails for the abatement category, it does not provide a complete or exhaustive list of guardrails. That’s why we are directly asking for feedback on these guardrails, in terms of how they impact this category’s usability and credibility. It’s also why, if this category does go forward, we would undertake a robust research and engagement process to ensure that the guardrails and criteria together ensure short to medium term emissions reduction while not locking in carbon emissions in the long-term.

What else, besides decarbonization of upstream oil and gas processes, would fit into the abatement category?

This is a question that requires further exploration. What activities qualify for the different taxonomy categories will likely change over time as technologies evolve and as the pathways to achieving net zero by 2050 narrow.

Do No Significant Harm (DNSH) / Minimal Social Safeguards (MSS)

Will the taxonomy’s DNSH and MSS criteria establish a higher level of ambition than what is currently required through existing laws, regulation, and policy?

The proposed DNSH and MSS framework would include developing both generic criteria and sector-specific criteria (occurring in the next phase of work). In many cases, and following the approach taken in other jurisdictions, these criteria would align with federal and provincial requirements that assess and address environmental risks and that enshrine Indigenous and human rights. Where stronger international standards for environmental and social issues exist, a higher bar may be required. This is an important and open question, which we are seeking feedback on as part of the public comment process.

How will companies demonstrate adherence to DNSH and MSS criteria? How will this be evaluated? Would it involve an audit?

Taxonomy users would need to disclose whether they meet the DNSH and MSS criteria to claim taxonomy alignment.

Assurance Reviewers and Third-party Assessors would own the role of assessing activities and verifying alignment with the taxonomy, to ensure the criteria are not misinterpreted, gamed, or misused. This is the well-established process in taxonomies worldwide.

Indigenous Rights and Engagement

The five-week comment period during the summer makes it very challenging for many Indigenous communities to be able to provide input, given immense capacity constraints. How is that being addressed?

We are committed to making this process as inclusive as possible for Indigenous participation. This summer is just the starting point of the process, and we are taking actions to ensure Indigenous voices and perspectives are sought and heard over the course of this development work. These actions include:

Direct outreach and invitations to dedicated briefings for Indigenous individuals and organizations with multiple dates and times for participation as well as an open invitation for one-on-one conversations with Council Chair, Marlene Puffer, to provide greater flexibility.
An open call and direct recruitment for Indigenous participation in Technical Working Groups, which will be instrumental in helping develop sector-specific guidelines.
Ongoing engagement efforts over the full course of the taxonomy development process, ensuring that the process remains iterative and flexible enough to incorporate Indigenous input effectively.

We are eager to support the participation of Indigenous individuals and encourage those with an interest in this process to reach out to us directly: secretariat@businessfuturepathways.ca.

Usability

What do you think will ensure the successful implementation of the taxonomy? What tools are needed to support taxonomy adoption?

What we’re seeing in other jurisdictions is market-driven adoption of taxonomies spurred by the development of taxonomy-aligned loans, bonds, and other instruments to finance sustainable activities. Investors, including banks, pension funds, and asset managers, are already demanding this standardized classification system to replace a patchwork approach and support the development of these financial tools.

The Council’s robust governance system, which includes approximately 50 representatives from the financial sector, is another important way we are building usability into the process.

Is the primary use of a taxonomy to facilitate the issuance of sustainability bonds? What’s the relationship between the taxonomy and bond labeling? Are they the same thing?

We hope that the taxonomy becomes the standard in Canada for Green and Transition bond labels. Taxonomies provide the credible, science-backed definitions that issuers can use to support the development of these products.

However, this is not the sole use of a taxonomy, nor are a taxonomy’s categories necessarily synonymous with bond labels.

Other uses for the taxonomy include supporting corporate climate-related disclosures to the public and regulators, tracking investment portfolios relative to sustainability goals, and evaluating and tracking climate risk.

Bond issuers label bonds to indicate to the market the proposed use of debt, which may be related to sustainability goals or other purposes. In the case of “green” or “transition” bonds, projects that adhere to the guidelines in the taxonomy for the relevant activity would be “taxonomy aligned” and may be labelled as “green” or “transition”. Investors would have confidence in the science-based and uniform criteria laid out in the taxonomy, which should replace other definitions that may be available and subject to greenwashing.

International Alignment

Are international perspectives included in the draft report?

Yes. The report draws from the expertise, experience, and lessons learned by jurisdictions with robust taxonomies around the world. The Australian taxonomy, which relied heavily on early taxonomy work completed in Canada, is a particularly strong reference for our efforts. We are also integrating learnings from the EU, China, and ASEAN taxonomies. Further, we’ve created an International Advisory Group to guide us and ensure Canada’s taxonomy harmonizes with those of our peers.

What is the relationship between the taxonomy and international principles and guidelines, such as those from ICMA and the Climate Bonds Initiative?

Canada’s taxonomy is being designed to complement international guidance such as ICMA the Climate Bonds Initiative, by creating guidelines that are specific to Canada’s economy and priorities. To read more about this, please see page 27 (Box 4) of the draft Methodology Report.

Alignment with Canadian Practice, Policy, and Legislation

How does the taxonomy fit within the broader ecosystem of transition planning, disclosure, and tracking?

The taxonomy is an important piece of the larger sustainable finance puzzle in Canada. Its role is to provide credible, science-backed definitions that enable stronger and more clear disclosure and transition planning practices. It is also designed to complement other important planks of climate policy, such as pricing and regulatory tools.

How do you expect the taxonomy to be used by or enshrined in the Canadian government’s policies or practices? Will it be used, for example, by the Major Projects Office or to determine how Clean Economy Tax Credits are determined?

The taxonomy is a voluntary tool being developed independently from governments and government-led initiatives. We expect it could support and guide any number of decisions, at multiple levels, today and in the future. However, those decisions would be made by governments and are outside the scope of the Council’s mandate.