Taxonomy Foundations
Please feel free to answer only the questions that are of the most interest and relevance to you.
It is proposed that the design and implementation of the Canadian taxonomy be informed by the following six principles: Credible; usable; interoperable; dynamic; regionally specific; and prioritized.
2a. Do you agree or disagree with these proposed principles as the foundation for the taxonomy?
Agree
2b. Please share the reason for your answer in the space provided
While I agree with the proposed principles, they should be defined in a general fashion. It is atypical to define guiding design principles for a taxonomy in a way that is specific to one objective. Principles of credibility, usability, interoperability, etc. are of high importance irrespective of the objectives ultimately covered now and in the future. There are a number of taxonomies available internationally to utilize as a reference in this regard, which draw on globally accepted principles.
3. Please rate each of the principles below on a scale from “very important” to “not at all important.”
- Credible
- Very important
- Usable
- Very important
- Interoperable
- Very important
- Dynamic
- Important
- Regionally Specific
- Important
- Prioritized
- Not that important
Do No Significant Harm and Minimum Social Safeguards
Please feel free to answer only the questions that are of the most interest and relevance to you.
The proposed taxonomy framework for Canada includes a set of Do No Significant Harm (DNSH) criteria and Minimum Social Safeguards (MSS), which will be designed to ensure that climate mitigation objectives do not adversely impact other environmental and social values, or legal rights. It is proposed that issuers must disclose the extent to which they meet specific criteria for both DNSH and MSS in order to claim taxonomy alignment.
4a. Do you agree or disagree with the proposed partial alignment approach, which would require entities to disclose the extent to which DNSH/MSS criteria are or are not met rather than requiring full alignment with all DNSH/MSS criteria?
Strongly disagree
4b. Please explain your answer in the space below
The Methodology Report does not actually specify what constitutes taxonomy alignment (though I think it should have done so). Assuming that the meaning of taxonomy alignment follows that of other taxonomies globally, a taxonomy-aligned activity is one that substantially contributes to at least one sustainability objective, does no significant harm to other sustainability objectives, and meets minimum social safeguards.
The UK GTAG's DNSH report, which influenced the Australian Taxonomy (which subsequently appears to be influencing the proposed partial alignment approach in this report), made recommendations related to partial compliance in the context of anticipated taxonomy-linked disclosures in the UK: "HMG should improve the transparency of taxonomy disclosures by adopting an approach to disclosures that would enable companies with activities that are not fully taxonomy aligned, but meet the substantial contribution and some DNSH criteria, to disclose the extent to which they meet the DNSH criteria. This would build on the binary approach seen in the EU Taxonomy. The approach would not consider such activities as taxonomy aligned, but would provide valuable additional information to the market, which the EU system does not currently enable."
The taxonomy is the definitional document that underpins the market. It can be applied for a variety of use cases, as you've noted in the report. The taxonomy itself is not a venue for use case-specific rules. Additionally, Canada's taxonomy is intended to be a voluntary market tool. It has no anticipated mandatory linkages to disclosures with taxonomy-related KPIs or market-wide thematic bond standards (e.g., the European Green Bond Standard). The issues raised in regards to the EU's approach to taxonomy-related disclosures, and the inability of companies to demonstrate partial compliance in those disclosures, strikes me as irrelevant in a context where companies will be able to determine how they'd like to apply the Canadian taxonomy (e.g., use the substantial contribution criteria to underpin the eligibility of a green bond framework).
If mandatory disclosures with taxonomy-related KPIs were ever introduced in Canada, the prospect of partial compliance and how to disclose that could be debated at that time, and stipulated in disclosure regulations / accompanying guidance notes. It seems unnecessary to consider this within the taxonomy's own methodological foundations, as it ultimately has no bearing on the work underway at this stage.
Finally, a taxonomy alignment claim sends an important market signal. It should not be distorted by allowing claims of partial alignment. The taxonomy itself should clearly set out what taxonomy alignment means. From there, it should naturally follow that a claim of taxonomy alignment is only credible if it satisfies the conditions for taxonomy alignment.
5a. Do you agree or disagree with the proposed scope of objectives to be covered under the DNSH and MSS frameworks?
Agree
6a. Do you agree or disagree with the proposed approach to grounding the DNSH/MSS frameworks in Canadian legislation and going beyond existing laws and standards where necessary?
Agree
6b. Please explain your answer in the space below
I agree with this as it is phrased at a high level in this question; however, the Methodology report states:
"(i) generic DNSH principles would lay the foundation across all sectors and (ii) sector-specific DNSH principles would cover the particular sector-specific requirements based on material impacts not covered under the generic guidance."
DNSH criteria are typically developed in the form of (1) generic criteria, and (2) activity-level criteria where necessary. Given that you have stated the approach is aligned with that of the European Union and Australia, I assume you mean to develop criteria at an activity level, not a sector level. It is important to remain consistent with terminology use to avoid confusion.
Second, the Methodology Report also states: "Yet it is also clear that DNSH/MSS frameworks are not a substitute for domestic laws or regulations, and the taxonomy itself—as a voluntary market tool—is not the appropriate mechanism to require or enforce higher standards on the private sector beyond those that are already required in existing laws or international standards."
Compliance with Canadian environmental laws is, as you say, a legal obligation. Therefore, it is of course the minimum expectation for an activity to avoid harm from an environmental perspective. However, the taxonomy actually is the venue for defining higher standards, if that is required to ensure an activity does not cause significant harm. A taxonomy provides definitions that establish our understanding of what it means for an economic activity to be sustainable. If, for a specific activity, applicable legislation is not enough, then the expectation should, in fact, be to define requirements beyond legislation.
From an interoperability standpoint, DNSH criteria pose many challenges. The Canadian taxonomy should avoid citing legislation that an activity is already obligated to comply with (as the inclusion of Canadian-specific legislation will make it more difficult to companies operating in multiple jurisdictions to demonstrate the compliance of their activities), and reference appropriate international standards wherever possible.
7. In which areas, if any, is it necessary to go beyond existing laws and standards for the DNSH/MSS framework?
See above answer. In the case of DNSH in particular, you will need to establish what constitutes significant harm for each objective included within the scope of DNSH to determine which activities will require additional criteria. While the EU's execution of DNSH is often criticized, their methodological approach to determining levels of ambition (i.e., 'headline ambition) and, following that, what constitutes significant harm, are instructive: https://finance.ec.europa.eu/system/files/2020-03/200309-sustainable-finance-teg-final-report-taxonomy-annexes_en.pdf
8a. Do you agree or disagree that different DNSH/MSS standards should apply to projects or entities of different sizes? E.g. more comprehensive disclosures required for larger projects and/or entities, with more streamlined disclosures for smaller projects and/or entities?
Agree
8b. Please explain your answer in the space below
I do agree with the notion of differentiated requirements, as proportionality is often a major concern. However, this will require a clear and thoughtful approach to avoid added complexity.
Section 3: Activity Classification Framework
Please feel free to answer only the questions that are of the most interest and relevance to you.
The activity classification framework proposes that the green category should be limited to activities with zero or near-zero emissions that make a substantial contribution to climate change mitigation or to activities that directly enable zero to near-zero emissions climate solutions (e.g., electric vehicle manufacturing facilities)
12a. Do you agree or disagree with this approach?
Agree
The framework proposes that the transition category should include activities that have materially high emissions today but have the potential to decarbonize sufficiently to align with the green definition (i.e., zero to near-zero emissions) by 2050. These activities are likely to experience stable or growing demand in Paris-aligned representative pathways due to a lack of technically feasible low-carbon substitutes (e.g., major decarbonization investments in steel, cement, and chemicals manufacturing).
13a. Do you agree or disagree with this approach?
Select
14a. Do you agree or disagree that the proposed guardrails for the transition category (both for the whole-of-activity and measures pathways) are sufficient to protect the science-based credibility of the category and reduce the risk of carbon lock-in, while supporting usability?
Select
The report proposes that initial research on the abatement measures category should be conducted in 2027 and include select emissions-reduction measures for activities that have high Scope 1 emissions today and are unable to achieve the life cycle emissions reductions necessary to align with Paris-aligned pathways (e.g. major decarbonization investments in the upstream production, refining, and distribution of oil and gas). These are activities that are highly likely to experience declining demand as the world transitions to clean energy and alternative technologies.
15a. Do you agree or disagree that the taxonomy should include a third “abatement” category, as proposed, that covers demand-decline activities?
Prefer not to answer
The report proposes an illustrative list of guardrails for the abatement measures category that, if formally developed and finalized, would be designed to prevent carbon lock-in and ensure the abatement measures category remains credible within a Paris-aligned framework. When thinking about the taxonomy’s credibility and usability, please provide feedback on this illustrative list of guardrails.
Section 4: Technical Screening Criteria
Please feel free to answer only the questions that are of the most interest and relevance to you.
18a. Do you agree or disagree with the proposed approach for developing technical screening criteria?
Select
Final questions
22. Overall, how satisfied are you with the proposed sustainable finance taxonomy framework?
Neutral
23. Is there any other feedback you would like to provide on the methodology report as a whole that has not already been covered?
Seven years after the Expert Panel on Sustainable Finance made a recommendation to develop a Canadian taxonomy, I am encouraged to see substantive work finally moving forward. Science-based taxonomy development is a significant undertaking and I commend this initiative's commitment to navigating the complexities of this process.