Taxonomy
Developing a Made-in-Canada Sustainable Finance Taxonomy
Sustainable investment guidelines, commonly referred to as a Sustainable Finance or Climate Investment Taxonomy, are a critical tool for mobilizing capital toward Canada’s clean growth and decarbonization priorities.
In collaboration with researchers at the Canadian Climate Institute, our mandate is to develop sustainable investment guidelines for six priority Canadian sectors by the end of 2027.
Taxonomy News and Updates
What is a Sustainable Finance Taxonomy?
Put simply, a taxonomy is a classification system. It sets out categories and defines what fits in those categories (and what doesn’t). A Sustainable Finance Taxonomy creates and defines categories for different types of investments.
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Many jurisdictions around the world have agreed broadly on a “green” category. These tend to include investments in projects or activities that are low or no carbon and that help move our economies faster toward net zero. Examples could include renewable energy projects, electrified transport, or high-efficiency buildings.
“Transition” is a relatively new category that a number of jurisdictions—including Australia and China—are starting to define and use. Broadly speaking, this “transition” category would include investments that help reduce emissions in high-emitting sectors. That might include, for example, installing an electric arc furnace in a steel production facility.
Taxonomies evolve over time to help meet investor and market demand. For example, financial institutions in Australia are currently backing the need for a new category to label investments in climate adaptation and resilience.
How Taxonomies Help Mobilize Capital
The fundamental role of sustainable finance taxonomies is to provide investors with the clarity, certainty, and confidence they need to channel capital into projects and economic activities that have clear environmental benefits. Taxonomies relieve the guess work, the burden of research, and the risk from investors who want to be certain that their dollars are going into sustainable projects.
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This is why taxonomies are used as the basis for a number of financial products including bonds and loans. These products are increasingly used by countries and communities to attract investment into high priority projects—from electrified transit infrastructure to clean energy generation to emission-reducing technologies. Companies are also starting to align their activities with taxonomy definitions to signal their investment-readiness.
Why a Made-in-Canada Taxonomy?
Across the world, there are now close to 70 different taxonomies in use or in development. So why does Canada need our own? The answer: because our economy and priorities are unique.
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Regions develop their taxonomies to support their most significant opportunities for clean growth and to reflect their economy’s unique pathways to decarbonization. Canada’s opportunities won’t be the same as China’s, the EU’s, Australia’s, Singapore’s, Brazil’s—or any other jurisdiction. That’s why the first step in Canada’s process is to identify the six sectors to prioritize in our new taxonomy.
At the same time, it is essential that Canada’s taxonomy speaks to and aligns with the other major taxonomies shaping global markets. We need to ensure that, for example, a transition bond issued from Canada is as credible—in investors’ eyes—as one issued from Australia, China, or anywhere else in the world. Ensuring our taxonomy is based on globally accepted climate science and shares common foundations with other taxonomies are key to that credibility.
“You can think of a taxonomy label the same way you think of an Energy Star label on an appliance. If you’re shopping for a new fridge and energy efficiency is something you care about, that Energy Star label tells you right away which fridges meet that need. A green or transition label plays that same role for investors who are out there shopping for sustainable investment opportunities.”
Barb Zvan
CEO, University Pension Plan
“The proliferation of… green and sustainable taxonomies around the world has shown the increasing interest in public and private sectors alike in fostering green capital flows. It’s time that Canada steps up in helping investors and industry build the future economy that is both sustainable and prosperous.”
Eric Usher
Head of UN Environment Programme Finance Initiative
FAQ
Who are Canada’s Sustainable Investment Guidelines for and who will they benefit?
- Investors: get increased clarity, certainty and confidence to allocate capital to projects that align with their investment strategies.
- Companies: can align activities with sustainable investment categories and definitions as a way to attract capital.
- Governments (all orders): can issue taxonomy-backed bonds and loans to secure investment in green and transition priorities.
- Individual Canadians: will have more transparency into how their financial institutions, pension funds, and companies are aligning their investment and economic activities with climate science.
Are these Guidelines mandatory?
- No. There is currently no rule that makes it mandatory for investors to use these guidelines in making their investment decisions. This is a voluntary tool that aims to improve clarity in the marketplace.
Will financial institutions or companies be required to report the alignment of their activities with the taxonomy?
- No. However, these definitions will prove useful to regulated financial institutions that are already required, by their regulator, to report sustainability criteria. Further, they will support a growing number of companies that are voluntarily reporting, or planning to report, in alignment with CSSB standards.
Doesn’t Canada already have a Sustainable Investment Taxonomy?
- No. However Canada does have a Roadmap for developing a green and transition taxonomy, developed by the Sustainable Finance Action Council. This document will be a key input to the development effort.
How would “transition” investments in high-emitting sectors align with climate science?
- Every path to net zero requires an effort to significantly reduce emissions from carbon-intensive sectors, such as steel and cement, critical minerals, and agriculture. In Canada, heavy industry accounted for 11 per cent of our greenhouse gas emissions in 2021. While the need for investment is clear, adequate capital isn’t flowing in this direction. A major barrier is lack of clarity or certainty around how to avoid greenwashing when it comes to transition investments. A transition taxonomy would help solve this problem, by helping identify and label legitimate, emission-reducing investment opportunities.
Who makes the decisions about what gets included and excluded from the taxonomies?
- The criteria for defining “green” and “transition” investments for different Canadian sectors will ultimately be approved by the independent Canadian Taxonomy and Transition Planning Council. Their decisions will be based on recommendations from the Research Team, which will include input from the Financial Sector and Technical Advisory Groups, as well as feedback from public consultations.