We tackled the EU’s Corporate Sustainability Reporting Directive and its effect on greenwashing, and now let’s dive into directives that other government organizations are taking to combat climate change.

Canada is on its way to implementing a Climate Investment Taxonomy that provides criteria for investments and other economic activities to identify what constitutes a climate investment. The regulation was announced by the Canadian Sustainable Finance Action Council (SFAC) in March 2023 (Department of Finance Canada, 2023). A Canadian Taxonomy guarantees the integrity of Canada’s transition pathways and climate objectives and allows for sustainable investing, which will help transform into a net-zero economy by 2050. Canada will need $115 billion per year coming from global capital to fund its transition (Department of Finance Canada, 2023). The taxonomy framework is created in the context of the 1.5°C global target so that it can build and maintain credibility in international capital markets (Canadian Climate Institute, 2023). Although there is no final date yet as to when the implementation is, it is essential that Canadian sectors start their preparations if they are in pursuit of green financial instruments.

The recommended framework architecture was developed by SFAG in cooperation with the Canadian Climate Institute to guide the creation of this taxonomy.

Companies issuing green financial instruments must meet the three requirements under the taxonomy:

For general requirements, companies must present net-zero emissions target setting, transition planning and climate disclosure that are up to date with emerging domestic regulatory requirements and international standards and best practices.

Under specific requirements, a categorization framework is observed to identify whether the project is a green or a transition-eligible investment or ineligible for a green financial instrument:

• Green-eligible investments:

  Activities with low or zero greenhouse gas emissions or those that enable them. This takes into account projects that have minimal or no scope 1 and 2 emissions, negligible downstream scope 3 emissions, as well as products or services anticipated to experience significant demand growth in the global low-carbon transition.

• Transition-eligible investments:

  Reducing carbon emissions from essential, high-emission activities to align with a net-zero target and the 1.5-degree Celsius pathway. Projects should decarbonize sectors that, by and large, have high scope 1 and 2 emissions or have high downstream scope 3 emissions and improve the carbon efficiency of activities vulnerable to higher carbon expenses in the global low-carbon transition.

A few examples of activities under these classifications may be found below:

The “do no significant harm” (DNSH) requirement entails companies to ensure that their projects are not detrimental to other environmental, social, and governance objectives. An example of which is constructing wind turbines in a wetland.

How does the climate investment taxonomy influence investment decisions?

From an investor’s perspective, the climate investment taxonomy provides a guided charter for sustainable financing. Investments are not just judged based on profitability but on their contribution to global warming as the world intensely shifts attention to climate change. The Climate Investment Taxonomy benefits investors in several ways:

• Disclosure and Transparency: The transparency in reports because of the taxonomy enables investors' trust in businesses' goal to help lessen the impact on the environment. There is also zero tolerance for greenwashing.

• Alignment with environmental goals: Investors are more mindful of their investments – if they align with climate goals, and the taxonomy can provide a clear criterion for sustainable and climate-risk investments.

• Performance benchmarking: Use the taxonomy as a benchmark to evaluate their product portfolios. If they are not aligned with their sustainable objectives, they can make some refinements to adhere to the standards.

• Regulatory Compliance - helps investors ensure that the companies they invest in are aligned with regulations not just in Canada but across the globe, such as the EU CSRD, and The TFCD framework.

Generally, investors can make more informed decisions and foster responsible business practices among sectors. With growing awareness of the importance of environmental responsibility and the urgency of addressing climate change, the taxonomy serves as a valuable tool for investors seeking to make a positive impact on the planet while securing their financial future.

Having established the Climate Investment Taxonomy, Canadians can expect new sustainable sectors to arise and a reduction in carbon emissions in our energy-intensive sectors, which will help boost the economy and fulfill the net-zero transition by 2050. It is a clear signal that Canada is committed to fostering a resilient and sustainable economy, and investors who embrace this taxonomy are on the right track in navigating the evolving landscape of green finance and driving positive change.