The Sustainable Finance Action Council is proposing investments that contribute to the transition to a low-carbon economy make up an important category alongside those that carry a green label. However, environmental groups say polluting industries are being accommodated under the guise of transition.Larry MacDougal/The Canadian Press
The energy transition is often seen as an amorphous blob of time – an almost three-decade era during which we’ll shift somehow from fossil fuels to low-carbon transport and heating. Our country’s top financial minds are trying to define it, with the effort now moving into its toughest phase.
It’s a process to set rules for what qualifies as a green investment and what can be credited with contributing to the transition to a low-carbon economy. Its success will play a major role in determining if Canada can meet its target of net-zero emissions by 2050.
Last week, The Globe and Mail reported details from the first phase of the government-sponsored effort to develop a green taxonomy, a guidebook for investors to confirm that the financing they provide is going to sustainable projects, not to greenwashing.
Representatives from the banking, pension and insurance fields make up the Sustainable Finance Action Council (SFAC), which is responsible for developing the taxonomy. The group is proposing that transitional investments make up an important category alongside those that carry a green label. Environmental groups complain that the effort amounts to giving the finance industry the power to develop public policy and that polluting industries are being accommodated under the guise of transition.
The next phase is the trickiest and most painstaking: hammering out the fine details of a catalogue for projects that, in the Canadian context, are deemed necessary to reduce carbon emissions without sending the economy into a tailspin and workers’ lives into disarray. It must reflect the fact that some practices may contribute to the energy transition now, or in five years, but may be past their usefulness later as green alternatives enter the mainstream.
Similar efforts in other jurisdictions have already proven contentious. Last summer, the European Union declared natural gas and nuclear power would be considered transitional investments through 2030 if they replace coal and oil. Austria has filed a lawsuit to overturn that decision, arguing it misleads consumers by saying a fossil fuel partly responsible for climate change is considered green.
The SFAC’s taxonomy roadmap walks a fine line. It sets out a series of eligible investments under green and transitional labels that it says must be geared to limiting the global average temperature gain to 1.5 degrees Celsius above preindustrial levels. The document points out that Canada’s is a resource- and industry-heavy economy and says all efforts should be made to smooth out the transition for workers and communities.
A main goal is to direct the hundreds of billions of dollars required to meet the country’s climate objectives. To do that it is necessary to invest in the technology to slash emissions in the most carbon-intensive sectors, such as oil and gas, cement and steel – none of which can be classified as green.
Some of the hypothetical examples include decarbonizing oil sands facilities with carbon capture, utilization and storage; electrifying steel manufacturing; and producing hydrogen from natural gas. These are projects that cut emissions from production and the energy used in operations or from the use of products, known as Scope 3 emissions. Projects would be evaluated on other criteria, such as demand-side risks and thresholds and timelines for slashing emissions.
Projects such as geothermal energy expansion, electric vehicle manufacturing, small modular nuclear reactors and hydrogen produced with the aid of renewables would be considered green in the examples provided by the SFAC.
Not everyone is on board. Climate Action Network Canada, Environmental Defence, Investors for Paris Compliance and Shift Action for Pension Wealth and Planet Health had an early look at the roadmap in September. In a letter to SFAC chair Kathy Bardswick, Finance Minister Chrystia Freeland and Environment Minister Steven Guilbeault, the green groups said the taxonomy should be led by the government, with non-governmental organizations and others at the table alongside the finance industry.
They noted that the SFAC has suggested the next stage be led by Ottawa but pointed out that industry will still be a “privileged actor” in the process, rather than a participant alongside other experts. The advocacy groups say they are broadly supportive of labelling some investments transitional, but contend that a Canadian taxonomy should not be weakened in an attempt to stave off the contraction of the fossil-fuel economy.
They argue the EU’s decision to include gas and nuclear reactors in its guidelines partly reflects fears of energy shortages on the continent, driven by Russia’s invasion of Ukraine, and that Canada, with its huge renewable energy potential, is not at risk of that.
For its part, the SFAC says it is aiming for a taxonomy that stands up to international scientific scrutiny, overseen by a credible governance structure.
This is what makes the next step so important. Determining what the transition is, how long it takes and what activities are eligible for special funding will be key to Canada being seen as a serious player in a sustainable finance world that will only grow.
Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at jeffjones@globeandmail.com.