Long-awaited guidelines to clarify what investments are green, and which are not, inched closer to reality this week, as Finance Minister Chrystia Freeland unveiled next steps for a potentially crucial part of an emission reduction strategy.
However, the next phase of the sustainable investing framework will stretch beyond the next election, throwing the guidelines’ future into question, if polls are to be believed, and the Liberal government falls.
Reaching net-zero by 2050 will require attracting more than $100 billion in clean technology and infrastructure every year, while simultaneously chasing money out of the fossil fuel sector to prevent climate-harming expansion. In fact, the federal government estimates achieving net-zero emissions in Canada by mid-century will require between $125 billion and $140 billion in annual investments, compared with current spending of between $15 billion and $25 billion.
"We know we need to pull in even more private capital. We need to crowd in even more private capital to have a transition happening at the pace and scale the climate requires," said Freeland at a Principles for Responsible Investment conference in Toronto Wednesday.
Sustainable investment guidelines, also called “green taxonomies,” if designed well, could help redirect financial investments by making green projects more attractive to investors, experts say. Redirecting investment is crucial given that Bay Street firms pumped over $1 trillion into coal, oil and gas companies in just one year.
The “made-in-Canada” taxonomy will have two broad categories: green and transition activities. For environmentalists, the green activities described are less controversial, and refer to projects with negligible emissions that contribute to a growing clean economy, like solar panels. Transition activities, defined as those which at least make a dent in the overall emission total such as more efficient steel and cement production, can still include projects with significant emissions.
Where to draw the lines on what counts as a “transition”-worthy investment is the single most controversial element of the framework’s development. As previously reported by Canada’s National Observer, Finance Canada undertook a multi-year effort to include LNG in the guidelines intended to help capital flow to clean alternatives.
Multiple sources familiar with the taxonomy’s development told Canada’s National Observer, Freeland’s office was stickhandling the pro-LNG push.
In May 2021, before the last election, those sources say Finance Canada set up a Sustainable Finance Action Council (SFAC) to help develop recommendations for the financial sector. The SFAC was composed entirely of financial firms, with no formal civil society or Indigenous participation. The SFAC recommended Finance Canada develop a green taxonomy in 2022, and warned against fossil fuels due to concerns that including natural gas would weaken the taxonomy’s credibility. But those recommendations didn’t go anywhere, leading Mark Carney to appear to take a swipe at Freeland last year, saying there is a “great roadmap,” but “we need someone to drive the car.”
Weeks after Carney’s comment, Finance Canada disclosed in the Fall Economic Statement that it would take over writing the taxonomy, reigniting concerns her office was trying to include LNG as a “transition” activity, which could make it more attractive for banks, pension funds, asset managers and other investors.
In mid-April, more than 55 climate groups wrote to Freeland, Environment and Climate Change Minister Steven Guilbeault, and Energy and Natural Resources Minister Jonathan Wilkinson urging them to rule out including fossil fuels in the taxonomy.
This week in its update announcement, the federal government didn’t officially rule fossil fuels out, but said it would be unlikely for new gas projects to be included.
“New natural gas production is not anticipated to be included,” the taxonomy backgrounder reads, although investments to decarbonize existing natural gas production could be included.
Karine Peloffy, a lawyer and Ecojustice sustainable finance project lead, said in a statement the taxonomy announcement failed to deliver on what is required.
“This taxonomy announcement was meant to settle what does and doesn’t count as a ‘sustainable investment’ — an ingredient in a broader effort to align Canada’s financial sector with Canada’s climate commitments, and ensure one isn’t working actively against the other,” she said. “Instead, what we got was yet another ‘plan to eventually make a plan’ that leaves the door open to considering fracked fossil gas as a climate solution, and brings us no closer to reining in the climate-heating investment practices of the financial sector.”
The taxonomy contained few details about how exactly next steps will unfold. Instead, the government will work with an undisclosed organization to develop the sustainable investing framework. On top of that, a contract with the organization has not yet been finalized. It will have a year to develop a taxonomy for a handful of priority sectors, meaning it has effectively been punted beyond the next federal election where a change in government could mean climate policies die on the vine.
The feds aren’t yet conceding that possibility. Instead, officials are describing the benefits to climate an eventual taxonomy could create.
In an interview with Canada’s National Observer, Guilbeault said “it's hard to see a place for natural gas,” in the eventual taxonomy, because the goal is a taxonomy that aligns with the Paris Agreement’s target of holding global warming to 1.5C above pre-industrial levels. To meet that goal, fossil fuels must be rapidly phased out.
“I speak to a lot of investors who say, ‘We're not sure if this investment or that investment is transition-aligned or can be considered green… We need help’,” Guilbeault said. “So I think giving clarity to the investment community will only accelerate the pace of investment in the things we want, and I suspect diminish investment in the things we don't want.”
Mark Campanale, executive director of the U.K.-based Carbon Tracker Initiative and sustainable finance expert, said in an email to Canada’s National Observer that financial regulation is crucial and warned against complex taxonomies that do more harm than good.
Campanale explained that the theory that taxonomies can mobilize capital for green activities on their own isn’t holding true in the U.K. and Europe. The complexity of those taxonomies seems to be making green investments more difficult, as analysts worry about being sued or “exposed” for investments that may not align.
“What appears to be happening is that funds that make no claims whatsoever about anything, are left untouched by regulators – they get on with life – and this is entrenching business as usual,” he said. “Whereas green funds who are trying to do the right thing, are now so over regulated and so over scrutinised, the industry seems to be blocking up/stifled.”
If the goal is to stop funding the economic activities that exacerbate the climate crisis and promote green alternatives, Campanale says there are three important things to consider. He says companies should set transparent and costed emission reduction goals to give investors a clear understanding of the transition; get out of fossil fuel combustion altogether with financial regulators ensuring the financial sector doesn’t increase fossil fuel supply that “clearly breaks international climate obligations,”; and regulate how fossil fuel companies are able to raise money by requiring clear transition plans that are aligned with the Paris Agreement.
“If we want to decarbonise the economy, regulate to stop funding the fossil fuel system,” he said. “Get the financial regulation of damaging activities sorted out first, before turning to complex regulation.”
-With files from the Canadian Press
Comments