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A taxonomy could be a win for the Trudeau Government – or a train wreck

The whole point of a green taxonomy for financing is certainty. We currently operate in a Wild West of claims about what is and isn’t sustainable, with financial companies essentially deciding for themselves. This leads to the types of abuses captured in our securities complaint regarding “sustainable finance” at Canada’s banks.

A taxonomy could help address this by forging consensus on some standards for financial institutions to apply. That consensus is based on legitimacy that derives from:

  1. A fair and transparent process where key stakeholders feel heard; and
  2. Alignment with science, particularly with climate science for anything emissions-related.

Unfortunately, the Canadian experience has yet to deliver on the first point, and if the rumours are true, is about to violate the second one. The end result could be lasting controversy and uncertainty, the opposite outcome of what a taxonomy is supposed to be about.

From the outset, the Canadian government has seemed strangely allergic to running an open process to develop a taxonomy, unlike other countries. Instead, as far back as the Expert Panel on Sustainable Finance, it sought to contract this out to the private sector.

The first iteration went to the CSA Group which invited heavy industry to the drafting table, with predictable results. The draft was so bad that it was even rejected by the financial sector.

The second iteration went to the Sustainable Finance Action Council (SFAC), which was supposed to be a multistakeholder body, but ended up being exclusively private sector financial institutions. Its draft recommendations were better, although still compromised by trying to shoehorn fossil fuel mitigation (like CCS) into the “transition” label, a form of carbon lock-in as resources are misallocated away from actual transition.

Nevertheless, those recommendations were sent to Chrystia Freeland’s office where they now sit. What the government does next will determine whether the taxonomy advances or turns into a train wreck.

The most appropriate response would be for the government to consider SFAC’s work as one input to an open and transparent consultation process that it runs with the advice of a credible panel of experts, some well versed in climate science. This would be a win for the government, demonstrating it understands the necessary ingredients for a credible taxonomy. It could announce such a process at PRI In Person in Toronto in October, with the active support of a wide array of stakeholders. That would set up a taxonomy for success, including through any changes in administration.

The rumours, though, are that Freeland’s office instead plans to announce not a process, but an actual taxonomy that not only makes SFAC’s mistake of including fossil fuel mitigation, but goes even further by giving a stamp of approval to investing in new fossil gas, thereby guaranteeing even more carbon lock-in and delaying the transition.

This would not only be a violation of democratic principles – we are still waiting for a proper process – but also of climate science. Ad Standards Canada correctly ruled just recently that ads characterizing LNG as a climate solution were greenwashing. This raises the prospect of a gas-fueled taxonomy running afoul of the government’s own new greenwashing standards.

The backlash against fossil gas inclusion would extend not just within Canada’s scientific and environmental community, but also overseas. Finance is global, and if Canada’s taxonomy lowers the bar for sustainable finance, it will be derided by other jurisdictions that are trying to bring some credibility to the system. Again, the net result will be years of controversy and uncertainty, the opposite of what a taxonomy is trying to establish.

For these reasons, we hope that the Trudeau Government will take the win that’s on offer and announce an open and transparent taxonomy process informed by an expert panel that includes climate science. We would be happy to join others in applauding this necessary step towards a taxonomy that can bring some needed credibility to sustainable finance, and investment dollars to projects that advance real energy transition.

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