Buildings are identified as one of six priority sectors for investment in decarbonization and low-carbon activities in proposed new guidelines to align Canada with international efforts to foster capital for undertakings that reduce greenhouse gas (GHG) emissions. Earlier this month, Deputy Prime Minister Chrystia Freeland released an overarching framework for what’s been dubbed a made-in-Canada “taxonomy” for financial market participants.
This presents a standardized approach for categorizing investment and verifying its credibility. That’s to be grounded on scientific-based assurance that qualifying investments are compatible with the goal of limiting global warming to 1.5⁰ Celsius and, like a similar taxonomy in the European Union, that they meet “do no significant harm” criteria related to environmental, social and Indigenous objectives.
The proposed taxonomy arises from the work of the federal government’s appointed Sustainable Finance Action Council (SFAC) — a 25-member body with representation from Canada’s major banks, insurance companies and pension funds — and related consultations. From here, yet-to-be-named third parties at arm’s length from the government will develop and finalize further details and oversee governance of the framework.
The buildings sector has been designated a priority due to its significance to the Canadian economy, its current contribution of about 13 per cent of national GHG emissions and expectations for a high level of investment opportunity in green and transition-related projects and assets. In addition to categorizing types of investment, it’s also suggested that there could be company-level criteria tied to net-zero targets, transition plans and disclosure practices.
“The made-in-Canada sustainable investment guidelines will become an important, voluntary tool for investors, lenders and other stakeholders navigating the global race to net-zero by credibly identifying ‘green’ and ‘transition’ economic activities,” the government’s explanatory summary maintains. “The development of the metrics-based Canadian taxonomy would first focus on the following sectors for the Canadian economy: electricity; transportation; buildings; agriculture and forestry; manufacturing; and extractives, including mineral extraction and processing, and natural gas.”
It’s proposed that investments related to low- or zero-emission outcomes such as renewable power generation, electricity transmission lines and hydrogen pipelines would be classified as green, while transition investments would be those related to replacing existing emission-intensive outputs with low- or zero-carbon alternatives. Generally, green investments would involve no direct or indirect emissions related to energy sources (scopes 1 and 2); low to zero emissions related to how consumers use the product (scope 3); and would be deemed to benefit markets that enable transition to net-zero emissions.
Investments in buildings are more likely to fall into the transition category. These are defined as activities that “make significant emissions reductions” and do not face near-term debilitating market forces and/or lock-in a longer-term carbon dependency. Such investments could continue to register scope 1, 2 and 3 emissions provided there is a significant reduction in scope 1 and 2 emissions.
It’s suggested that qualifying investments in the buildings sector would include development or acquisition of high-performance buildings and retrofit activities in the existing building stock. As well, many products and technologies to help deliver low-carbon performance and retrofits in buildings are tapped to be qualifying investments in the manufacturing sector including production of energy-efficient building equipment, batteries and renewable energy technologies and low-carbon and/or energy efficient production processes for key structural materials like cement, steel, iron and aluminum.
The taxonomy is envisioned as something of a matchmaking service for sustainable project proponents/enterprises seeking financing and lenders/investors seeking more certainty. It’s also considered instrumental to forge capacity for the wider range and expanded scale of investment that is projected to be coming.
“Financial market participants, including banks, insurers, pension plans and asset managers, have indicated that they need clarity about what economic activities are considered green or transition,” the government’s summary document reiterates. “A taxonomy supports a wide range of use cases. For example, taxonomies can be used to set standards for classifying climate-related financial instruments (e.g., bonds or loans), and/or to evaluate the green or transition credentials of financial instruments and issuers. The aim of the Canadian taxonomy would be to mobilize investment in support of Canada’s net-zero transition by enabling investors to understand and communicate which key activities and investments will deliver a Canadian net-zero economy.”
While the taxonomy will be a voluntary framework, the Canadian government also advises that it is moving ahead with earlier announced intentions to mandate climate-related disclosure for specified large federally incorporated private companies. Parliamentary approval for authorizing amendments to the Canada Business Corporation Act will be required before any new dictates can be enacted. It’s also promised that regulatory requirements would be harmonized with pending new rules for publicly traded entities from Canadian Securities Administrators (CSA).
“The development of a sustainable investment taxonomy, paired with heightened transparency on climate disclosures, amounts to an important stepping stone for Canada on the path towards that cleaner economy,” says Steven Guilbeault, Canada’s Minister of Environment and Climate Change. “These initiatives will help mobilize needed private sector financial flows to build a cleaner economy and give investors who are looking for the sustainable option the clear direction they seek.”
