Canada's New Sustainability Taxonomy

Guiding Canada's Transition to a Sustainable Future: An Overview of the New Sustainability Taxonomy

The release of Canada's sustainable growth taxonomy couldn't come at a more critical time, as the world races to combat the increasing risks of climate change. This groundbreaking taxonomy aims to provide a standardized approach for benchmarking economic activities that are consistent with domestic and global climate goals. By setting screening criteria, investors, companies, and financial intermediaries can assess the climate credentials of economic activities and ensure they align with credible, science-based transition pathways. This presents a unique opportunity for global and Canadians firms to position themselves for the significant increase in the nation’s climate investment to $110 billion annually from current levels of $15 billion to $25 billion, as recommended by the report.

This new taxonomy is guided by a set of principles that ensure it aligns with credible, science-based transition pathways. The principles include ensuring material positive contributions to sustainability goals, avoiding negative contributions to other sustainability goals, being dynamic in adjusting to reflect changes in policies and technologies, reflecting good governance and transparency, being science-based for environmental goals, and addressing transition considerations. By adhering to these principles, the sustainable growth taxonomy is reported to help guide the transition to a sustainable and equitable future.

Reporting

One crucial aspect of the sustainable growth taxonomy is its reporting requirements. Under the taxonomy, issuing companies will be required to commit to achieving net-zero emissions by 2050 and then publish a corresponding net-zero transition plan that includes science-based emissions targets. This plan will help ensure that companies have a clear roadmap for reducing their carbon footprint and aligning their business practices with credible transition pathways.

Policymakers and regulators have increasingly turned their attention to the business sector, recognizing that companies have a critical role to play in this transition. This trend towards increasing regulation of climate-related impacts is reflected in the requirements of the sustainable growth taxonomy. By mandating that companies commit to achieving net-zero emissions by 2050, the taxonomy is setting a high bar for action that climate-focused companies must meet.

Additionally, companies will be required to report their progress towards their emissions targets annually. To ensure that these reporting requirements are effective, they will be based on emerging domestic regulatory requirements and international standards and best practices. This approach will ensure that companies are reporting their emissions in a standardized way that aligns with global best practices, enabling stakeholders to make meaningful comparisons between companies.

The taxonomy also requires companies to disclose climate risks and opportunities to investors and other stakeholders in accordance with the Task Force on Climate-related Financial Disclosures (TCFD). This disclosure requirement will enable investors and other stakeholders to understand the financial risks and opportunities associated with a company's climate-related impacts.

Finally, the taxonomy sets issuance verification requirements in line with current international best practices. These requirements encourage the use of third-party assurance at both the pre- and post-issuance stages, which provides investors with confidence in the environmental credentials of the financial products they are investing in.

Governance

The sustainable growth taxonomy's governance model is based on a three-tier governance framework, which ensures transparency, accountability, and stakeholder engagement in its development and implementation. Although the governance model of the taxonomy does not include a compliance review and enforcement function, its voluntary use may still overlap with federal and provincial laws. Issuing financial instruments under the taxonomy, for instance, would be subject to provincial securities laws administered by provincial securities regulators, which perform a compliance and enforcement role.

The first tier consists of a high-level body responsible for the initiative's overall strategic direction and oversight. This body is accountable for the taxonomy and ensures that it adheres to the established principles and objectives.

The second tier comprises a technical custodian body with expert and technical staff responsible for developing the standards and technical criteria. This team will oversee the development and implementation of the taxonomy, ensuring that it remains objective and science-based while adapting to changes in policy and technology. They will also be responsible for ensuring the taxonomy adheres to the "do no significant harm" principle, screening out activities that harm other sustainability objectives.

The third tier comprises of technical advisory groups consisting of independent external experts who support the custodian's technical work. This group will also include forums and due process initiatives to obtain stakeholder feedback on consultation drafts. The technical advisory groups will ensure that the taxonomy is science-based and reflects emerging best practices and standards.

Screening Criteria

The screening criteria of the sustainable growth taxonomy are rigorous and designed to provide a standardized approach for evaluating economic activities based on their climate credentials. The criteria are objective and science-based, ensuring that economic activities are evaluated based on their actual impact on the environment rather than subjective assessments.

Moreover, the screening criteria are dynamic and adaptable, reflecting changes in policies, technologies, and the state of the transition to a net-zero economy. This means that activities that were previously considered eligible may become more stringent over time as new scientific evidence emerges or as technological innovations change the way we evaluate environmental impact. For example, the taxonomy looks to The European Commission requirement to review the screening criteria of the European Union's sustainable finance taxonomy at prescribed intervals, of at least every three years for transition activities and at least every five years for green activities. This ensures that the taxonomy remains up-to-date and reflects the latest scientific knowledge and best practices to ultimately avoid greenwashing.

Another key element of the screening criteria that was briefly touched on above for the sustainable growth taxonomy is the "do no significant harm" requirement. This requirement is essential to ensure that economic activities that are deemed sustainable and eligible and do not cause significant harm to other environmental, social, and governance (ESG) objectives. For instance, an activity such as building a solar farm in a projected future floodplain may have a positive impact on climate change mitigation, but it could also have negative impacts on biodiversity, water resources, and local communities.