The recent announcement of the inaugural Taxonomy and Transition Planning Council—made up of leaders from finance, sustainable investment, and policy—marks a major milestone in establishing Canada’s Sustainable Investment Taxonomy. Such taxonomies are well-established globally and essentially establish guidelines for investors, letting them know which investments are aligned with the global transition to low-carbon technologies, and which are not. These rigorous, evidence-based standards for sustainable investment are designed to drive better outcomes for the economy and the climate.
The recent Council announcement comes on the heels of federal seed funding last December, which mandated the Canadian Climate Institute to collaborate with Business Future Pathways to develop an independent and science-based approach to creating Canadian sustainable investment guidelines. In the months ahead, the Institute’s sustainable finance team will be conducting research to support draft taxonomy guidance with input from two prominent advisory groups, and ongoing public consultation. That guidance will ultimately lead to recommendations that inform the Council’s decisionmaking.
To set the stage for the work ahead, let’s review what exactly a sustainable investment taxonomy is, and why it’s important for Canada’s financial markets and economy.
The Canadian taxonomy will improve market efficiency and mobilize capital
When it comes to the global transition to low-carbon technologies, information in financial markets is often incomplete and inconsistent. Definitions around what qualifies as “green” or “transition” investment get interpreted differently by different private sector actors, government, and by the public. This has created a lack of clarity in the market in terms of what projects and investments are genuinely aligned with climate science.
The Canadian taxonomy will provide a cheatsheet for financial markets to understand what types of investments are truly aligned with a future that avoids the worst impacts from climate change. Most global taxonomies are grounded in the ambition of the Paris Agreement, which commits countries to keep global temperature rise to well below 2° C. The first taxonomy output, expected this summer, will specify the objectives, principles, and levels of ambition that will underpin the Canadian investment guidelines.
As the new Council Chair, Marlene Puffer, put it: “[The taxonomy] is the missing link that I wish I had had as an investor at the helm of large pension plans, rather than everyone else having to kind of invent their own taxonomy and evaluation criteria. Having a clear set of guidelines and criteria helps the entire system work more effectively, more efficiently and with better transparency.”
By providing comprehensive and consistent classifications, the Canadian taxonomy will help investors and lenders better evaluate the alignment of their portfolios with climate objectives and their level of exposure to potential transition-related climate risks. This type of standardized information will help cut through greenwashing risks, which reduce investor confidence in financial offerings that are marketed as climate-aligned and contribute to the mispricing of assets.
Finally, the Canadian taxonomy will also help reduce transaction costs for financial institutions. In the absence of a national standardized taxonomy, financial institutions must develop and implement their own assessment criteria, which can increase complexity and raise the costs of green lending and financing. It can also create inconsistencies in how climate-related risks and opportunities are defined and assessed across institutions.
The taxonomy will strengthen Canada’s climate competitiveness
The accelerating pace and scale of the global energy transition is reshaping the fundamentals of economic competitiveness (despite recent efforts from the U.S. administration to reverse key policies and block investment in the energy transition).
Staying competitive in this new future requires sustained, large-scale capital investment across Canada’s energy, industry, transportation, buildings, and natural resource sectors. At the same time, because nearly 70 countries have a national taxonomy in place or under development, ensuring Canada has a taxonomy that is interoperable with others could help open access to both markets and foreign capital.
Canada’s taxonomy will be designed to reflect the country’s economy and the pathways required to decarbonize it, with opportunities to show leadership and innovation. While most other taxonomies focus narrowly on defining “green” activities, Canada’s taxonomy aims to create clarity around “transition” investments, often viewed as the missing middle of taxonomies. This will include identifying activities within key sectors (e.g., cement, steel, aluminum, mining) that are on credible, science-based pathways to significantly reduce emissions. It also aims to provide clarity on what types of decarbonization investments in oil and gas are taxonomy-aligned—including the types of guardrails required to protect against locking in additional emissions.
The taxonomy will therefore contribute what is currently a missing piece in the climate conversation: while we’ve seen many private- and public-sector commitments to align investment with climate objectives, there is a lack of clarity and public trust about what this entails, and what should be considered greenwashing.
The taxonomy will be grounded in a robust and independent governance structure
Moving forward, the Canadian taxonomy will be grounded in an arms-length and independent governance structure. It is underpinned by the newly appointed Taxonomy and Transition Planning Council, along with two advisory groups and international observers, and with designated windows for public input. This structure, with the Institute as the main research engine making recommendations to Council, will ensure the taxonomy has the scientific credibility, market practicality, and broad buy-in necessary to drive adoption and mobilize capital.
With the Council now in place, the work to develop and implement a Canadian taxonomy for financial markets is now officially underway, building on years of expertise and guidance. The first output of the taxonomy will be a methods and framework report, which will outline the fundamentals of how Canada’s taxonomy will get built and identify the key sectors to prioritize in the coming year. That report will then shape market guidance at the sectoral level. An early draft of this framework report—and all other pieces of taxonomy-related guidance—will be published for public consultation later this spring. Stay tuned for more updates.
