New Canadian investing rulebook would disqualify new oil and gas projects from ‘green’ tag

A federal advisory body is proposing to disqualify any new oil and gas projects from being classified as green, and award that designation only in a limited and qualified way to projects to reduce pollution from existing fossil-fuel production.

The recommendations are included in a framework for a rulebook to define sustainable investments in this country, known as a green taxonomy, a copy of which was obtained by The Globe and Mail.

Submitted to Finance Canada this fall by the government-appointed Sustainable Finance Action Council (SFAC), the 77-page document received sign-off from all of that group’s members – including representatives of most major Canadian financial institutions, insurers and pension funds.

But it has not yet been publicly released by Ottawa, even as the European Union and other jurisdictions have taken a lead in developing such guides for growing numbers of climate-conscious investors.

SFAC chair Kathy Bardswick declined to comment on the contents of the taxonomy roadmap before its formal release. The document’s authenticity was confirmed by two other sources who were engaged in its development, whom The Globe and Mail is not identifying because they were not authorized to speak publicly about it.

The finance ministry remains in collaboration with the council and financial-industry leaders on the taxonomy framework, said Adrienne Vaupshas, press secretary for Finance Minister Chrystia Freeland. “Our goal is to foster a sustainable finance market in Canada that will boost investor confidence, drive economic growth, and help fight climate change,” she said in an e-mail.

While taxonomies such as the one being proposed by SFAC do not prohibit financial institutions or anyone else from funding economic activities that are not deemed to be sustainable, they have the potential to significantly shape global markets by serving as the most credible available protection against greenwashing – false or exaggerated claims by companies seeking to prove their environmental bona fides.

SFAC’s effort to set the direction for a made-in-Canada approach, in recognition of this country’s resource-heavy economy, could prove contentious with both fossil-fuel companies and environmental groups, because of the way it seeks to limit but not completely exclude oil-and-gas investment from green-finance eligibility. Indeed, some activists had previously criticized the process for not bringing representatives from green groups to the table.

The proposed framework hinges on an attempt to separate the Canadian taxonomy into two categories – not just green projects, but also transitional ones – in a way that others have not done.

The more straightforward green label would be reserved for projects that have zero or low emissions both in their own operations and from the consumption of their products, and that are projected to be in high demand during the shift to a lower-carbon economy. Among the examples offered by the SFAC are green hydrogen projects, electric-vehicle manufacturing with low-emissions supply chains, clean-electricity infrastructure and tree-planting in areas where forests did not previously grow.

The transitional label is meant for projects that reduce emissions in carbon-intensive industries – including fossil-fuel production, as well as manufacturing sectors such as steel, cement and chemicals – without fully identifying them as green.

To qualify even for that category, oil-and-gas investments – such as the installation of methane-capture technology for natural gas production, and carbon-capture technology in the oil sands – would have to meet a set of criteria.

That would include the funded projects leading to “significant emissions reductions from existing assets,” and having “well-defined lifespans” that are in line with decreases in fossil-fuel consumption required to hit global climate-change mitigation targets.

The proposed requirements add up to an attempt to avoid giving any stamp of approval to investments that could either expand oil-and-gas production beyond existing levels, contribute to the lock-in of oil-and-gas infrastructure beyond the point it would otherwise cease to be viable, or create stranded assets.

And the document states that purported sustainability investments that involve “new oil and gas extraction projects” will be ineligible.

It broadly proposes a range of other criteria for investments to qualify as either green or transitional. Those include a requirement that any company issuing financial instruments under the taxonomy has a company-wide commitment to achieve net-zero emissions by 2050, and that projects meet a “do no significant harm” principle related to other environmental, social and governance (ESG) aspects such as Indigenous reconciliation.

Still, the framework leaves open to interpretation some key aspects of what might qualify for the transitional classification in particular.

One of those involves what is considered an existing fossil-fuel extraction site for which investment to minimize emissions could be eligible. The document suggests that beyond just sites already producing oil and gas, under-development sites could qualify if they have been granted production licences and significant capital expenditures have already been allocated.

Another is the proposed requirement that any qualifying investment be consistent with pathways to containing planetary warming to 1.5 Celsius above preindustrial levels – a Paris Climate Accord target currently in enough peril that many projects could be disqualified depending on how stringently it is interpreted.

The framework proposes that such decisions, on which specific projects qualify for the green and transitional labels, ultimately rest in the hands of a complex new governance structure. It would be overseen by a taxonomy council – including senior federal officials and representatives of institutional investors – who would be served by more technical staff and working groups.

Before that happens, the proposed framework, which was written by a technical experts group convened by SFAC, in partnership with the Canadian Climate Institute, is to be followed by a much more detailed document laying out greater specifics about thresholds and timelines for the green and transitional categories.

A source involved in the process said that SFAC – which plans to oversee that stage as well – had expected the next document to be released next summer, but the timeline is now unclear because of the framework’s delayed release.

For investors, SFAC’s taxonomy development has taken on extra importance since work began on it in 2021, because a pre-existing effort to develop a Canadian taxonomy by the CSA Group – the non-profit industry standards association – fell apart earlier this year amid disagreements about its contents.

Although that turn of events underscored the difficulty of settling on taxonomy principles in a resource-heavy economy, other countries with similar reliance on fossil-fuel sectors – notably Australia, which this month released a framework similar to the SFAC proposals – have recently been starting to outpace Canada in framing the discussion.

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