Sustainable finance taxonomies will play a crucial role in the transition to net-zero, but more clarity is needed to ensure investors and the market understand the regulations, according to a panel organized by the Institute for Sustainable Finance.

The Jan. 15 webinar examined how global trends and regulations are shaping sustainable finance in Canada.

A clear definition “would go a long way in supporting the strategies for investors to mobilize their capital,” Susan Thompson, director of sustainable finance and corporate transitions at TD Securities, said.

The panel was moderated by Andrea Moffat, senior director of investment stewardship at Addenda Capital. She was joined by panelists Helena Viñes Fiestas, the chair of the European Union (EU) Platform on Sustainable Finance; Matteo Bigoni, head of taxonomies at the Climate Bonds Initiative; and Thompson.

A hub for finance and sustainability professionals, the institute is housed at the Queen’s University Smith School of Business in Kingston, Ont.

The state of Canada’s sustainable taxonomy

The taxonomies define green or transition investments, and the panelists said clarifying the terms for everyone involved in the markets system attracts capital for decarbonization and reduces the risks of greenwashing.

Bigoni said he talked to investors interested in climate transition and adaptation finance, but the lack of firm definitions impeded those efforts. The problem was also raised by Canadian Finance Minister Chrystia Freeland at the 2023 Sustainable Finance Forum.

If there is a clearer picture with a taxonomy, “I think you’ll actually see a boost that can spark the financial markets and different flows of the capital, (both) inter-border and cross-border,” he said.

The Sustainable Finance Action Council, a government-led organization which was created to guide the Canadian financial sector in sustainable practices, unveiled a taxonomy roadmap as a blueprint in March 2023.

Canada is making progress on sustainable investments, Thompson explained. She cited a notice published by the Canadian Securities Administrators on ESG-related fund disclosures and whether the funds can market themselves under an ESG label.

But with Canada two to three years behind the EU’s sustainable framework, the country can learn from other jurisdictions, according to Thompson.

“We really need some clarity around what constitutes a net-zero aligned green – and particularly transition – activity.”

The EU’s taxonomy and sustainable finance package loomed over the webinar as the model for the world. Fiestas said it includes:

• looking at the value chain of the finance sector;
• the regulations and norms to incentivize or mandate integrating ESG risks and opportunities for actors and for most financial activities, instruments and products in the EU;
• redirection of capital flows to sustainable investments and supporting the financing of the net-zero transition; and
• addressing pollution, deforestation and social elements such as labour standards and a just transition.

What sustainable taxonomies need

The panelists also zoomed out of Canada — rhetorically speaking — and moved on to the areas of improvement for sustainable finance taxonomies as a whole.

Key to all such taxonomies is a global agreement on the same metrics and methodologies for sustainable finance, Fiestas said.

A notable gap in sustainable finance taxonomies is the absence of categories for resilience and adaptation, according to Bigoni. Though it is not universal, certain countries are leading in those two disciplines, such as the U.K., Australia, Brazil and developing economies.

Emerging sectors such as critical minerals mining will need to be considered in a taxonomy, especially with Canada as a leader in the field, he said.

More jurisdictions are thinking about clarifying transition assets in their taxonomies, to which the Climate Bonds Initiative is supporting Australia and basing its methodology partly on that of Canada, Bigoni disclosed.

Both Bigoni and Fiestas agreed it is important to have a taxonomy that includes mandatory reporting and matches the reality of a country’s economy and environmental objectives. Brazil, for example, focuses on biodiversity.

“My recommendation is (to) build on the EU taxonomy, but then craft it to your own needs,” Fiestas said.