Taxonomy experts and those leading the framework disagree on whether to include upstream oil and gas investments

There were more than 60 national and regional taxonomies in development worldwide as of last year, after the EU popularised the concept of classifying economic activities according to their environmental credentials.

In July, Canada became the latest major capital market to begin drafting a taxonomy. But the council tasked with creating it, which is co-ordinated by the investor-led climate transition organisation Business Future Pathways, has published a proposal that stands out from the others. 

Alongside “green” and “transition” categories, it wants to introduce an “abatement” category, which would allow investments in upstream oil and gas activities.

One of the main arguments for this is that fossil fuels represent around one-third of emissions in Canada, taxonomy council chair Marlene Puffer tells Sustainable Views.

“To completely disregard this sector ignores a potential opportunity for decarbonisation in the short-to-medium term, and by defining that in the abatement category we think there is a possibility of encouraging further investment into those activities,” Puffer says.

The question of whether a country with such a large oil and gas sector relative to other major developed economies could develop a credible taxonomy that also finances decarbonisation has been an ongoing point of contention.

Sean Kidney, chief executive of the Climate Bonds Initiative, says it is not realistic to exclude discussions on emissions abatement from the taxonomy because of methane emissions. This is a particularly big problem for Canada, compared with other developed economies, due to the size of its oil and gas industry and large agricultural sector.

But he admits it won’t be without its challenges. “In the oil and gas space, we have to be careful not to extend the life of assets,” he says.

A major piece of the puzzle is how the council will put in effective guardrails to ensure this does not happen.

Puffer says: “The question we’re trying to address is challenging: is it possible to invest in the decarbonisation of the existing fossil fuel sector in a way that meaningfully and significantly reduces emissions, but does not lock us into prolonged production of fossil fuels as the world transitions to net zero?”

Investors

The initial consultation will conclude on August 13 but many institutional investors and capital markets teams have already expressed their support for the abatement measures category, Maya Saryyeve, director of think-tank the Institute for Sustainable Finance, tells Sustainable Views.

“Investors want the taxonomy to be usable and appropriate to the Canadian context of an economy that is heavily weighted to natural resources,” she says, adding that it is unlikely the taxonomy would receive broad-based support from large investors without this category.

She adds that in the transition to a low-carbon economy, Canada needs to focus on high-emitting sectors. While they are often “challenging” to invest in from a sustainability perspective, they are also where the most benefit can be had for climate change mitigation.

Some members of the taxonomy council’s advisory groups, however, say they do not think a voluntary sustainable finance taxonomy is the right solution for reducing emissions in Canada’s oil and gas sector.

Kyra Bell-Pasht was previously director of research and policy at the climate shareholder advocacy group Investors for Paris, which in May closed down after concluding that investor accountability was “not sufficient” to deliver net zero outcomes or manage climate risk at the system level.

She notes that institutional investors have long claimed that their continued investment in Canadian oil and gas producers is enabling net zero engagement with these companies — but she questions how meaningful this has been, given production has continued to increase unabated.

“It seems more like an excuse to remain invested while claiming a commitment to sustainability,” Bell-Pasht tells Sustainable Views.

While she is supportive of more transparent reporting from oil and gas companies, this is something that should be tackled by regulation, not a voluntary framework, she adds.

She says the sector has shown it is “more than willing” to engage in “rampant greenwashing” to attract investment and exploit voluntary financial sector net zero commitments, and that the financial sector has shown it is willing to play along.

Transition category

Another one of the council’s arguments for introducing an abatement category is to provide more clarity on what does not belong in the transition category, to protect it from greenwashing.

The transition category is a relatively new addition to green taxonomies, with only a few markets like Australia, the Association of Southeast Asian Nations and Singapore explicitly including transitional activities in their frameworks.

A transition category includes activities that are currently emissions-intensive but have the potential to achieve the scale of decarbonisation necessary to align with the “green” category definition by 2050.

Saryyeve argues that while the abatement category “won’t be universally popular” it should help to support the interoperability of the Canadian taxonomy because it preserves the integrity of the green and transition categories, which exclude the fossil fuel sector entirely.

But Julie Segal, senior manager, climate finance at Environmental Defence, says it would be “mission drift” for the taxonomy to include this category, since the mandate of the framework is to list what actions will help get Canada to net zero carbon emissions by 2050.

“The risk for the newly created category is that it encourages and endorses carbon capture projects for the oil sands, which then expand production and therefore carbon pollution beyond what it otherwise would have been without this gold-star label.”

For David Harris, head of sustainable finance strategic initiatives and partnerships at the London Stock Exchange Group, Canada’s proposal may be smarter than the EU’s, which he says is “very restrictive” and less relevant for the institutional investor community.

EU taxonomy data shows there is more than €1tn in taxonomy-aligned capital expenditure, driven mostly by the energy, manufacturing and transport sectors. European investors are using it for portfolio comparison, with a large number of major managers now publishing taxonomy alignment indicators.

Harris notes most large institutional investors will be invested in oil and gas companies and will want to understand how the sector will be impacted by the transition and how they are going to compete in the future.

The abatement category, he says, would provide investors with more data and insight across a range of high-carbon sectors in which they can be invested, allowing for more “meaningful engagement” with these companies about their climate strategies.

“I imagine that a few leading companies will look at this seriously to see how they can link it through to certain green financing, such as transition bond issuance for example,” he says.

The Canadian government has pledged to issue at least CA$10bn a year through its first transition bonds by 2027. The funds will aim to help high emitters, industrial and agricultural sectors finance decarbonisation projects.