The proposed inclusion of an “abatement measures” category in Canada’s upcoming sustainable finance taxonomy has drawn a mixed response from financial institutions.
A consultation on the draft methodology for the voluntary taxonomy closed last week. It set out three potential categories of eligible climate mitigation-related economic activities: green, transition and abatement measures.
Abatement measures would cover investments that achieve substantial near-term emissions reductions in emissions-intensive activities “that are highly likely to experience demand decline in Paris-aligned pathways”, the draft said.
Investments in the abatement measures category would be limited to a whitelist of pre-approved technologies, processes, practices, materials or services, requiring “robust and science-based guardrails” to ensure investments focus on emissions reductions and do not “lock in” emitting infrastructure.
Financial institutions were split in their responses. Vancity, Schroders, Genus Capital Management and Clear Skies Investment Management opposed the category’s inclusion, while Desjardins Group and Fiera Capital also raised concerns.
In its response, Desjardins said the category presents “significant risks to the credibility, clarity and usability of the taxonomy”.
The C$510.2 billion ($367.9 billion; €316.7 billion) investor said other public policy and regulatory instruments “can effectively promote the decarbonisation of these sectors… without requiring the inclusion of specific projects associated with these activities in the taxonomy”.
These include carbon pricing, emissions caps and other environmental regulatory mechanisms.
Credit union Vancity said it recognised that some abatement measures may reduce near-term emissions in high-emitting activities, but disagreed with a distinct abatement category.
“Labelling fossil fuel abatement as sustainable finance risks market confusion, dilution of climate finance, and potential diversion of capital away from solutions that build the low-carbon economy, such as building retrofits, clean energy, electrification and resilience,” it said.
‘Pragmatic and balanced’
Other financial institutions and organisations were more open to the category.
OMERS, British Columbia Investment Management, Canada Life, Co-operators, the Pension Investment Association of Canada (PIAC), the Climate Bonds Initiative and Ceres all said they agreed in principle, while Addenda was neutral.
“The introduction of this category is novel relative to international precedent and is being considered to reflect the realities of a resource-based economy and Canadian investment universe,” wrote Canada Life.
“We believe it is a pragmatic and balanced approach.”
Financial services firm Co-operators, meanwhile, agreed on principle with the category, while noting that significant research and analysis would be needed to ensure clear guardrails and substantive disclosures.
“Having a separate category that allows investors and stakeholders to recognise credible near-term reductions in high-emission-intensive activities that cannot decarbonise over the long term is a useful approach,” it explained.
Robust guardrails
On both sides of the debate, respondents stressed the importance of strong guardrails.
“We agree that an abatement category warrants further consideration, provided it is supported by clear safeguards to ensure the taxonomy remains scientifically credible,” said OMERS, the pension plan for municipal Ontario employees.
Fiera Capital said the guardrails should “at a minimum” become progressively more stringent over time to ensure abatement activities only remain eligible “where no viable lower-emission alternative exists”.
Canada’s largest cooperative financial group Desjardins suggested that, if the category were created, it could be temporary.
“Its continued existence should itself be subject to a periodic review mechanism (a ‘sunset clause’) based on the evolution of science, available technologies, and pathways compatible with the Paris Agreement.”
Transition category
Some respondents suggested abatement measures should be included under the broader transition category.
Toronto-based firm TMX Group suggested this would help “to promote recognition and uptake”, while urging caution over the creation of a third category.
It said “abatement-related investments” are not a recognised portfolio investment category, and may not successfully attract international investors that seek to align their portfolio to activities known as transition or green.
Industry groups Oil Sands Alliance and Canadian Association of Petroleum Producers (CAPP) also called for emissions-reductions projects to qualify for the transition category.
“The proposed ‘abatement measures’ category reduces clarity for investors and, as proposed, places burdens on our sector that may undermine the taxonomy’s ability to drive emissions reductions from our sector,” said CAPP.
Environmental NGOs, including Environmental Defence and Shift also opposed the category.
“A taxonomy system steward cannot credibly assess stranded assets, carbon lock-in, or the technical feasibility of proposed abatement projects on a case-by-case basis,” said Shift, the pensions campaign group.
DNSH and MSS
Financial institutions also agreed that taxonomy-aligned activities that pass technical screening for climate mitigation do not have to fully align with all Do No Significant Harm (DNSH) and Minimum Social Safeguards (MSS) criteria.
The draft report proposed a partial alignment approach, similar to that adopted in Australia, whereby full or partial taxonomy-aligned status is permitted based on the entity disclosing which criteria are or are not met.
This contrasts with the EU, where failure to meet any DNSH and MSS criterion precludes an activity from achieving taxonomy-aligned status.
Investment manager Addenda Capital said this approach “would allow for broader applicability that can help phase in best practices and improve disclosures in the market over time”.
Among the other feedback from respondents, Desjardins, the PIAC and the Principles for Responsible Investment also suggested that some criteria – in particular relating to human rights and Indigenous rights – should require full compliance.
“A violation of fundamental rights cannot be considered partially acceptable in the same way as a deviation from certain quantitative environmental criteria,” Desjardins said.