On October 9, the Government of Canada announced:
- the details of a governance framework, priority sectors and timelines for the development of made-in-Canada sustainable investment guidelines, otherwise known as a taxonomy, for voluntary adoption by financial market participants (the Guidelines)1; and
- its intention to introduce amendments to the Canada Business Corporations Act (CBCA) to require climate disclosures by large federally incorporated private corporations.
An external expert organization will be charged with developing the Guidelines, starting with a taxonomy for a first set of priority sectors to be released within 12 months of that organization beginning its work. The proposed CBCA climate disclosure rules will go through a legislative and regulatory process that determines the substance of the disclosure requirements and the size of private corporations that would be subject to them, with the government signaling that it will seek to harmonize these rules with Canadian securities laws.
What you need to know
- The Guidelines will be voluntary and define what economic activities are considered "green" or "transition". The Guidelines will create this classification system based on independent climate science and sectoral expertise to provide market participants with clarity around what economic activities should be considered sustainable. The Guidelines are intended to be interoperable and broadly compatible with other major science-based taxonomies and frameworks globally while reflecting Canada's own economic context.
- The external expert organization will initially focus on developing the Guidelines for a limited number of priority sectors. A yet-to-be-identified expert organization will develop a metrics-based Canadian taxonomy that will first focus on the following sectors of the Canadian economy: electricity, transportation, buildings, agriculture and forestry, manufacturing, mineral extraction and processing, and natural gas. Guidelines for two to three priority sectors will be released within 12 months of the external expert organization beginning its work.
- Once adopted, the CBCA climate disclosure requirements will be applicable only to large federally incorporated private corporations. The substance of these disclosure requirements and the size of the private federal corporations that would be subject to them is not yet known; however, small and medium-sized businesses will not be subject to the requirements. Timing for publication of the requirements and implementation remains uncertain, with the government signaling that it will seek to harmonize with climate disclosure requirements that Canadian securities regulators are expected to require from public companies.
Defining "green" and "transition" investments
Many financial market participants, including banks, insurers, pension funds, asset managers and investors, have expressed the need for clarity around what economic activities can be considered sustainable and aligned with the transition to net zero. Finance Canada notes, for instance, that taxonomies can be used to set standards for classifying climate-related financial instruments, such as bonds or loans, and/or to evaluate the green or transition credentials of financial instruments and issuers. Over 40 jurisdictions worldwide are developing or have implemented sustainable investment taxonomies, which generally are calibrated to a particular country's domestic economic reality and priorities.
According to Finance Canada, the made-in-Canada Guidelines will create a classification system based on scientifically determined eligibility criteria that are consistent with the goal of reaching net-zero emissions by 2050 and limiting global temperature rise to 1.5°C above pre-industrial levels. They will include a "green" label for low or non-emitting activities, and a "transition" label for activities consistent with scientifically credible pathways to decarbonize Canada's emissions-intensive sectors.
Priority sectors for the Guidelines
A yet-to-be-identified external expert organization(s) will be tasked with developing and making final determinations regarding the Guidelines. Finance Canada has indicated that the Guidelines will first focus on the following sectors of the Canadian economy: electricity, transportation, buildings, agriculture and forestry, manufacturing, mineral extraction and processing, and natural gas. These sectors were prioritized based on investment opportunity, their importance for decarbonizing the Canadian economy and economic significance to Canada.
For example, in the electricity sector, eligible sustainable activities could include the generation of electricity from renewable sources, the storage of electricity, and the transmission and distribution of electricity. Eligible transportation sector activities could include electric vehicle charging or railway transport. Eligible manufacturing could include batteries or energy efficiency technologies. Eligible mining could include the mining of critical minerals.
While the final determination of eligible activities will be made by the external expert organization, Finance Canada indicated that new natural gas production is unlikely to be eligible, whereas activities that reduce the emissions of existing natural gas production may be eligible under certain circumstances. To develop the Guidelines, the external expert organization is expected to engage with financial market participants, industry and sector-based experts, experts in climate science, civil society, governments, and regulatory and Indigenous partners.
In addition to classifying certain economic activities, the Guidelines may also include company-level requirements to determine eligibility for "green" and "transition" labelling, such as net-zero targets, transition plans and climate disclosure. These requirements would become the eligibility criteria for companies seeking to rely on the Guidelines for certain economic activities.
CBCA climate disclosure requirements
Increasingly, companies across many industries are making voluntary climate-related disclosures, including disclosure of greenhouse gas emissions and emissions reduction targets, governance practices and processes for managing climate-related risks. These disclosures typically appear in annual reports, or in sustainability or ESG reports. Although this disclosure is still largely voluntary, efforts have been underway for several years to mandate climate-related disclosure under Canadian securities laws. The latest indication from the Canadian Securities Administrators (CSA) is that work on climate-related disclosure rules remains on pause to allow the CSA to reflect on the final standards that are expected to be proposed by the Canadian Sustainability Standards Board in 2025. Any Canadian securities law requirements that may be adopted, however, would only be applicable to public companies.
The Government of Canada has announced its intention to amend the CBCA to mandate climate-related disclosure by large federally incorporated private corporations. At this stage, the substance of these disclosure requirements and the size of the private federal corporations that would be subject to them is unknown. These details are expected to be revealed over the coming months, with legislative amendments to the CBCA and a regulatory process that may include consultation with provincial and territorial counterparts as well as securities regulators. The government intends to harmonize the CBCA climate disclosure requirements with Canadian securities laws, which (as noted above) is not expected to occur until 2025 at the earliest.
Footnote
1 The Sustainable Finance Action Council was established in 2021 to give the federal government advice on defining green and transition investment and, in 2022, finalized the Taxonomy Roadmap Report, making recommendations regarding the development of a Canadian taxonomy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
