The Decibel - The little-known document reshaping climate finance in Canada

Episode Date: March 30, 2023

As Canada races to compete in the clean tech sector as countries work toward their net zero climate goals, investors are trying to figure out where to park huge sums of money to back projects that are a part of this.Enter Canada’s green taxonomy, a guide to assess how green a project requiring investment actually is. Report on Business journalist Jeffrey Jones explains how it works and what it means for Canada’s oil and gas industries.Questions? Comments? Ideas? Email us at [e-mail]

One of the main goals of this week's federal budget is to position Canada to be competitive in a net-zero world. To do this, the government has bet big on the clean tech sector. But these projects that aim to transition us off fossil fuels will need investors. So how will people choose which investments to back? And how can investors be sure that what they're putting their money into is actually green? Well, Canada has a new classification system that's supposed to help. It's called a green taxonomy. Report on business journalist Jeffrey Jones is here to explain what this framework is and how it could

have a big role in helping Canada meet its climate change goals. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Jeff, thank you so much for being here today. Oh, thank you. I guess we should start off by acknowledging that a green taxonomy sounds, it sounds really dry, but essentially it's a classification system, right? It's a way of classifying companies and projects run by companies to understand how environmentally friendly they are. So what are the categories in this classification system in Canada's green taxonomy? Well, Canada's green taxonomy is essentially a catalog that says investments that are made are being done in a way that helps Canada achieve

its climate goals. So it's got a green category. That's the first one. No problem there. Most people would agree what is essentially a low or no carbon energy source or industrial process. But in the Canadian context, we've also got a transition category that they came up with. And we've seen them pop up in other parts of the world too. And it's been controversial at times when you think about the green taxonomy that has been developed in the European Union, for instance, they've added things such as natural gas and nuclear power as being part of that. Interesting. Can you maybe give us some examples of what kind of projects would be in each category, Jeff, so we can understand them? Okay. Well, let's take, for instance,

a solar project. We already know that that is going to be a no emission project. So especially if it is displacing some kind of carbon heavy energy, that could be considered as being a green investment. If you think about carbon capture and storage at a natural gas project, for instance, that could be considered a transitionary investment because it is removing emissions from an energy source that emits methane or carbon or any type of greenhouse gas. Okay, so that's about an existing plant. What about new oil and gas and their carbon capture? Would that be included here? So new oil and gas projects would not be considered for either one of those two categories.

The reason being is that for the long term, they would not be a green investment from the position of most international and domestic investors. Now, don't forget, doesn't mean people can't invest in those projects. They just can't be considered as being green investments. These are not regulations then? They are not. Okay. This is basically a catalog of eligible investments that could be considered to be helping to achieve Canada's investment goals, as well as the investment goals of

major investors that are looking to put their money into such projects. And of course, the big question here, how would this actually help Canada in terms of reaching its emission targets? Well, there's no question that there's hundreds of billions of dollars that are required to move the economy to a low carbon future. There's no doubt about it. The financial industry has to play a part in this because, you know, all of these projects require money. Unless there is some kind of guide, some kind of insurance that that money is going to be spent in a way that is going to actually lower emissions, you're just not going to get the level of investment that you require to do that. Like who would be looking at these guidelines? Would they be individual people as well? They would mostly be large institutional investors. So sovereign wealth funds, pension funds, foundations, any that would have a mandate to invest their money into sustainable finance. Okay. It sounds like it's basically a labeling system for, it could be for the everyday investor even, right? If trying to understand if something is green or helping in the green transition or if it's just being greenwashed, right?

So marketed as if it's environmentally friendly, but not really environmentally friendly. This is kind of a way to suss out what is real and what's not. Is that fair? That's right. And it could actually trickle down to the individual investor as well. Because when you think about large asset managers have funds that individual investors can put their money into. So I guess I'm wondering why something like this is needed, because we already have the concept of ESG investing. I'm sure people have heard of this. This stands for environmental, social and governance. It's been a trend really to try to shift investing to think about the environment, social issues, and good governance. So why do we need this green taxonomy, Jeff, if we already have that?

Well, those ESG factors at this point are all voluntary, especially in Canada. There are regulations that are appearing around the world and here to have companies disclose and standardize all of their ESG-related factors. But as it stands right now, there are no specific rules saying what constitutes a sustainable investment. So what this does is allows a level of confidence to grow in various projects. I mean, right now, there's $115 billion per year that needs to be spent in order for Canada to meet its climate goals. The reason why we're not there now is that large investors are saying, well, look, we don't know what the rules are.

Unless there is some kind of specific list that tells us that our money is being spent in a way that is effective, we run the risk of being taken in by greenwashing. Yeah, so we've mentioned greenwas to be very low emission, but it turns out that software they developed made it look much better than it actually was in terms of performance. Another example might be the instance, especially in the United States, where forests were being used as carbon offsets. And normally, to be used as a carbon offset, a forest has to be in danger of being cut down and saved. There's no indication in some instances that some of those forests were actually in any danger at all.

And I guess if we have these clear categorizations here, we know what actually is clean technology, clean companies, that's eventually going to mean fewer emissions down the road than if we're investing and putting our money in those. That's certainly the objective of the taxonomy. I won't try to say that it's not in some way controversial. The makeup of the group and how it's been put together has been met with some criticism, especially from environmental groups. Why? some criticism, especially from environmental groups. You know, one of the main complaints from some of the green groups has been that the makeup has been entirely financial people, right?

So from the banks, the pension funds, insurance companies, they say, well, why should they be privileged actors in setting up a investment catalog under which they will essentially police themselves. So environmental activist groups are not actually part of this process of setting out what is green and what's not? Well, going back into the history of this, Canada tried to come up with a taxonomy before. It faltered, so the government appointed this. Basically, what they've come up with so far is a roadmap to the next step. And they've said, okay, now that we've got this, we can use it as a basis to discuss finer details with other parts of society, whether that's other governments, green groups, academics, you name it.

So how have environmental groups responded to this framework? If people really on the environmental side were not necessarily consulted about this, what's been their response? It provides cover for the oil and gas industry to keep operating when what Canada should be doing, in their view, is reducing the use of fossil fuel and much quicker. Yeah, because the idea of this transition category would be, you know, over a number of decades even. So this is really actually kind of counter to what some people might say about the fact that we need to get off of these things right away. It could be. And this is really the trick. What activities are transition? And for how long are they considered to be a transition activity, right? So you could say, well, okay, so this technology is a bridge to some other more permanent green technology between, is it going to be five years? Is it going to be 10 years? Is it going to be

until the final demand for the product, say whether it's gasoline or whatever, starts to dwindle to the point where there is another alternative that dominates? So that could be any period of time. We'll be right back. This document is also dropping at an interesting moment. If we look at the broader context here, Jeff, the idea of ESG investing, it's actually seeing a bit of a backlash right now. It is. With critics labeling it, quote unquote, woke capitalism. Have you heard this term here?

I have. And recently there was a big fight in the U.S. over some ESG legislation. So I'm wondering politically, how has this Canadian report been received? Well, in a way, it's kind of been one of the softest launches I've ever seen. The government has had it for a very long time. And I know that earlier in March, there was kind of the official launch of it. Environment Minister Stephen Gu Gilbeau said, here it is. These are recommendations. We will take them to heart. But without really saying,

here is our new taxonomy. Come look and join the party. It's been almost too quiet in terms of its launch. It's very surprising. Why is the government taking so long to go to the next steps with this? Well, if you take a look out west, there is a general criticism over some of the ESG-related aspects that have been discussed at the federal level, especially when it comes to energy security. If you go to downtown Calgary, there's a lot of discussion about, yes, carbon capture is a terrific bridge to lowering carbon emissions. But don't forget, Europe, for example, has undergone an energy crisis since Russia has invaded Ukraine. So don't forget that the world still requires fossil fuels. And could this be a document that puts Canada on its back foot just at a time when the world needs secure supply? So, Jeff, let's actually dive into how investments get the designation of one of these two labels, either green or transition. One of the main purposes here is to guard against greenwashing, as we touched on before.

So let's actually look at what is the criteria that goes into this labeling? One of them is the ability of the project to actually lower or displace emissions. How is it helping Canada reduce its emissions to meet its global commitments? Don't forget, we're looking at trying to reduce emissions by 40 to 45 percent by 2030, which is a very, very tall order. There's other aspects, too, that they talk about. For instance, there's a provision that they call do no harm, which is in the pursuit of lower emissions that there isn't some other type of damage that's caused when it comes to things like mining, for instance. So you can't violate human rights, for example, by doing certain kinds of mining. Yeah. And indigenous concerns are very high in that aspect of it as well. Another thing has to do with overall demand for the products that are produced under these scenarios, right?

So if you think about gasoline, you could be reducing emissions at an oil and gas facility so it reduces the production impact. But there is still emissions associated with the burning and use of those fuels. So in that situation, how would that be categorized then? That one, I think, has to still be determined. I mean, when you take a look at the next steps of this taxonomy, I think they're going to get into the actual details to go industry by industry and determine exactly how those things fit into the taxonomy.

So let's dig into this aspect of the lowering emissions part of this that we just talked about here. How do they know whether a company does that? And what data is this analysis being done on? Like this expert group is going to be looking at information to base these assessments on, but where's that information coming from? Well, there are science-based standards that the industry uses. Those are worldwide standards. There is some aspect of self-reporting by the companies. And also as part of the taxonomy itself, there will be a

governance structure that will require third-party verification of all of these results when it comes to lowering emissions. So a lot of this is self-reported from the companies then? Some of it is and some of it is also verified. There's another aspect of this that we haven't talked about. If you take a look at what's been going on, there are green bonds. There's a green bond market, which are used to finance specific green projects. And so a taxonomy will go a long way to helping to verify those types of securities. What we don't have in Canada right now is a transition bond market or a transition security market. So the authors of the green taxonomy are hoping that this helps to stimulate that type of investment. I think one of the issues seems to be when we're talking about this is the fact that there's not

really universal standards for a lot of these things, the way that these investments are measured. I'm wondering about standards around how companies report and measure their emissions. Are there universal standards for that, Jeff? There are. And, you know, it's becoming more standardized so companies can be compared, so progress can be gauged, and greenwashing can be avoided. And when we're talking about emissions, what exactly are we talking about here? Maybe we can define this a little bit. Like, is it just how many emissions, say, a new product will produce? Yeah, that's right. I mean, you can take a look at company-wide emissions.

Let's say company A has a number of manufacturing plants around Canada. They can determine how much they emit from their actual factories, how much the energy they buy emits in terms of carbon and other greenhouse gases, as well as, and this is the trickier part, what they call scope three emissions, those that stem from the use of their products. Okay, so it's not even necessarily just the emissions from the operations here. It's actually the energy that is used at the start and then also the energy that is the end chain of what's happening with its products even once they're produced then too.

That's right. That's what they call the full three scopes of emissions. Just lastly here, Jeff, if we can look into the future a little bit here, how will we know that this green taxonomy is working, that it's actually accomplished the goals it's supposed to? I think the real gauge will be whether investors start putting their money into green projects, where in the absence of the taxonomy, they were not doing that. I mean, obviously, it's not going to put their money into the country and help

achieve these climate goals that we've all agreed to. Jeff, thank you so much for taking the time to speak with me today. Thank you. That's it for today. I'm Maina Karaman-Wilms. Jay Coburn helped work on this episode. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrienne Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.