Canada has finalized the framework for its first national sustainable finance taxonomy meant to curb greenwashing, but has yet to decide whether to include oil and gas emissions. 

Business Future Pathways, an investor-led initiative Ottawa tasked with developing the voluntary guidelines, released the framework Tuesday to give banks, pension funds and other investors concrete standards for investments that support climate goals. They come as concerns over greenwashing raise questions about the credibility of sustainability investments. The framework could also help companies raise money through green and transition bonds.

It divides eligible investments into two categories, green and transition, across six sectors: electricity, buildings, transportation, mining, manufacturing and agriculture and forestry. The green category covers activities with zero or near-zero emissions, like renewable energy, while the transition category covers emission-intensive industries, including steel and cement, that can substantially reduce emissions.

But it leaves out a third category—first proposed in a July draft—for projects that reduce oil and gas emissions. The council will study the issue starting in 2027 before deciding whether to include it.

“The main reason is really feeling that we haven’t been able to do sufficient due diligence as yet on what might make that category,” Marlene Puffer, chair of the Canadian Taxonomy and Transition Planning Council, said in an interview. The federally funded council, established in April, brings together institutional investors and professors, as well as the Superintendent of the Office of the Superintendent of Financial Institutions.

Oil and gas accounted for about 30 per cent of Canada’s greenhouse gas emissions in 2024, according to federal data. Puffer said the council decided against including these “abatement measures” after it found roughly two-thirds of respondents to a public consultation opposed the category. Opposition was strongest among individuals and environmental organizations, while only one oil and gas industry association submitted feedback.

Puffer said the voluntary taxonomy is meant to facilitate sustainable financing, not dictate industrial policy, when asked whether delaying the category could discourage investment in cutting oil and gas emissions.

Canada is a laggard among G20 countries when it comes to national sustainable finance taxonomy. The European Union and Australia already have similar systems in place. About 70 taxonomies worldwide have been introduced or are being developed, according to the report.

Canada’s efforts to develop its own taxonomy started in 2019 but have been repeatedly delayed. A 2022 roadmap called for an initial framework by mid-2023 and a comprehensive version by the end of 2025. Neither target was met, prompting Ottawa to relaunch the effort under a new governance structure last December. 

The framework also won’t require companies to have corporate net-zero targets or transition plans for individual projects to qualify. Puffer said only 5 per cent of Canadian public companies have a credible transition plan, making such a requirement premature.

The taxonomy is taking shape as Canada’s largest financial institutions scale back their climate commitments. TD, BMO, National Bank and CIBC withdrew from the Net-Zero Banking Alliance last January. In April, RBC and Scotiabank lowered their 2030 financed-emissions targets for several carbon-intensive sectors, citing changes in government policy, energy demand and the slow development of carbon capture technologies.

Puffer said major financial institutions and pension funds nonetheless played a part in developing the taxonomy. Some were already considering updates to their sustainable finance strategies, she said, although none had committed to adopting them yet. 

Companies seeking to classify their projects under the framework will also have to disclose whether their projects meet environmental and social safeguards, including those related to Indigenous rights, but aren’t required to meet every criterion.

Puffer described the approach as a trade-off between “usability and credibility” to avoid making the framework too difficult for companies to adopt.

The council expects to finalize technical criteria for electricity, buildings and transportation in mid 2027, followed by mining, manufacturing and agriculture and forestry by year-end. Banks and investors could begin adopting the first set of criteria before the remaining guidelines are completed, she added.

“[The taxonomy] should help reduce any potential greenwashing, support disclosure because now there’s a standard against which to disclose and help market participants have more information than otherwise,” Puffer said.