Strengthening Sustainable Finance Pathways to Accelerate Canada’s Clean Economy Transition

The goal sounds simple enough: achieve net-zero emissions by 2050 or earlier. Many countries across the globe, including Canada, have confirmed their commitment to get there. 

From that common ground, and based on an understanding of the risks of climate change and an assessment of what needs to be done to address them, a race is underway. It is a competition for funds and financing to advance the decarbonization of systems and capitalize on associated opportunities.

Every jurisdiction in the world is trying to figure out how to pay for its climate transition. For Canada, the estimated cost is in the realm of $125 to 140 billion per year. That’s a big number, and getting there requires foreign capital. Today, it is estimated that only $15 billion per year is being invested. 

Globally, climate-related private investment growth is outpacing the broader market, as measured by deal activity and capital deployment. McKinsey estimates that demand for capital for climate investments—or opportunities for investors—could reach $9 trillion to $12 trillion annually by 2030.

Since Canada is competing for investors’ climate-related capital with countries across the world, proving our ability to move in the right direction matters. Capital tends to flow to where it is easiest—meaning, where there is a degree of policy certainty and clarity of opportunities. 

Against this backdrop, we must ask a number of questions: Where does Canada stand compared to the rest of the world in terms of sustainable finance? How can we prove that our net-zero commitment is being translated into concrete steps in the right direction? And what more can we do to inspire investor confidence to facilitate the investments we need going forward? 

That’s where we can look to the international arena for inspiration. There, we see countries gaining momentum in their journey towards a low-carbon economy. We also see that those making the most headway have implemented certain foundational elements and frameworks, including company-based sustainability disclosures and a green and transition finance taxonomy.

Company-Based Sustainability Disclosures

It is often said, “You can’t manage what you can’t measure,” and this applies to sustainability as well. That’s where sustainability-related financial disclosures provide answers for all involved: finance, industry and government.

Investors need reliable and comparable information on how companies or assets are performing on sustainability and climate-related parameters to better understand opportunities and risks. Such data also represents an essential tool for Canadian businesses to climate-proof their strategies and demonstrate their value propositions for investors. For governments, it enables benchmarking performance on climate targets.

Many countries look to the global sustainability performance standards that were issued by the International Sustainability Standards Board (ISSB) in June 2023. This disclosure framework—where sustainability-related information is provided alongside financial information—has rapidly gained traction. 

By the time COP28 took place later that year, nearly 400 organizations worldwide—encompassing stock exchanges, accounting bodies, companies, and investors representing over $120 trillion in assets—had already endorsed the standards.

In 2024, ISSB standard setters announced that more than 20 jurisdictions—representing 55% of the global GDP and more than half of global emissions—have decided to adopt the standards or use them as a framework for their own standards, including the EU, UK, Brazil, Japan, and Australia.

The EU is setting the pace globally with an ambitious corporate sustainability disclosure framework. More than 2,000 public companies operating in the EU are already making mandatory sustainability disclosures, with rules being phased in to apply to over 50,000 companies, which together make up around 75% of the EU’s annual turnover. 

While the US has not integrated the ISSB framework, securities regulators have acknowledged similarities to their own rules that require public companies to make a wide range of climate risk disclosures. 

Australia, another country that relies on a resource-heavy economy, initially proposed a framework with significant modifications, before choosing to align more closely with the international framework to not “undermine the goal of global comparability.”

In Canada, the Canadian Sustainability Standards Board, the Canadian body created to adopt the standards, continues to examine “the global standards and how they can be adapted to the Canadian context,” especially in recognition of the country’s “heavy reliance on resource-based and export industries, as well as its large concentration of small and medium-sized businesses.” 

While we need to consider ISSB standards from a Canadian perspective, we cannot ignore the global trade and investment perspectives. Not only are we vying for global capital, but lack of harmonization creates significant challenges for businesses with operations and supply-chains across the world. Ultimately, companies want to do business in jurisdictions where the disclosure rules are certain and, most importantly, aligned with other parts of the world where they operate. 

This is also relevant for our high-emitting industries. Not only are they fundamental players in our economy’s transition, but they are also at risk when they cannot demonstrate to investors that they have built climate resilience into their business strategies.  

Since ISSB standards are on track for world-wide adoption, implementing the framework in Canada should be an important goal not only for investors but for industry and government as well, since Canada’s global competitiveness as a destination for investment ultimately impacts us all.

Green and Transition Finance Taxonomies

By providing transparency of how a company or entity is doing, disclosure tells us where we are. By placing these metrics in the context of regional, national or global climate goals, green and transition finance taxonomies assist with moving ahead.

Grounded in science and based on the Paris Agreement goals, green and transition finance taxonomies allow investors to understand which projects, assets and activities are aligned with a 1.5°C pathway and gauge a company’s or sector’s readiness for the future. For businesses and government, they provide a tool to benchmark current sustainability performance as well as directing attention and effort to improving outcomes. 

Having common definitions that classifies activities or assets as “green” or “transition”—and the policy certainty that comes with it—allows a greater alignment between capital markets and climate objectives. It also helps to clear up potential misinformation and limit confusion in the marketplace. 

Taxonomies have already gained widespread support at a global level and are in development or operational in over 40 jurisdictions, including the EU, the UK, Australia, ASEAN countries, China and across the developing world. 

While most are green taxonomies, meaning they identify projects that are net-zero or low-carbon, Japan and Canada have introduced the concept of transition taxonomies which focus on helping high-emitting sectors to tangibly reduce emissions, step by step. This is especially important for Canada because our economy is driven, in part, by industries that are heavy emitters.

Both “green” and “transition” investments are required to achieve our climate goals. Clarity and confidence that investments will indeed “support low- or no-carbon climate solutions” or “help to significantly reduce emissions—over a defined period—in high-emitting sectors” can help Canada scale up a healthy green and transition financing market.

A green and transition finance taxonomy that has unassailable value in terms of decarbonization and is interoperable across major global markets has the potential to open floodgates of investment for Canadian transition priorities. For oil and gas, think methane reduction, effective carbon capture, utilization and storage, and blue hydrogen opportunities. For heavy manufacturing, including steel, iron and aluminum, think wide-spread electrification and clean hydrogen. For airlines, think sustainable biofuels. 

There is plenty of evidence of taxonomies delivering tangible and impactful benefits. A recent report by the Platform on Sustainable Finance, an advisory body to the European Commission, speaks about returning investor confidence. Mairead McGuinness, the EU’s Commissioner for Financial Services, Financial Stability and Capital Markets Union, stated, “Companies are using the taxonomy to set targets and back up claims on sustainability, which is helping them access finance. Auditors can see the shift in companies’ mindsets – moving from general goals to specific targets. Investors and lenders are able to compare companies’ transition efforts. All of this is helping to shift financial markets towards sustainability.”

In Japan, the publication of transition definition sparked a healthy transition bond market that’s helping finance fuel-efficient jets – and alternative fuels like hydrogen and biofuels. 

In Canada, however, implementation of a taxonomy has stalled. While the finance community is asking government to advance the process, companies would be well served to add their voice. 

Just consider our performance compared to our neighbour to the south. While there has been extensive media attention on anti-ESG activities in the States, research shows that progress is continuing at the company level. Recent data from the CDP’s 2023 SBTi Monitoring Report, shows that 34% of the US’s S&P 500 companies have science-based targets, providing a clearly defined path to reduce emissions in line with the Paris Agreement goals, with another 14% having made commitments. In comparison, among Canadian S&P/TSX60 companies, only 15% have science-based targets and 12% have commitments—leaving Canadian companies lagging in the race for global capital. 

Moving Toward a Common Goal

For Canada to compete in sustainable finance, we need the foundational components in place. To achieve this and send a strong signal across our economy and to global markets, we need to adopt ISSB’s disclosure recommendations and implement a green and transition finance taxonomy. We also need finance, industry, and government to work together towards these common goals. Progress towards these goals will facilitate the development of credible transition plans, providing a pathway to commercial lift off to net-zero.

The success of Canada’s net-zero transition depends on our ability to finance it. Yet if we want to attract global investment or even international collaboration, we have to build a foundation for success by implementing globally accepted standards. 

We cannot grow Canada’s economy of the future by ignoring what is taking place in the rest of the world. Instead, we need to ensure Canada is one of the most attractive places for those with capital to invest. Securing our prosperous net-zero future requires defining it in a global context, the contexts of capital markets and of climate science, the terms of which are definitive and clear. 

It can help bring together voices from the financial sector, government, science and industry as well as advocates, Indigenous groups and community leaders with the vision and will to work together for a sustainable future. 

We all have a stake in meeting our net-zero commitments, and 2050 is much closer than we think.