Canadian climate-focused investor initiative Business Future Pathways (BFP) announced the release of a new draft of the methodology underlying the development of Canada’s Sustainable Finance Taxonomy, its upcoming categorization system aimed at helping investors to identify sustainable investments, and to drive capital into business and projects that reduce emissions in line with Canada’s net zero goals.
While including the “green” and “transition” investment categories common to several other countries’ taxonomies, which nearly always exclude activities related to oil and gas production, Canada’s new proposed methodology introduces a new “abatement” category, which would apply to activities that “drive major carbon reductions in fossil fuel extraction and production processes.”
The release of the new draft methodology follows an announcement by the government of Canada late last year of plans to launch a new sustainable investment taxonomy by the end of 2026. At the time, the government indicated that the new taxonomy will provide a set of criteria for the identification of investments that are eligible for a “green” or “transition” investment label, enabling companies to issue green or transition bonds, and investors to evaluate the credibility of sustainable investment products.
The new draft methodology however, proposes three categories, including “Green,” which would apply to zero to near-zero emission climate solutions such as renewable energy generation and storage and EV manufacturing, “Transition,” for emissions-intensive activities that can achieve deep emissions reductions and have the potential to achieve the scale of decarbonization necessary to align with the green definition by mid-century, and “Abatement,” for activities that would drive significant, immediate-term emissions reductions in high-emitting sectors that are likely to experience a decline in demand on the path to net zero, such as upstream oil and gas production.
The draft report acknowledges the unique nature of the proposed Abatement category, stating:
“Including a third category for abatement measures is novel relative to international taxonomies, which have typically excluded any type of investment in activities misaligned with the long-term objectives of the Paris Agreement. Historically, this has meant excluding investments in the production, refining, and distribution of oil and gas, along with investments in fuels and technologies that have readily available low-carbon substitutes today.”
The report continues, however, to argus that the new category “will help enable select, tightly ring-fenced emissions-reduction investments made in the short-term, predominantly focusing on decarbonizing fossil fuel related activities, such as upstream oil and gas production.”
Environmental groups have warned against the inclusion of oil and gas production-related activities in the Canadian Taxonomy. Prior to the release of the draft methodology, Julie Segal, Senior Manager of Climate Finance at Environmental Defence Canada, said:
“Offering a gold star to an oil or gas-related investment would muddy the water rather than clarify it. A taxonomy’s purpose is for science to guide finance – not for today’s economy to constrain tomorrow’s.”
Jessica Carradine, Senior Analyst at Investors for Paris Compliance said:
“A taxonomy that allows fossil fuels would be a taxonomy that investors cannot trust or rely on.”
The draft report includes a series of “guardrails” for the new proposed category which it said would “ensure that investments focus squarely on reducing emissions in the short to medium term and do not lead to carbon lock-in.” Proposed guardrails include only allowing investment into the abatement of existing assets, limiting the set of activity-specific approved abatement measures to those that do not extend the lifetime of existing assets, requiring a significant reduction of Scope 1 and Scope 2 emissions and of upstream Scope 3 emissions, and requiring the decommissioning or sunsetting of assets within a certain timeframe consistent with credible scenarios. Additionally, asset owners would be required to implement accompanying investments in low-carbon alternatives, and issuers would be required to implement entity-level transition plans.
Alongside the release of the draft report, the BFP announced the launch of a public comment period on the proposed methodology, which will run through August 13, 2026.
Marlene Puffer, Chair, Canadian Taxonomy and Transition Planning Council, said:
“If and how the taxonomy ultimately includes an abatement category is an open question. We’re very interested in people’s feedback on this topic.”
The federal government has mandated that taxonomy guidelines be developed for six priority sectors by the end of 2027. The Canadian Taxonomy and Transition Planning Council has prioritized the Electricity, Buildings, Transportation, Mining, Manufacturing and Agriculture/forestry, and aims to have the guidelines for the first three sectors – electricity, buildings, and transportation – published for public comment before the end of 2026.
