It would be possible to get around a city if there were no agreed-upon street names, but it would take longer, people would get lost and international travellers might just give the place a pass.

The same could be said of investors trying to navigate where to put the many trillions of dollars that are needed every year as the world works through the biggest energy transition since humans figured out fire. Without standardization, there’s a lot of guesswork as to which investments are climate-aligned and which financial players are keeping their climate commitments.

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To help direct investments to where they need to go, many governments have started to put together standards for what kind of investments they consider environmentally sustainable. In other words, they define criteria for an official stamp of approval. Canada was early heading to the starting line on this in 2019, but critics say it has since been lapped by many other countries as it slow-walks its way to getting something in place.

“We haven’t gotten out of the gate,” says Barbara Zvan, chief executive officer at the University Pension Plan.

She helped lead an expert group of Canada’s major financial institutions that submitted recommendations on a “taxonomy” — as the sustainability standards are known — to the federal government back in 2022 and is frustrated that little has come of it so far.

Defining what’s officially considered sustainable in a resource-heavy country like Canada was always going to be tricky. Nonetheless, other resource-heavy countries like Australia have since borrowed generously from the Canadian group’s proposals, established governance systems and released draft taxonomies for review.

The federal government has acknowledged the importance of defining sustainability standards, including through recent comments by the parliamentary secretary to Finance Minister Chrystia Freeland during a video address to the World Federation of Exchanges’ Global Meeting on Sustainability on June 5.

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“This will help provide credibility, accountability and transparency in the marketplace, which we know are the essential conditions for investors and companies to make those investments,” says Ryan Turnbull, member of parliament for Whitby, Ont., noting the government has committed to providing an update later this year. “This is not just a nice-to-have. Let’s be honest, it’s a necessity.”

All of that’s needed because Canada has a spending gap of more than $100 billion a year to reach its climate goals, according to an estimate in the federal government’s 2022 budget. That shortfall means the country needs to work hard to attract international investment, says Zvan.

“We all talk about climate change as a team sport, every country has to do their bit, but finance is a competition. Money goes to where it’s easiest.”

Zvan is part of a crowded field of executives and organizations that have emphasized the urgency of getting a system in place to attract foreign investment. These include the Canadian Chamber of Commerce, environmental groups and former Bank of Canada governor Mark Carney, who, through his climate roles at both Brookfield Asset Management and the United Nations, has regularly brought up Canada’s shortfall.

Dave McKay, the Royal Bank of Canada’s chief executive officer, said at a parliamentary committee meeting on June 13 that clarity is very important for attracting capital and to give the country a clear vision of what the transition looks like. “We have to agree on the journey. And I think the taxonomy . . . bring us together on that point.”

With specific standards in place, someone doing a presentation to a committee or a board of directors can point to a sustainability project as one with official certification. “It gives greater confidence to markets that these projects are genuinely aligned with climate targets,” says Jonathan Arnold, acting director of clean growth at the Canadian Climate Institute.

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But because a place in the official taxonomy would carry so much weight, what falls under the rubric is being heavily debated as industries campaign to be included.

The most controversial area is the potential inclusion of oil and gas, which would fall within the less developed transition finance category. These investments, unlike clearly green investments like solar panels, involve spending on lowering emissions for high-carbon industries as they make the transition to net zero.

As the oil and gas industry make up more than a quarter of Canada’s emissions, any attempt to reach climate goals will require reductions in the sector, so Arnold and others have pushed for them to be included — though with strict restrictions around what would be eligible. To qualify, oil and gas companies would need to have clear net-zero targets that include emissions from consumers burning their product, something that no Canadian company currently has. Meanwhile, their proposed projects would have to reach a high bar for emissions reductions. Inclusion could mean efforts in the areas of methane leak reductions or carbon capture and storage.

Environmental groups are adamant, though, that no oil and gas investments should get such a seal of approval, saying that would dilute the credibility of a sustainable finance label. “It will muddy the waters rather than clarify them,” says Julie Segal, senior manager of climate finance at Environmental Defence.

She points out there’s nothing stopping oil and gas companies or their backers from investing in emissions reductions and there are many other government incentives both in place and proposed to help all that along. But as with all efforts to address climate change, figuring out how to reduce the impact of heavy emitters in the shorter term is complicated but crucial, says Arnold. “It’s hard but it’s not impossible and it’s quite necessary.”

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