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Sustainable Finance Taxonomy use cases

Access to transition capital is key for many of our listed companies as Canada looks to decarbonize and meet net zero commitments. To help meet our national commitments, the Sustainable Finance Action Council (SFAC) recently released the Taxonomy Roadmap Report, which provides a framework to guide the development of a Canadian Green and Transition Finance Taxonomy. The development of the taxonomy will act as a guide for financial institutions (FIs) to determine which projects would be granted a green or transition label for the purpose of allocating capital. Issuers who seek transition funding need to understand the evaluation and definitions FIs use to make capital allocation decisions. The below summary, provided by the Institute for Sustainable Finance on behalf of SFAC, illustrates various use cases for the taxonomy.

Sustainable Finance Taxonomy use cases

The Taxonomy Roadmap Report fills an important gap in the market by proposing credible definitions for green and transition financing. There are a lot of nuances involved when determining what qualifies for each label, especially transition, and this roadmap helps several different stakeholders navigate the complexity of this process.

The roadmap can be used by for a variety of purposes. The following goes over some core use cases for a Canadian investment taxonomy broken up by the type of user.

Financial Institutions — commercial & retail lending

  • Evaluate a project's eligibility for green or transition alignment
  • Find or seek out projects that can be financed and contribute to green-aligned financing targets set by the FI
  • Identify areas of the economy/industries that would have heightened levels of transition risk and thus lending terms and risk models can be adjusted accordingly

Investment banking

  • Identify deals that would help keep facilitated emissions (defined by PCAF, this is separate from financed emissions) low
  • Identify deals or companies that would be exposed to lower-than-average levels of transition risk
  • Identify companies that could make up a low-carbon or "transition-ready" exchange-traded fund (ETF) product (if classification is done at a firm instead of project level)
  • Evaluate company progress and find sector-leading companies in terms of adapting to a future low-carbon economy
  • Check to see if M&A activity would jeopardize a company's ability to be classified as transition or green aligned
  • Provide advisory services to firms looking to raise capital (advise a client to tweak their project so that it can be officially green or transition aligned)
  • Use it to encourage firms to disclose more relevant climate data ("we'd like to classify your project as green but can't until you give us more data")

Financial regulators

  • Identify areas of the economy that are exposed to higher levels of transition risk and therefore may jeopardize financial stability (and subsequently act on this information)

Policy makers

  • Embed the taxonomy into regulation
  • Make blanket level regulation more project specific (or just allow a higher level of granularity in how it is applied)
  • Identify areas of the economy that need more attention and regulatory oversight
  • Use the taxonomy to identify green or transition aligned activities to give preferential tax treatment and thus help spur environmental action

Learn more about Canada's Green and Transition Taxonomy

The Institute for Sustainable Finance is a Core Knowledge Partner with the Sustainable Finance Action Council, contributing research to inform SFAC's taxonomy report and educational resources for stakeholders. For background research, infographics, briefing note, interviews and more visit our taxonomy resources page and Taxonomy Primer, and check out our recent webinar sessions with top Canadian and Global taxonomy experts.

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