Canada Urged to Stand Firm on Sustainable Finance as EU ‘Simplifies’, U.S. Steps Back #CanadaFinance

Canada’s slow and winding path to adopting crucial sustainable finance rules must not be derailed by political instability in the European Union and the United States, despite political headwinds in countries that have provided much of the rationale for federal action, a Canadian expert says.

In the multi-year lead-up to Finance Minister Chrystia Freeland’s announcement in mid-October, confirming a process to develop a Canadian sustainable finance taxonomy to guide climate disclosures, advocates frequently pointed to the international investment that would be put at risk if the federal government continued dragging its feet on the new rules. While taxonomies are quickly becoming standard fare around the world, the European Union and the United States are often cited as Canadian trading partners whose governments expect companies to meet a higher standard.

But those influences were thrown into doubt last week with news reports that the European Commission will “radically simplify” its green regulations, just as Donald Trump arrives at the White House to derail a climate disclosure rule under development by the U.S. Securities and Exchange Commission (SEC).

Green Central Banking reported last week that the SEC rule, already bogged down in legal challenges, won’t likely move forward if it isn’t adopted by the time Trump takes office Jan. 20. And in Brussels, Politico wrote, EC President Ursula von der Leyen announced plans to simplify three flagship environment laws—the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive, and the EU Taxonomy—after businesses “complained these rules were complicated and onerous, and suffocated Europe’s competitiveness.”

“The questions we are asking, the data points we are collecting—thousands of them—is too much, often redundant, often overlapping,” von der Leyen said. “So it’s our task to reduce this bureaucratic burden without changing the correct content of the law that we all want.”

Politico cast that position as “a decisive pivot away from the Green Deal program of the last five years, which put climate and the environment at the centre of European lawmaking. The hope was that where Europe went, the world would follow.” But “business had complained these rules were complicated and onerous, and suffocated Europe’s competitiveness.”

Von der Leyen’s retreat suggests the European Commission “is worried its green regulations in their current form will have a negative economic impact—a fear shared by a growing number of European countries, businesses, and economic experts,” Politico said. “It also reflects Europe’s new political reality, where a shift to the right in national governments and European Parliament has brought rising skepticism about Europe’s environmental regulations.”

Europe Is Still In, Canadian Expert Says

Just hours before the Politico report appeared, a sustainable finance expert cited the CSRD as “one small example” of the pressure on Canadian governments and businesses to meet investors’ demands for sustainability disclosures. While the rule is meant for European companies, “it also captures a significant number of Canadian companies that have representation in Europe,” Maya Saryyeva, acting executive director of the Institute for Sustainable Finance at Queens University, told The Energy Mix. “This creates an urgency for us to push for our own made-in-Canada, interoperable taxonomy, to increase investor confidence and attract capital” to Canadian jurisdictions.

“We have to keep our eyes on what’s happening globally, what’s going to provide clarity for investors, and that clarity is alignment with global standards,” she said.

In response to von der Leyen’s announcement, Saryyeva said it remains to be seen where the EC will fall on the continuum between streamlining the directive and watering it down. But the “stated goal is to simplify and reduce the regulatory burden, something sustainable finance proponents agree with and something Canadian policy-makers can learn from observing,” she wrote in an email.

“There is concern among investors that elements of the European Parliament will take the opportunity to weaken the standards. We’ll have to watch as it plays out,” she added. “But the bottom line is, the EU has a legal framework in place that Canada has taken baby steps toward.” And the benefits to Europe are already showing up, with taxonomy-aligned capital investments hitting €440 billion in the 18 months ending June 30 and corporate leaders in the field outperforming the market.

“So, yes, there is still work going on to establish the right framework and keep the regulatory burden to a minimum, and to support small and medium enterprises as they are affected. And there are some political headwinds to deal with,” Saryyeva wrote. “However, the climate crisis isn’t going away,” and “the necessary elements to drive green investments remain a credible taxonomy and clear, comparable climate reporting requirements for business. Canada needs to move urgently in this direction.”

Canada Already Losing Investment

In August, The Mix reported that Canadian fossil fuel and mining companies were already beginning to alienate the institutional investors they depend on with their steadfast refusal to adopt sustainability disclosure practices already in effect in 164 countries around the world. “After doing engagement for so many years, people who’ve been a part of those engagements are starting to morph their portfolios,” Barbara Zvan, president and CEO of University Pension Plan Ontario (UPP), said at the time. While there is no move afoot to pull investment dollars out of whole sectors like fossil fuels or mining, institutional investors like pension funds “will make more and more of those decisions” as the target dates for meaningful emission reductions get closer, she told The Mix.

In the earlier interview leading into last week’s Sustainable Finance Forum in Ottawa, Saryyeva acknowledged that “Canadian companies might not be ready. But it goes back to us needing to align to  accepted global standards, then Canadian investors wanting a standardized, comparable disclosure standard to provide clarity for investment decisions.”

With billions of dollars in new capital investments needed to reach Canada’s net-zero targets, “it is the reality we face,” she said. “Canada is missing out on so many of those opportunities and dollars,” including some instances in Alberta where investors “had to pull away” because projects fell short of a reasonable climate standard.

“It’s really a race to attract climate capital and keep our economy competitive while others are pulling ahead.”