Canada has issued a draft methodology for its soon-to-be-adopted Sustainable Finance Taxonomy, which includes a new investment category for "decarbonizing the oil and gas sector. The proposal, from Business Future Pathways (BFP), aims to enable investors to identify environmentally sustainable investments and to foster the country's long-term net zero goals. The framework is likely to impact investment decisions in the event of sustainable investment, climate finance, green bonds, transition finance, net-zero emissions, sustainable finance taxonomy, oil and gas decarbonization and ESG investing across Canada.

The suggested taxonomy builds upon the existing “green” and “transition” investment taxonomy that is widely adopted in other jurisdictions, and introduces a new category “Abatement.” This new classification will be used for projects that make significant emissions cuts from fossil fuel extraction and production activities. The draft methodology falls within the Canadian government's long-term strategy to develop a national taxonomy for sustainable finance by the end of 2026, which will offer investors a science-based taxonomy framework to assess sustainable financial products and that will promote investment in sustainable projects helping Canada meet its climate targets.

A new approach to sustainable investment.

The proposed taxonomy aims to acknowledge that some industries that emit a lot of greenhouse gases will remain in operation in the transition to a low carbon economy, BFP said. Many international taxonomies, for example, do not include investment in oil and gas production in their definition of transition. The Canadian proposal suggests that investments specifically targeting emissions reduction from existing fossil fuel production may be able to make a meaningful contribution to near-term climate targets.

The draft methodology adds three investment categories. The “Green” category is used for activities already emitting very little or none such as renewable energy generation, energy storage technologies and EV manufacturing. The “Transition” category is for industries that emit a lot of greenhouse gases and have the potential to reduce those emissions significantly over time, without running afoul of long-term climate targets.

The new “Abatement” category would be reserved for projects that offer immediate and substantial emissions reductions in sectors that are likely to be smaller in the future as the global economy strives to achieve a net zero carbon status. These include upstream oil and gas production, where technology can reduce GHGs without increasing fossil fuel production.

How the Abatement Category differs from other courses.

BFP recognised that the proposed Abatement category is a step away from the international sustainable finance frameworks. Current taxonomies have left out investments that are consistent with fossil fuel production, which are deemed inconsistent with the long-term goals set out in the Paris Agreement.

With the exception of those supporting the development of oil and gas extraction, refining and distribution, and other fossil fuel-related facilities, previous taxonomies have excluded investments in such facilities because of the availability of cleaner alternatives. The Canadian offer suggests, however, that it is not possible to exclude all investments in existing fossil fuel assets as it would reduce the chances of achieving significant emissions reductions in the near term while the energy transition is playing out.

The report says the Abatement category is for investments that have carefully controlled projects, and specifically target emissions reduction from existing operations, not new fossil fuel production.

Environmental Groups Raise Concerns

Many environmental groups and climate finance specialists have expressed concerns about the proposal that would see oil and gas included in a sustainable finance taxonomy, fearing it could lead to a loss of investor confidence.

Environmental Defence Canada's Julie Segal, Senior Manager of Climate Finance, cautioned that tagging oil and gas related investments under a sustainability reporting system might "increase the lack of clarity" instead of offering greater transparency. She said the structure of the current economy should not dictate the shape of sustainable finance taxonomies, but rather climate science should inform their direction.

Speaking on the question of a fossil fuel-related taxonomy, Jessica Carradine, Investors for Paris Compliance, also voiced concerns, saying that the taxonomy might undermine the credibility of investors in search of credible sustainability standards.

Proponents of sustainable finance frameworks say that they need to be clear on separating the investments that really do help the transition to a low-carbon economy from those that might continue to support fossil fuels.

Proposed Guardrails to Avoid Carbon Lock-In

The draft methodology suggests a number of safeguards to ensure that investments in Abatement are not made to extend the life of fossil fuel investments, but rather emissions reduction.

The proposal would not allow funding for new oil and gas projects, only for existing ones. Limited emissions reduction measures would only be allowed to be applied to technologies that would not contribute to prolonging the life of existing infrastructure.

Projects would need to show meaningful decreases in Scope 1 and Scope 2 emissions and reductions of Scope 3 emissions which are relevant. Owners would also have to be prepared to decommission or retire assets within a timeline that is in line with credible net zero scenarios.

Furthermore, if a company is interested in being classified as "Abatement", it would be expected to invest at the same time in the alternative low-carbon technologies, as well as to develop organization-wide transition plans that would show alignment with long-term climate targets.

Public consultation and next steps.

In parallel with the publication of the draft methodology, an open consultation regarding the draft methodology has been launched and will be open until August 13, 2026. This consultation will seek feedback from investors, industry, environmental groups, policy makers and other stakeholders prior to finalizing the methodology.

The proposed Abatement category is still an open question as the final taxonomy will also be shaped by stakeholder feedback, said Marlene Puffer, Chair of the Canadian Taxonomy and Transition Planning Council.

The council has been asked by the Canadian government to create guidance for six priority sectors by the end of 2027. These industries encompass electricity, buildings, transportation, mining, manufacturing, agriculture and forestry. The electricity, buildings, and transportation sector guidance will be made available for public consultation before the end of 2026, further steps in Canada's ongoing process to develop a comprehensive sustainable finance framework to support its transition to a net-zero economy.