Market Watch: Taking the next steps to support sustainable finance in 2025

General Market Commentary

Canadian Finance Minister Chrystia Freeland has resigned today, hours before she was scheduled to deliver an economic and fiscal update in which it was expected that the federal government would miss the deficit target of $40.1-billion. In her letter posted on X, Freeland stated that she and the Prime Minister have been at odds during the past few weeks when it comes to the best path forward for Canada. Freeland, the first female finance minister, was also the deputy prime minister.

In other news, the Bank of Canada reduced its interest rate on December 11 to 3.25% as the Bank continues its policy of balance sheet normalization. Global financial conditions have eased, and the Canadian dollar has depreciated in the face of broad-based strength in the US dollar ($1USD is $1.42 CDN on December 16). In Canada, the economy grew by one per cent in the third quarter, below the Bank’s previous projection, and the fourth quarter also looks weaker than projected. The Bank’s Governing Council is committed to maintaining price stability by keeping inflation close to the two per cent target.

Meanwhile, when it comes to the clean economy, a new report reveals that there’s $789 billion in green finance opportunities for small to medium sized enterprises. “Unlocking Sustainable Finance for SMEs” is a global report, produced in part by the International Chamber of Commerce, which quantifies gap between sustainability ambition and the ability of SMEs to take action, preventing them from accessing vital green finance needed to drive their initiatives. According to the report, Canadian SMEs are highly committed to sustainability, with a resounding belief that sustainability is important to their business and local communities. Many Canadian SMEs have sought green financing and believe that reporting is key to obtaining this financing. The report includes key data points for Canadian SME sustainability.

Hot Sector News

This edition we’re putting the spotlight on the topic of sustainable finance. The federal government recently announced its plan to develop a green and transition “taxonomy” to provide a clear definition for a green or transition investment, helping eliminate confusion and prevent misleading claims about environmental benefits. Supported by Canada’s 25 largest financial institutions, this initiative is crucial for accelerating capital flows to climate solutions.

With this in mind, we engaged Maya Saryyeva, interim executive director at the Institute for Sustainable Finance (ISF) at Smith School of Business, Queen’s University to provide her perspective on the key issues surrounding the state of sustainable finance.

The ISF, a pan Canadian hub of expertise and collaboration for advancing sustainable finance, focuses on developing research, education, and collaboration that support the shift to a low-carbon economy.  What are some key initiatives ISF focused on for 2025

According to Saryyeva, ISF is getting nature on the balance sheet. “ISF’s ongoing work will help Canadians understand the full value of the services nature provides us, which are currently severely underappreciated. According to our preliminary research, wetlands in Canada alone provide hundreds of billions of dollars worth of water filtration and carbon sequestration services every year,” states Saryyeva.

There are also some important collaborations underway. ISF is working with the Taskforce on Nature-related Financial Disclosures to encourage companies in Canada to voluntarily disclose their impacts on nature and risk from loss of natural assets, as many now do on climate. Nature is becoming a prevalent topic in sustainability reporting.

The organization is also collaborating on a three-part series on Voluntary Carbon Markets (VCMs). Carbon credits have significant potential to scale investment in mitigating greenhouse gas emissions, but there have been questions about quality, verification and actual emissions reductions. ISF’s work informs users about the workings of VCMs and assessing the quality of credits, and makes recommendations to improve the credibility of markets going forward.

A decision-useful “playbook” for financial institutions is also being built to help accelerate investments in transition finance in Canada. Additionally, ISF will launch a data portal that consolidates important datasets and insights related to natural assets and nature risk, and tracks industrial greenhouse gas emissions and climate-related disclosures.

What do you think are the biggest obstacles to meeting net zero targets and supporting sustainable finance in Canada?  

High-emitting sectors: Canada’s unique economic structure suggests that early and effective transition investment in hard-to-abate sectors will dictate whether Canada will be able to meet its 2050 net zero emission targets. Oil and gas, transportation, buildings, heavy industry, and agriculture contributed to over 85 per cent of Canada’s emissions in 2022, with each sector posing unique decarbonization challenges.

An additional challenge in transition finance is the lack of 1.5C-degree aligned transition-linked financial products to bridge the gap between sustainability-focused investors and firms in emissions-intensive industries. Transition-linked agreements will help to assure investors that their capital is contributing to constructive outcomes while giving progressive companies access to competitively priced capital.

Need for mandatory disclosure framework: Consumers and investors require good information to make sustainable choices. While large corporations are increasingly reporting on their greenhouse gas emissions and net zero targets, it is necessary to mandate rigorous, comparable climate-related financial reporting as the EU and other jurisdictions have done.

Scope 3 emissions: Difficulties remain in measuring and reporting Scope 3 emissions, or greenhouse gas emissions from a company’s customers and suppliers. Standardizing and achieving comprehensive scope 3 accounting are necessary to provide investors and consumers with the best information and to prevent firms from outsourcing emissions to their supply chains to create the appearance of progress, while making no meaningful change to overall real emissions.

Undervaluing nature: We need a consensus on the value and pricing of nature in business decision-making which requires a significant shift. As highlighted at COP16, nature and the economy are inseparable, yet much of nature’s value remains unrecognized. Bridging the $700 billion biodiversity finance gap demands aligning financial strategies with nature-positive goals, integrating nature-related risks into business plans, and fostering cross-sector partnerships. Development finance institutions and the private sector must collaborate to embed nature in investment decisions, ensuring sustainable growth and the conservation of vital ecosystems.

A lack of “circularity”: Current business models are built on the premise of “take-make-consume-dispose.” A paradigm shift is required to redefine how our economies function, reduce dependencies on finite virgin materials and move towards circularity. This contradicts the interests of many businesses, whose profits are dependent on consumers buying more (e.g. debates regarding the right to repair).

What policies and incentives do you think are needed to drive the cleantech market and clean energy transition, and how are Canadian leaders helping to move the needle? 

ISF is closely following the development of the sustainable finance policy framework in Canada, with some significant announcements expected soon. It is expected that the federal government will deliver on its promise of a taxonomy plan announced in October, and we will see finalized sustainability disclosure standards from the Canadian Sustainability Standards Board.

The necessary elements to accelerate capital to climate solutions remain a taxonomy (guidelines for credible green and transition investments) and clear, comparable climate reporting requirements for business that are closely aligned with international standards. Canada needs to move urgently in this direction if we want to keep up in the global race for climate capital.

How do you think the new administration in the United States will impact the North American market and opportunities for continued and collaborative growth? 

Policy and regulatory signals are the primary drivers for the financial sector to pursue sustainable finance. Mixed signals will likely lead to reduced action by private actors, who may adopt a wait-and-see approach.

The political transitions in the U.S. are likely to have an impact on the North American market. For instance, the continuity of the ‘Joint Statement of Policy and Principles for Responsible Participation in VCMs’ released by the Biden-Harris Administration is no longer guaranteed under the new administration. The U.S. Securities and Exchange Commission’s climate disclosure rules, already delayed by legal action, could be rescinded.

From their previous record and campaign promises, a substantial shift away from climate-related policies can be expected from the new administration. However, despite anticipated policy changes, continued corporate commitments, renewable energy’s competitiveness, and substantial actions by states and local governments can continue to support climate actions.

The climate crisis isn’t going away. Progress on Canada’s own sustainable finance framework will position this country to remain competitive and attract investment.

What are your thoughts on how states such as Texas and provinces such as Alberta can transform their oil & gas industries into low-carbon competitors?

In the short-term, it means tackling the high emissions from oil and gas production, which account for a third of Canada’s greenhouse gas emissions and are defying the national trend towards lower absolute emissions in other sectors. This will require investments in carbon capture and storage, emissions-free power generation such as small modular nuclear reactors and renewable energy, and cracking down on methane leaks.

In the longer term, it means transitioning away from fossil fuel production toward clean energy, which will be a significant transformation of the Canadian economy but a necessary one as global demand for oil and gas declines.

Some critics claim that misguided ESG policies, rampant greenwashing and poor-performing green bonds have tainted the potential of sustainable finance initiatives. Please share your perspective on these types of claims. 

Constructive criticism is welcome and highlights areas where current practices or ideas fall short and can be improved. The answer is not to give up on sustainable finance but to provide clarity and rigorous standards and transparency measures, and support small and medium businesses. This is why governments and regulatory bodies are taking measures to improve transparency and accountability of ESG related products and reporting, for example the EU’s Sustainable Finance Disclosure Regulation that standardizes how firms report sustainability metrics. As sustainable finance matures, we expect greater standardization and better policy support to weed out bad actors and incentivize Paris-aligned products.

Globally, there is a strong demand for ESG-related products and services as indicated by MSCI ESG indexes, which have frequently shown resilience during market downturns, suggesting that sustainability-focused strategies may offer better risk-adjusted returns. Research also consistently shows that firms with strong ESG performance are better equipped to manage risks and adapt to changing regulatory and market conditions.

Lastly, data-driven results and insights are inherently objective and less prone to these criticisms, so as time goes on and data gets better, so will opportunities to create policies, investment frameworks, and financial instruments with transparent underlying methodologies supporting genuine climate action.

What are some organizational goals you’re excited about for the new year?  

This year ISF will be celebrating its fifth anniversary. It is amazing to witness the growth of awareness and support for sustainability that the organization has taken on since, but it is clear there is still more work to be done and real challenges remain.

ISF will be launching exciting new projects on carbon markets, transition finance, the sustainable bond market, natural assets, sustainable finance data, advancing taxonomy development, and getting nature on the balance sheet. ISF will also be profiling some rigorous new academic research from Smith School of Business at Queen’s University.

Any other comments to share with readers working in the environment sector? 

ISF shares a sense of urgency with the sector for meeting Canada’s climate targets. There has been some notable progress, but a lot of investment is required, fast, to get to net zero by 2050, and the longer we wait, the harder it will be. Faster progress on transition planning is required mainly by the heavy emitting sector, as are accelerated investments into climate solutions. It will require more than $100 billion annually, and Canada is nowhere near there yet. Government cannot solve this problem on its own, but it can create the conditions by setting the right policies and standards to unlock the power of private capital.

Stocks to Watch

Here is a list of Canadian cleantech stocks that we are monitoring for this column. This list of public companies is by no means complete, and we are open to suggestions from our advisors and readers.