Consultation Summary: Considerations for Taxonomy Council’s Governance Manual August 2023

This document summarizes consultations with the Sustainable Finance Action Council (SFAC) members on key aspects of governance that should be considered when "standing up" the Taxonomy Council, the organization responsible for executing the Taxonomy effort.^{Footnote 1,Footnote 2} 

Consultations with SFAC members were focused on building on the governance recommendations found in the September 2022 Taxonomy Roadmap Report. Although outreach has progressed significantly, it is not yet formally completed; consultations continue with groups such as, but not limited to, provincial & territorial stakeholders, Indigenous rights holders, and community stakeholders. To date, stakeholders have expressed interest in continuing the dialogue and potentially participating in their respective Advisory Groups (subject to review of formal documentation outlining their role and responsibilities, etc.).

The emphasis in this document is placed on the Taxonomy Council, which is the initial governance priority. Once stood up, the Council will oversee establishing other aspects of governance, including the Custodian.

I. Overall Governance Structure

As a foundational matter, to position the Canadian taxonomy for credibility and usability, it was recommended in the Taxonomy Roadmap Report that governance and leadership be transparent, results oriented, well resourced, and inclusive of federal government and financial sector leadership, and strong provincial, territorial, and Indigenous participation.^{Footnote 3}

Drawing from the governance frameworks frequently observed among financial sector standard-setting bodies and taxonomies, the governance model recommended in the Taxonomy Roadmap Report consists of the following bodies:

• Taxonomy Council (oversight and approvals, tier 1): The Council will be responsible for the governance, strategic direction, and performance of the Taxonomy initiative. Council membership will include federal government and the financial sector, with strong provincial, territorial, and Indigenous participation. The Council will form and convene the Stakeholder Advisory Groups, and select the Taxonomy Custodian and oversee its workplan, budget, and reporting. The Council will be supported by a Secretariat.
• Taxonomy Custodian (taxonomy developer, tier 2): The Custodian will carry out the technical work to develop taxonomy proposals for Council approval. The Custodian will be non-partisan and independent from governments, the financial sector, and other interests. The Custodian will have expertise in climate action and the environment, as well as an established network of climate and taxonomy experts. Among its other duties, the Custodian will establish a Stakeholder Advisory Forum and form technical working groups to inform technical development of the Taxonomy, and ensure two-way engagement of stakeholders affected by the Taxonomy.
• Stakeholder Advisory Groups (external expertise, tier 3): Established and convened by the Council, these high-level advisory groups will support the development of the Taxonomy and provide both technical and strategic guidance to maximize usability and adoptability. Three working groups are envisioned: Indigenous, Provincial, Territorial, and Federal Government Stakeholder Advisory Group; Financial Sector Advisory Group; Community Stakeholder Advisory Group.
• Technical Working Groups (external expertise, tier 3): The Custodian will be responsible for convening technical working groups to support the development of technical criteria that are scientifically robust, credible, and usable. Working groups may be permanent or of fixed duration, and will comprise the right mix of industry, academics, and subject matter experts to provide the critical input and diverse expertise needed in the detailed formation of the Taxonomy. The working groups may be organized by sector (e.g., oil and gas, mining), topic/theme (e.g., clean technology), and/or by stakeholder group (e.g., Indigenous matters).

The relationship between these bodies is illustrated below. The proposed composition, duties of members, and expected roles of these bodies are elaborated in the following sections. The final governance details will be fleshed out and approved by the Taxonomy Council once it is stood up.

II. Objectives of the Taxonomy Council

The Taxonomy Council will be responsible for the overall governance and oversight of the Taxonomy initiative, including Taxonomy development and maintenance, alignment with climate science, oversight of the Custodian, engagement and consultations with stakeholders, and final decision-making regarding definitions and inclusions of green and transition sustainable finance in the Taxonomy.   

III. Governance Structure

IV. Taxonomy Council Membership

The Taxonomy Council will be comprised:

• Impartial Chair of the Council (1 member)^{Footnote 5}
• Bank of Canada (2 permanent members)^{Footnote 6}
• Prudential supervisors (3 permanent members: 2 from the Office of the Superintendent of Financial Services (OSFI)3, and 1 from the Autorité des marchés financiers (AMF))^{Footnote 7}
• Indigenous representation (1)
• Leads of Financial Sector Advisory Group (3)
• 3 leads will be selected from the Finance Sector Advisory Group based on the following skills categories:
  1. Underwriting/supporting issuers in the creation of use-of-proceeds debt ("sell side")
  2. Investors ("buy-side")
  3. Physical risk assessment and management related to property and casualty
• Chair of the Community Stakeholder Advisory Group (1)
• Chair of the Indigenous, Provincial, Territorial, and Federal Government Stakeholder Advisory Group (1)
• Official Observer: Canadian Sustainability Standards Board (CSSB) representative (1) (to be confirmed)

Council members who are appointed and are representatives of an organization, corporation, or regulatory body are acting in their professional capacity and not in their personal capacity. 

Council members from the Financial Sector Advisory Group are appointed for a two-year term (unpaid).  Council members other than Bank of Canada, OSFI, AMF, and Finance Sector Advisory Group are appointed for a three-year term, renewable once, but initial terms will be staggered at two to four years (unpaid).

A Council member will continue to serve once their appointment has concluded until a replacement has been selected.  

If a Council member leaves their organization, their membership of the Council shall co-terminate.

V. Duties of Taxonomy Council Members

1. Duty of care and prudence, and confidentiality requirements

The Taxonomy Council (or Interim Council) will engage legal counsel to develop a policy regarding the duty of care and prudence applicable to Taxonomy Council members, a conflict of interest policy applicable to members (including practical guidance in relation to potentially conflicting duties), and confidentiality requirements.

2. Draft Reports and Minutes of Meeting Decisions

The Taxonomy Council is committed to publishing reports on its decisions in respect of the Taxonomy, offering a limited period (60 days) for public comment before the decisions are finalized and published.  This is critical to ensure broad input from industry, academics, civil society, and other financial stakeholders not included within the governance structure.

The Taxonomy Council is committed to publicly publishing high-level minutes of its decisions in respect of the Taxonomy, which will support transparency and accountability while respecting confidentiality.

VI. Decision-making of the Council

1. Quorum for Meetings

Quorum for Council meetings should be established by the Council, as well as requirements for delivery of material in advance for quorum to be registered. It is encouraged that the Chair of the Council and key representatives from the Official Sector be in attendance for quorum. Quorum for meetings will allow meetings to take place, but all votes of the Taxonomy Council are subject to the rules set out in section 2 below on "Voting".

2. Consensus Decision-making and Voting

The goal of the Council is to reach a consensus on all issues; however, where consensus is not possible after deliberations, decisions will be made by vote. The Council should determine voting procedures.^{Footnote 8} Where consensus is not possible after discussions, approval requires a supermajority of voting members to vote in favour of a decision. Given the proposed composition of the Council, consultations aligned to 66 per cent (or 2/3rds)^{Footnote 9}.  The Council will review whether this voting threshold is appropriate after one year.

• Where there is not a clear consensus^{Footnote 10} within an Advisory Group, the Chair/Lead appointees to the Council will convey the views of their Advisory Group but will not vote on a decision. For the Financial Sector Advisory Group, the Lead of a subgroup will convey the views of the subgroups it represents, but will not vote on a decision if there is not clear consensus in its subgroup. In these cases, the non-vote will be deemed an abstainment and not a vote in support or a vote against.^{Footnote 11}  The other Financial Sector Advisory Group Leads to the Council will still be able to vote on a decision if there is clear consensus within their subgroup.

VII. Scientific Integrity of Council Decisions

1. Science-based Taxonomy and Transition Pathways

The Taxonomy will be grounded in the latest climate science and developed through an extensive multi-stakeholder and expert approach, with verifiable targets and metrics. The Taxonomy Custodian will make recommendations to the Council based on the latest available science, with a view to keeping global temperature rise below 1.5C (based on pre-industrial levels) across all emissions categories and updated to be aligned with the latest international agreement on climate change, which will require projects to meet increasingly stringent emissions reduction thresholds over time. The Taxonomy Custodian will rely primarily on the scientific findings of the Intergovernmental Panel on Climate Change (IPCC), which represents 195 member governments and over 1,000 scientists.^{Footnote 12} Other points of reference include scientific reports on solutions to ensure an orderly transition across various sectors in terms of best practices in metrics.

The Taxonomy Custodian and the Council may also reference credible sector pathways and scenarios approaches consistent with limiting warming to 1.5°C with no or limited overshoot and updated to be aligned with the latest international agreement on climate change, such as IPCC reports; the GHG Protocol in terms of best practices in metrics;^{Footnote 13} the UN-convened Net-Zero Asset Owner Alliance (NZAOA) One Earth Climate Model (OECM);^{Footnote 14} the United Nations' High-Level Expert Group on the net zero emissions commitments of non-state entities;^{Footnote 15} the International Energy Agency's (IEA) Updated roadmap to Net Zero Emissions by 2050;^{Footnote 16} the Network of Central Banks and Supervisors for Greening the Financial System's (NGFS) reports regarding climate scenarios to support mobilization of capital for green and low-carbon investments to advance sustainable development;^{Footnote 17} and other guidance as it develops. The Custodian and the Council may also rely on independent third-party assessments and verification – for example, the Transition Pathway Initiative.^{Footnote 18}

The Custodian's recommendations will include clear time-bound metrics and pathways set by scientific experts. Safeguarding the scientific integrity of the Taxonomy will be one of the key responsibilities of the Taxonomy Custodian.

2. Presumption of acceptance of Taxonomy Custodian's recommendations regarding science-basis

Applicable Principles:

1. Taxonomy must be grounded in climate science and evidence-based, with verifiable targets and metrics, to have credibility;
2. To ensure its broad-based support, the taxonomy must be developed through a multi-stakeholder and expert consultative approach;
3. Climate science-based taxonomy decisions must be made independently of special interests and must be seen to be independent in order to maintain the credibility of the Taxonomy and the integrity and neutrality of the Council;
4. The Custodian^{Footnote 19} must have the respect of and endorsement as a climate science expert by a large majority of the global science community in this sector;
5. In light of the evolution of science, as well as any concerns that may be raised as part of public consultations or by the Council, the Council should have the opportunity to obtain a second opinion ("Second Independent Expert") that would require the consideration of any new viewpoints and evidence with a further issue resolution mechanism for final resolution;
   The Council will be in charge of selecting, instructing, and overseeing the work of the Second Independent Expert. The Custodian must co-operate and facilitate the work of the Second Independent Expert;
6. The Council is bound to take a decision within a defined and documented timeframe of receipt of the report of the Second Independent Expert, such that time shall be of the essence in the Second Independent Expert process.

3. Alignment, where possible, with international taxonomies

The Taxonomy will align, to the extent practicable, with existing international taxonomies in order to enhance interoperability, comparability, and transparency of climate-related financial decision-making. The Council's decisions may deviate from global practices and developing standards due to Canada-specific issues; however, the Council should provide a public explanation for its decision, when warranted. 

VIII. Roles and Responsibilities of Taxonomy Council

1. Key Governance Principles

The Council is committed to diversity and inclusion with respect to gender, race, and affiliation in appointments to Advisory Groups and Council, as well as transparency, accountability, scientific integrity, clarity, breadth of perspective, being practical and expeditious, useful, and resilient, alignment with and/or interoperability with other taxonomies, and optimization of impact.

2. Appointment to the Council

The Bank of Canada, OSFI, and AMF will appoint their representatives. The Community Advisory Group and the Indigenous, Provincial, Territorial, and Federal Government Stakeholder Advisory Group will select their own Chairs, who will serve on the Council as voting members.^{Footnote 20} The Financial Sector Advisory Council will select its Leads, who will serve on the Council as voting members. The Taxonomy Council will develop a process for the nomination of the Chairs/Leads of the Advisory Groups.  

For the Financial Services Advisory Group, the selection process will consider the following factors.  To be eligible for nomination, the candidate must:

• be a member of the Financial Sector Advisory Group for a sufficient period of time that allows them to gain an understanding of its role,
• have a demonstrated ability to build consensus,
• have the support of their organization, and
• have the time to commit to the duties of the Council and fulfil the duty to consult the Financial Sector Advisory Group

The Financial Services Advisory Group selection process will include non-binding consultation with the impartial chair.  No organization will have more than one Lead in the Financial Services Advisory Group.

The Council is committed to engagement with Indigenous leadership in advance of selecting the Indigenous member of the Council, in alignment with the federal United Nations Declaration on the Rights of Indigenous Peoples Act.^{Footnote 21}Ideally, the Indigenous representative has expertise or experience regarding finance issues of particular concern to northern Indigenous communities.

3. Independence

Council members appointed by the Bank of Canada and prudential supervisors will represent their organizations in discussions and decision-making.

It is recognized that Chairs/Leads will hold two representative roles: one at the Council level, and one at the Advisory Group level. In Advisory Group meetings, the Chair/Lead, in addition to chairing meetings, may represent their individual organization/corporation/community in Advisory Group discussions.  However, in Council meetings, the Chair/Lead shall represent the Advisory Group's views collectively and not that of their particular organization/corporation/community.^{Footnote 22}

4. Key Functions of the Council and Its Committees

4.1 Taxonomy Oversight – Council as a Whole

• Approval of the taxonomy as it develops, and oversight of the development process and custodian services.
• Receive and consider for approval the Custodian's recommendations for a priority framework and focus area recommendations for developing the taxonomy.
• Receive and consider reports of the Custodian on evolving science and science-based financial developments, and reports of the Custodian's industry and expert technical working groups.
• Receive and consider feedback from the Advisory Groups and public engagement/consultations.
• Oversee the Council Secretariat and determine the Secretariat's scope of activities, including its potential role in overseeing efforts to encourage adoption of the taxonomy; offering guidance to the Council on strategies to encourage adoption; monitoring progress in its adoption in financial and capital markets; developing key indicators of success and monitoring effectiveness of the taxonomy; and conducting public education in respect of the taxonomy and its implementation (under discussion^{Footnote 23}).
• Share taxonomy decisions with prudential supervisors
• Oversee public communication regarding milestones in development of the taxonomy or guidance on use of the taxonomy.
• Approve a Skills and Experience Matrix, to be used in assessing both council needs and all nominated candidates.
• Approve members and Chairs/Leads of the Advisory Groups: the Indigenous, Provincial, Territorial, and Federal Government Stakeholder Advisory Group; the Community Stakeholder Advisory Group; and the Financial Sector Advisory Group, based on the Matrix.
• Engage with Indigenous leadership regarding selection of the Indigenous representative, in alignment with the Canadian United Nations Declaration on the Rights of Indigenous Peoples Act, focusing on Indigenous representation with expertise or experience regarding finance issues of particular concern to northern Indigenous communities.

4.2 Audit & Finance Committee

• Oversight of finances, including required accountability reporting to federal government.
• Monitor accountability pursuant to contract with the Taxonomy Custodian.

4.3 Governance & Nominating Committee

• Quorum, encourage minimum of Chair, and 1 each of Bank of Canada & 1 OSFI to be present.
• Develop and oversee diversity, equity, and inclusion commitment.
• Develop "evergreen List" of potential council members, based on representation as defined, geographic, sector, and the Skills and Experience Matrix.
• Make recommendations to the Council on establishing the three Advisory Groups: the Indigenous, Provincial, Territorial, and Federal Government Stakeholder Advisory Group; the Community Stakeholder Advisory Group; and the Financial Sector Advisory Group. Seeking broad input, the Governance & Nominating Committee will create a list of possible organizations and design an approach that provides clarity to different groups when they have the ability to nominate a candidate that meets the skill requirements. The Governance & Nominating Committee will oversee ongoing requests to participate in the Advisory Groups.
• Oversight of stakeholder relations, including periodic assessment of effectiveness, and consideration of feedback from the three Stakeholder Advisory Groups and Custodian.
• Develop a mechanism to receive and resolve any complaints or concerns from advisory groups or the public.
• Periodically review and enhance the Skills and Experience Matrix.

IX. Duties and Responsibilities of the Advisory Groups

1. Duties

• The Advisory Group members of the Council have a duty to consult with members of their respective advisory group peers as appropriate. Financial Sector Advisory group members of the Council (Leads) have a duty, where appropriate, to consult their respective subgroups. When an Advisory Group member is sharing personal or its organization's opinions outside of the Advisory Group deliberations, it must be clear that they do not represent the views of the Council or the Advisory Group.     

2. Indigenous, Provincial, Territorial, and Federal Government Stakeholder Advisory Group 

• Serve as group to advise on taxonomy developments (not scientific integrity, which is the role of the Custodian).
• Advisory Group will elect its own Chair for a fixed period (2 years, possible renewal once). The Chair must meet the criteria of the Skills and Experience Matrix and be prepared to volunteer considerable amount of time.
• Broad participation from provincial, territorial, and federal governments and Indigenous communities, including regulators and from official disclosure and finance bodies (e.g. CSSB, CIB, BDC, EDC), with attention paid to regional and northern representation and experience.
• While it is expected that Taxonomy Custodian representativewill usually participate (ex officio), there may be occasions when the Advisory Group meets without the Taxonomy Custodian present; Council Chair and 1 member each from the Bank of Canada and OSFI to participate as observers.
• The Taxonomy Council will document the selection process to serve on this Advisory Group^{Footnote 24}.

3. Community Stakeholder Advisory Group

• Climate/Environmental, Social, and Governance (ESG) related non-governmental organizations (NGO), open to research and advocacy institutes, and community groups (e.g. Youth Climate Groups).
• Serve as group to advise on taxonomy developments (not scientific integrity, which is the role of the Custodian)
• Advisory Group will elect its own Chair for a fixed period (2 years, possible renewal once). The Chair must meet the criteria of the Skills and Experience Matrix and be prepared to volunteer considerable amount of time.
• While it is expected that Taxonomy Custodian representative twill usually participate (ex officio), there may be occasions when the Advisory Group may meets without the Taxonomy Custodian present. Council Chair to participate.
• The Taxonomy Council will document the selection process to serve on this Advisory Group^{Footnote 25}.

4. Financial Sector Advisory Group

• Open to banks, life and health insurers, property and casualty insurers, asset managers, pension funds, credit unions and cooperative financial groups, and other financial services organizations. It will be seeded initially with members of SFAC's Taxonomy Technical Expert Group.
• This Advisory Group will have three subgroups:
  1. Underwriting/supporting issuers in the creation of use-of-proceeds debt ("sell side")
  2. Investors ("buy-side")
  3. Physical risk assessment and management related to property and casualty
  A single organization may have more than one representative in the Advisory Group, but not more than one per subgroup. The Taxonomy Council, working with the Advisory Group, will develop the skills/experience required to participate in each subgroup^{Footnote 26}.

• Serve as group to advise on taxonomy developments (not scientific integrity, which is the role of the Custodian) via the Leads of the Financial Sector Advisory Group.
• While it is expected that a Custodian representative will usually participate (ex officio), there may be occasions the Advisory Group may meet without the Taxonomy Custodian present. Council Chair to participate.
• The Taxonomy Council will document the selection process to serve on this Advisory Group^{Footnote 27}

X. Council Oversight of the Taxonomy Custodian

• The Custodian will be selected by the Taxonomy Council through a competitive bidding process, and will be accountable to the Taxonomy Council.
• The Taxonomy Council will document the selection process and key general terms/requirements of the Custodian.^{Footnote 28}
• The Custodian, housed within an existing independent organization, carries out the technical work to develop taxonomy proposals for Council approval. The Council may direct revisions to taxonomy proposals (subject to rules of procedure), as long as these revisions do not undermine the scientific integrity^{Footnote 29} of the taxonomy and its technical criteria.
• The Custodian will convene industry and expert working groups as needed to support the development of technical criteria that are scientifically robust, credible, and usable. Working groups may be permanent or time-limited, and will comprise a combination of industry, academics, and subject matter experts.
• The Custodian reports to the Taxonomy Council on progress of work, reports, and summaries of deliberations with working groups, expert committees, and the public, disclosing how members of each working group have been selected.
• Conducts public consultation as needed.
• Conducts education and awareness-raising activities, as well as respond to feedback and technical inquiries.

XI. Duties and Responsibilities of the Technical Working Groups

• The Working Groups' terms of reference and composition should aim to appropriately balance rigour and efficiency.     
• The process to establish the Technical Working Groups should be documented.

XII. Periodic Review

This summary of considerations was developed through a process of extensive consultations with SFAC members, representing viewpoints of the financial industry. Although initial conversations have been completed with other stakeholders (e.g., Indigenous rights holders, provinces, and territories) and the federal government, their perspectives are not included in this summary. Those perspectives will need to be incorporated prior to finalizing the governance structure of the taxonomy.

Regardless of the final model, it should be reviewed periodically as we learn.  The Taxonomy Council will review this manual periodically, updating the duties and responsibilities as it gains experience with the Taxonomy Roadmap. Consideration is to be given as to whether some other body, such as the federal government, should be able to amend the Council's governance/objectives.

Note: Need to determine if the governance manual is publicly available
Note: Enforcement, to be further discussed.