Reliable standards for environmentally sound investments do not exist and very few Canadian clean tech firms are listed on a stock exchange. Too often, Canadian clean tech firms must go outside Canada for financial support and/or to enter the stock market. This article presents solutions for investors and clean tech companies alike, but these solutions require government action.
Responsible investment challenges and preference for Canadian firms
There is no point in keeping one’s money in the bank. Since bank savings interest rates do not keep up with inflation, they are in effect negative rates.
What if one wants to direct one’s savings to sound conscience companies, otherwise commonly referred to as firms adhering to Environmental and Social Governance (ESG)? What if one wants to support Canadian clean technology companies? These are colossal challenges.
In answer to the first question, there aren’t any ESG standards, rendering the term ideal for greenwashing. More on ESG follows in the next section.
As for investing in Canadian-based clean tech companies, the numbers of such companies listed on a stock exchange are so few that they can be counted on one’s fingers.
Too often to get listed on a stock exchange, Canadian companies seek foreign financing, mainly from the U.S. In most cases these firms go through a merger and acquisition (M & A) with a special purpose acquisition company (SPAC) or an oil and gas company engaged in a transition to a green economy. Nova Scotia’s META Materials, a Global Cleantech 100 developer of high-performance functional materials and nanocomposites; Quebec’s Lion Electric, manufacturer to electric trucks, school buses and batteries, Ontario’s Li-Cycle, North America’s largest electric vehicle (EV) battery recycler, and BC’s The Metals Company, explorer of lower-impact battery metals from seafloor polymetallic nodules, have taken these routes to get listed on stock exchanges. Lion is now on the TSX and NYSE and META Materials on the TSX and NASDAQ. The other two are awaiting M & A security commission approvals.
Other clean tech stock market companies in Canada are not based in Canada, implying an individual cannot direct one’s investments to Canada-specific business operations. Only governments can do that and most have not received any, or meaningful, public support.
Blue Solutions, a Boucherville, Quebec EV battery producer and supplier for Daimler, is a division of the France’s Bolloré. Nova Bus of St-Eustache, Quebec, owned by Volvo, recently made a $190 million investment, with $10 million in federal assistance, to expand its capacity to build electric urban transit buses. Dana Incorporated of Ohio, has a 55 percent stake in in Quebec’s TM4, a firm specializing in electric vehicle drivetrain systems. Dana has taken over Quebec’s Nordresa electric truck conversion firm, and has since established a e-truck partnership with Paccar, the makers of Peterbuilt and Kenworth trucks. Tesla acquired Ontario’s Hibar Systems, an avant-garde precision manufacturer of small cell batteries with a super mechanized pump injection system. BYD, headquartered in China, and one of the largest EV manufacturers in the world, has an electric bus facility in Newmarket, Ontario.
Then there are Canadian-owned companies that are focusing their clean tech activities outside Canada. Winnipeg’s New Flyer urban bus company produces its electric buses, the Xcelsior, in Alabama alongside its Vehicle Innovation Center. Ontario’s Magna International will produce EVs and EV propulsion systems via joint ventures in China, Austria and elsewhere.
The harsh reality is that the vast majority of Canadian clean tech companies are neither on stock exchanges, nor do they obtain significant government support. Many resort to financing from outside of Canada, there being so little private funding available within Canada. For Canadian start-ups, its worse.
Environmental and Social Governance: A path to nowhere
For the majority of Canadian investors trying to do the right thing, a close look at the top 10 investments of any “ethical fund”, suggests most of these funds are anything but ethical. The top 10 investments usually include fossil fuel companies and other financial institutions. In general, these “other financial institutions” embodied in ESG fund portfolios, invest in just about everything.
Yet the demand for environmentally-motivated investments is spiraling. ESG has become a popular ethical labeling term for companies, exchange traded funds, mutual funds and lenders wanting to improve their respective images. So great is the demand that sustainability-linked bonds market has grown exponentially in the last few years.
And globally, there are approximately 600 ESG exchange-traded funds.
But there are still no ESG standards. This is so despite sustainability-linked loans accounted for 80 percent of ESG loan market during the beginning of 2021. And ESG targets are rarely disclosed. Typically, an organization’s track record, relative to its target, is not divulged. Perhaps, the Biden administration will implement its goal for improved ESG climate-related reporting.
Moreover, though ESG funds are vigorously hunting for green investment possibilities, they seem to have trouble finding them, the outcome being tech assets that are not related to the green economy have prominence in ESG portfolios.
So mysterious is the meaning of ESG, that the firm MSCI has a special service to discern fact from fiction. In a MSCI April 2021 report, the concluding remarks are: “The ESG fund universe is anything but uniform.”
A report by the Paris-based business school, EDHEC, likewise concluded ESG investments are inconsistent with desired environmental impacts. EDHEC made the observation that ESG investment profiles are not much different than that of the Standard and Poor’s 500. Stated another way, the financial markets don’t reward climate action as much as traditional activities to enhance characterization. Accordingly, 9 of the 10 iShares ESG Aware MSCI USA ETF are the same the heavyweights in the S & P 500.
Not surprisingly, the International Financial Reporting Standards Foundation (IFRS) will be presenting an ESG standardization plan by November 2021, in time for the United Nations climate conference in Glasgow, Scotland.
With similar goals in mind, the International Organization of Securities Commissions (IOSCO) will come out with a report addressing the standardization issues in July 2021. IOSCO will be working with the IFRS on mandatory standards on climate change.
In parallel, global standardization is the focus of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) regarding both emissions disclosure and risks for businesses associated with global warming and government policies.
Nevertheless, the U.S. and EU are going their own way.
The European Union Taxonomy Model: Showing the way
The European Union (EU) intends to tackle the nonsense by introducing its own strict standards, known as taxonomy, which will validate what is truly green. The European Commission has been tasked with defining environmental stewardship as part the European Green Deal legislative climate package to achieve the world’s most ambitious emission reduction targets, 55 percent by 2030, based on 1990 levels, as well as climate neutrality by 2050. If all goes well, the European taxonomy standards will become the international reference.
The European climate law was approved in its first reading by the European Parliament on June 24, 2021.
To ensure taxonomy compliance, there will be auditing, enforcement and potential sanctions from national EU authorities. Consequently, those who break the rules will be subject to scrutiny by citizens at-large, large shareholders and activist groups. The good performers will shine as climate saviors.
Accordingly, in July 2020, the EU adopted a Taxonomy Regulation, a science-based green list classification system for environmentally sustainable activities. This Regulation requires that the European Commission produce Delegated Acts defining technical screening criteria. The first Delegated Act was approved in April 21, 2021, by the College of Commissioners, and formally adopted by the EU on June 4, 2021. It will become effective January 1, 2022.
The Taxonomy Climate Delegated Act defines performance criteria for each sector covered. These sectors represent 40 percent of EU domiciled companies that collectively represent 80 percent of EU direct greenhouse gas (GHG) emissions. The Act will be organic, adding amendments and activities over time. Six amending Delegated Acts will follow.
The science-based content stems from the Platform on Sustainable Science, an expertise group composed of representatives of the public sector, industry, academia, civil society and the financial industry. Stakeholders will eventually be able to contribute to the Act criteria via a web portal.
As such, not only will the evaluation criteria become an evolving/living universal foundation for rating companies, but they will also guide companies on how to improve their practices and ratings.
Most important, the Taxonomy Climate Delegated Act will serve as a guide for investors wanting to go green. With all the indefinite timelines for other international efforts to replace ESG with common terminology standards, it will be simpler to apply the European initiatives to an international scale.
And there is nothing to stop companies not participating in stock markets from having their firms rated, based on EU taxonomy parameters, by reputable independent third parties.
U.S. Securities Exchange Commission
Publicly-traded companies account for 40 percent of U.S. emissions.
In March 2022, the U.S. Security Exchange Commission (SEC) announced that all publicly traded companies will have to disclose their GHGs and climate risks with standardized parameters. These parameters will be defined by the GHG Protocol Corporate Accounting and Reporting Standard which will serve as both a guide and requirements for reporting corporate-wide GHG emissions. The protocol covers carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PCFs), sulphur hexafluoride (SF6), and nitrogen trifluoride (NF3).
The SEC initiative implies businesses will need to recalibrate their business models; integrate climate-related challenges in their business decisions; and contemplate leading action by their industry or ecosystem of investors, supply chains – Scope 3 –, customers, and regulators. But Scope 3 rules only apply to important sources and allows for avoidance of reporting.
Action required is exemplified in a 2019 U.S. report indicated that 100 companies are responsible for 71% of the country’s industrial emissions.
Currently, two-thirds of business spending is allotted to high emissions products and operations such as fossil fuels.
One of first cases to which new SEC ESG metrics applied judicially is the Bank of New York Mellon Corp. This led to an agreement on a civil penalty of US$1.5 million. Taking on the major leagues, the SEC is investigating Goldman Sachs Inc. mutual funds for compliance with ESG metrics.
In June 2022, Attorney Generals in 24 states wrote to the SEC to the effect that the SEC’s role is limited to protecting investors and financial markets. Should the SEC proceed with its climate disclosure rules, Attorney Generals in 29 states declared they would withdraw investments in organizations divesting in fossil fuels and guns.
Here in Canada, the Chartered Professional Accountants of Canada is advocating the creation of a universal standards for ESG. Joining the chorus on harmonized ESG evaluation criteria, are the eight largest pension funds in Canada, including Canada Pension Plan Investment Board, Caisse de dépôt et placement du Québec and Ontario Teachers’ Pension Plan.
Initiatives of other jurisdiction on regulating climate reporting
In 2021, New Zealand became the first nation to require climate disclosure.
Britain and Japan will come out with business climate reporting standards in April 2022.
Switzerland will do the same, effective 2024.
Green Bonds: Need to do this right
Taxonomy regulations will eliminate much of the confusion over socially responsible investments on stock markets.
But how does that help the majority of Canadian clean tech firms, not on stock markets, some of which are listed in the CanadaCleanTech Alliance and ÉcoTech Québec? The former has 200 plus firms in its roster and the latter has 350 clean tech companies in its directory.
This is precisely why government issued green bonds can be an effective financing vehicle to support clean tech projects, regardless of whether or not the companies involved are registered in a stock exchange. Taxonomy-like criteria could be integrated into defining eligible projects to assure sound environmental objectives.
Especially important, green bonds issued by governments can provide opportunities for citizen participation.
To these ends, the EU intends to complement its climate legislative package with the issuance of US$301 billion in green bonds.
By way of comparison, Canada’s Budget 2021 provides new possibilities for individual Canadians, beginning 2021-22, with the creation of a federal green bond, with an issuance target of $5 billion.
But $5 billion, should the optimistic target of the Canadian government be achieved, will not place Canada in the global clean technology developments major leagues, particularly because there is so little private capital in Canada for such ventures.
Right now, Canada pitifully compares with other developed countries where there are often both government and private billions of dollars in support per green initiative and/or firm.
As alluded earlier, Canadian clean tech firms generally go to the U.S., Europe and elsewhere to acquire financing for manufacturing, the development of a supply chain and/or a commercialization agenda. This also leads to locating many of the activities of Canadian clean tech firms outside of Canada.
Juxtaposition Canada’s climate-related investment options with that of Germany. While acknowledging that Germany is a global economic powerhouse, Germany’s public bank, kfw, is one of the world’s largest investors in clean tech projects. Through its program “Green Bonds – Made by kfw”, individuals can support such kfw projects. By March 2021, kfw had issued US$45.84 billion in green bonds.
The French government has plans for putting US$21 billion worth of green bonds on the market.
Yet, even green bonds are not always a panacea for would be environmentally motivated investors. It doesn’t help that green bonds issued by the private and public sectors alike, in many instances are project- or portfolio-specific, not applicable to the organization in question, at-large.
Clean tech investing: Financing from the public and oil and gas industry
The Canada Infrastructure Bank, the Business Development Bank of Canada, Export Development Canada, Sustainable Development Technology Canada, federal and provincial government environmental funds, the Canadian Pension Plan Investment Board, the Caisse de dépôt et placement du Québec and provincial government business investment funds spread their environment-related business activities too thin.
Much more can be accomplished if the federal government established a national one-stop shopping brokerage entity with a mission to pool together and leverage all available public and private funding, including green bond proceeds. This framework would give all Canadian clean tech firms and citizens alike a chance to participate in the investment process. But federal-provincial collaboration dynamics to do this could prove to a bumpy, and in some cases, an insurmountable obstacle.
There are other more practical alternatives. That Canada is still very much a resource-based economy, need not be an obstacle for a clean tech national coordinated approach.
As illustrated in my article, “Fossil fuel sector contrasts: Green transition engaged, but not enough,” several Big Oil companies are actively seeking partnerships and investments in the green economy. Such firms are reconciling the massive and rapid shift to electric vehicles is on the way, and renewables are cheaper than natural gas/LNG for electrical power generation in most of the world.
Moreover, Big Oil diversification is growing in importance expeditiously because the industry is having trouble getting financing and apprehensive about government climate action. Let’s give the fossil fuel majors Canadian opportunities to put their deep pocket money where their mouth is.
The smaller nonrenewable fuel firms are also feeling the heat to reinvent themselves, bankruptcies are now common among those at the bottom of the supply chain. The former Torchlight, which has since merged with META Materials, used to be an oil and gas exploration company, but has decided to exclusively pursue green investments.
Click on the fossil fuel contrasts article link above for more info on the emerging transition of many oil and gas companies.
Filling clean tech research and integration gaps
However, green Canadian leveraging is not just a question of money. It includes research and development to bridge the gaps for which Canadian firms, especially small ones and start-ups, do not always have the resources.
In the larger context of a Canadian green economy, research support is necessary to lead the way towards the integration of Canadian clean technologies.
The U.S. has a model for this, created during the Obama mandate, called the National Renewable Energy Laboratory (NREL). The NREL has a 327 acre campus in Golden, Colorado, and 2,960 employees representing 70 countries.
If a Canadian-scaled NREL equivalent was to be located in Alberta, it would kill two birds with one stone, support for Canadian clean tech firms and Alberta diversification. It could bring together a clean tech community that could include such diverse groups as the University of British Columbia Clean Energy Research Centre, the St-Jérôme, Quebec Innovative Vehicle Institute and all Canadian private sector clean tech companies, coast-to-coast.
A Canadian version of the NREL could support start-ups too. This is the backdrop for the Shell partnership with NREL regarding the Shell GameChanger Accelerator Powered by NREL, or GCxN. The goal is to provide an incubator to support clean tech start-ups with the financial strength to get these technologies out of the lab, into production and on the market. The Wells Fargo Innovation Incubator IN² in collaboration with the NREL has goals similar to that of the Shell GameChanger Accelerator.
These incubators are critical in light of the fact that 90-95% of start-ups fail.
Barriers or opportunities
Even though most banks have their investments heavily weighted in favour of fossil fuel assets, Morgan Stanley, Barclays Plc and Citigroup Inc. are departing rather rapidly from the Calgary-based financial hub of the Canadian oil and gas sector. Many of the U.S. bank behemoths have made US$1 to US$2.5 trillion dollar commitments for clean tech initiatives by 2030.
What is it that Canadians and their different levels of governments do not understand?
Political will is the main barrier for a Made in Canada green economy that accommodates clean tech firms and citizen investors alike. The federal and provincial governments have an obligation to both compensate for the lack of private funding for Canadian clean tech firms and leverage a little more private financing enthusiasm.
Keep in mind Canada will certainly get caught up in the global green economy transition. The question remains as to whether Canadian clean tech firms will play an active role or will Canada be mostly dependent on foreign suppliers.
With a federal election coming up, now is an excellent time for Canada to offer Canadians possibilities to invest in a domestic green economy.