Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 6 - Evidence
OTTAWA, Thursday, March 2, 2000
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 9:00 a.m. to examine issues relating to energy, the environment and natural resources generally in Canada (Eco-efficiency).
Senator Mira Spivak (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, I wish to welcome Colin Isaacs, who is a representative of the Canadian Environment Industry Association. Mr. Isaacs is the Chair of their National Policy Forum.
Also with us at this morning's session will be Mr. Skip Willis, Director of Climate Change, Energy Advantage.
We are delighted to have these gentlemen appear before us; we invited them because several committee members saw their "Day on the Hill" display in early February.
One of the tasks of this committee is to help bring to the fore businesses that are concerned with solving problems on energy and the environment, such as mining and other activities that can operate with less environmental impact. Such businesses are our hope for the future, and these associations certainly qualify in that regard. Moreover, as some committee members will be attending Globe 2000 later this month in Vancouver, we thought that having these presentations would be a good forerunner for that event.
Finally, we would like to give the witnesses the opportunity to comment on the budget, which set aside $100 million for a sustainable development technology fund, $100 million over four years for technology transfers through CIDA, $125 million for two "green" municipal funds, and $210 million over three years for the climate change action fund.
Gentlemen, we will be happy to hear your comments. Please proceed.
Mr. Colin Isaacs, Chair, National Policy Forum, Canadian Environment Industry Association: It is a great pleasure for me to be with you today and to have the opportunity to address you on the broad topic of eco-efficiency.
As you have stated, I am Chair of the National Policy Forum of the Canadian Environment Industry Association. My company is also directly involved in eco-efficiency matters. We work with corporations and associations in the private sector, as well as occasionally with government departments, to assist them on design and implementation of pollution prevention, eco-efficiency, and sustainable development initiatives.
Having Mr. Willis appear with me today was an excellent choice, because, while my company is involved primarily on the environmental management side of business, Mr. Willis's company is involved primarily on the energy management side of business. Therefore, together we encompass both the environment and energy.
The recent federal budget makes more references to the environment than any budget I can remember in 24 years of being involved in the environmental management field.
The Chairman: Remember the Green Plan.
Mr. Isaacs: Yes, but we actually counted the number of references. Green Plan was certainly an excellent initiative, one that we applauded then and would continue to applaud. Indeed, we should like to see that kind of planning exercise renewed.
Senator Kenny: Is there a correlation between references and activity?
Mr. Isaacs: Time will tell. Of course, there were many references to environment in the Speech from the Throne last fall as well, and we applauded that at the time. It is clear that "environment" is coming back on the public policy agenda. We see that as important and, obviously, we want that momentum to continue.
It is interesting to note that we were one of the few organizations that, in their pre-budget submissions, were not asking for major government spending. Canada certainly needs environmental leadership, but spending by government is no longer a satisfactory measure of good environmental performance. Today we understand that sound environmental performance and good business practices go hand in hand, and that many sound environmental initiatives are cost-effective for business.
Your choice of eco-efficiency as the subject for your hearings today indicates your understanding of the linkage between economic and ecological efficiency. "Eco-efficiency" has been defined as:
... a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and corporate change maximize value-added while minimizing resource consumption, waste and pollution.
The link between environmental performance and economic performance has been the focus of a great deal of attention since the World Commission on Environment and Development, the Brundtland Commission, produced its report, "Our Common Future", in 1987. That report defined the concept of "sustainable development" as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Since 1989, organizations in Canada have joined with others around the world to turn that concept of sustainable development into practical strategies for business and government. Eco-efficiency is an important part of the sustainable development framework.
The origin of the concept of eco-efficiency can be traced back to at least the mid-1970s. At that time, the 3M company introduced a program known as "Pollution Prevention Pays". In 1982, a Canadian non-profit organization, with which I was associated at the time, published a book entitled Profit from Pollution Prevention that described more than 400 examples of Canadian and U.S. companies that had implemented cost-effective environmental initiatives.
In 1991, in the report "Canada at the Crossroads: The Reality of a New Competitive Environment", a well known study on Canada, Professor Michael Porter said:
...stringent standards and regulations for product performance and environmental impact can create and upgrade competitive advantage by pressuring firms to improve product and process quality. Further, standards that anticipate international trends often have particularly beneficial effects. Canada's record in creating more sophisticated demand through strict, anticipatory standards and regulations is mixed. With some exceptions, environmental standards have rarely been at the forefront of international practices, with the result that such industries as pulp and paper are having to undertake substantial investments simply to catch up.
Today, many dozens of business management books and courses focus on the positive linkage between environmental performance and competitive advantage, but, as I will explain in a moment, Canadian industry is still not at the forefront of environmental management performance.
The concept that a company and a country can profit from pollution prevention is not unexpected. Waste, whether in the form of garbage, air pollution, water pollution, or release of hazardous materials, inevitably represents a loss of those raw materials that went into production of the waste, along with all of the inputs -- energy, water and so on -- that were consumed during production of the waste. Eliminating waste means that raw materials are being used more efficiently and fewer inputs are required for manufacture of the desired product.
However, the nature of our economy means that implementation of pollution prevention is not always as simple or as obviously profitable to the company as my example might suggest. Hence, innovative engineering technologies and knowledge-based service industries designed to assist industry and government in achieving the pollution prevention challenge have emerged.
Today Canada's environment industry is a major engine for job and wealth creation. It helps traditional industries achieve their environmental and economic goals, and contributes significantly to Canadian productivity. It is also arguably one of the most important sectors of our economy in terms of enabling our nation as a whole to meet its obligations arising from international accords, such as the Montreal Protocol, Agenda 21 and, most recently, the Kyoto accord.
The environment industry in Canada today consists of over 5,000 companies with annual sales in excess of $19 billion, or 2.2 per cent of Canada's GDP. Canada's environment sector employs about 220,000 people, making it the third largest employment sector in Canada, following pulp and paper and the chemical industry. It is a knowledge and technology-based industry, with 50 cent of the workers having a university degree or college diploma. Environmental companies are located in every region of the country. The industry's exports exceed $1 billion.
Many of Canada's environmental companies add value to society as a whole by providing jobs and economic growth in local, provincial and regional economies. These companies participate in protecting, preventing degradation to and enhancing local ecosystems and improving the quality of life for Canadians by reducing harmful pollutants that may damage health.
However, it is clear to those of us who work in sustainable development and environmental management in the international arena that Canada is not yet a leader in this field. This may already be having an impact on our competitiveness in environmentally sensitive consumer markets, such as those of many Western European nations, and its impact will increase in the future. As the value of the Canadian dollar rises against the U.S. dollar, the importance of cost savings from eco-efficiency will increase for the Canadian economy. Unless we are aggressively implementing eco-efficiency initiatives, including especially energy efficiency, waste reduction and pollution prevention initiatives, we can expect that our products will become increasingly less competitive even in our largest market. U.S. companies are currently implementing eco-efficiency measures at a more aggressive rate than Canadian companies.
One of the measures of eco-efficiency, not a perfect measure but at least illustrative, is the implementation of environmental management systems, known as EMS. The world standard in environmental management systems is known as ISO 14001. As of August 1999, Canada stands 22nd in the world in terms of the total number of companies with ISO 14001 certification; that is well behind Japan, with 2,338 certifications, Germany with 1400, the U.K. with 1,009 and the U.S. with 480. According to my sources of data, Canada had just 100 ISO 14001 certified companies by August 1999. When calculated per unit of gross domestic product our ranking is even worse. We are 34th in the world in terms of ISO 14001 certifications per unit of GDP, behind all our major competitors and behind such countries as Korea, Thailand, Brazil and Mexico.
Some will argue that our poor showing is unfair because many companies have implemented environmental management systems but have not had them certified to the ISO 14001 standard. While there may be some truth to that, our showing in terms of ISO 14001 implementation is so dismal that, even if we had twice the reported number of ISO 14001 companies, we would move only a few places up the scale. To become a world leader in corporate environmental management, and hence to become environmentally efficient and to reap the resulting economic benefits, we need to encourage at least six times as many companies to adopt the ISO 14001 environmental management system standard or its equivalent.
I would add that the rate of implementation in Europe and in the United States is increasing so dramatically that we really need to get behind this approach if we are to remain competitive in terms of eco-efficiency.
It is important for me to note that a number of companies in Canada have chosen to implement eco-efficiency initiatives. I divide these into a number of categories.
One category is those that have a CEO who is ethically committed to being a leader in social, ethical and environmental issues. For those companies, the economic benefit of improved environmental performance is relatively unimportant so long as they remain profitable, but they usually achieve economic benefits in any case.
Another category is those that have experienced, or anticipate experiencing, enhanced environmental risks or challenges -- in other words, those companies that face serious environmental problems. Those companies implement advanced environmental management systems in an effort to reduce the economic impact of those problems. They almost always succeed. Two outstanding examples include Dow Canada and Transalta.
My third category is those that expect to achieve increased market penetration through environmental marketing. The success of this approach in Canada has been mixed, but environmental products have achieved very significant market penetration in Europe and in parts of the United States. Even in Canada, use of recycled content in consumer product packaging has become an industry standard, and few companies dare not include a recycled content logo on their consumer dry goods packaging.
Despite these positive examples, we must obviously ask why Canadian companies are falling behind in environmental performance compared to companies in other countries, if it represents such an economically sound strategy. I believe there are several reasons.
First, there has been insufficient leadership or encouragement in Canada for improved environmental performance within the domestic economy. Encouragement does not need to be financial; it could be such initiatives as improved access to government procurement, often known as "green procurement", mention in ministerial speeches, prestigious awards, et cetera. In the United States, senior political leaders have been explaining the merits of the eco-efficiency approach for several years. It is clear that this has resulted in a higher priority for corporate environmental performance in that country in comparison to Canada during the most recent time period. The same can be said for Western Europe.
Second, business leaders in Canada still expect "command and control" regulations from government and are waiting for government to tell them what environmental regulations must be met. Although Canada is nominally moving away from the command and control type of regulations, the reality is that the process is very slow and business has been burned in the past because early action "voluntary initiatives" have not been recognized when government has introduced mandatory requirements. To a large extent, this problem has occurred at the provincial level, but few business leaders differentiate between being burned by federal and being burned by provincial environmental regulations.
Third, most Canadian business schools are not yet teaching eco-efficiency, and few business leaders grasp the business opportunity that it represents. Similarly, few financial houses give recognition for advanced environmental performance, although that is beginning to change, particularly in U.S. and European capital markets.
Finally, in Canada, some organizations have sought to control and limit the environmental agenda to a much greater extent than in the United States or Western Europe. In those countries, environmental performance has been a factor in domestic competition for at least 10 years, and major corporations are accustomed to the concept of competition based on high environmental performance and eco-efficiency. Developing countries and economies in transition are learning more from the European experience than from the Canadian experience.
On the topic of eco-efficiency, I therefore recommend to the committee, first, that the Government of Canada adopt a green procurement program that gives the advantage to suppliers who can demonstrate advanced environmental responsibility; second, that the Government of Canada implement an environmental regime that gives recognition and encouragement to environmental leadership and voluntary action by individual companies; third, that the Government of Canada encourage the adoption of advanced environmental management systems by Canadian industry in the same way as European and United States government agencies are encouraging such practices; and, fourth, that all Canadian industrial and economic development strategies and programs, whether focused upon the domestic or the export markets, give priority to those companies and organizations that can demonstrate the highest standards of economic and environmental performance.
Senator Cochrane: Thank you for appearing here this morning. On page 2 of your brief you say that many of Canada's environmental companies add value to society as a whole by providing jobs, enhancing local ecosystems, and improving the quality of life for Canadians by reducing harmful pollutants that may damage health.
Is your association involved in any way in developing remedies to reduce pollutants to people in general? I am concerned about people in the areas where there are harmful chemicals, and so on.
Mr. Isaacs: Indeed, many of our companies are actively involved in research and development of new technologies that will reduce air pollution and emissions from industrial plants, waste water emissions, and generation of hazardous wastes. We are also increasingly reaching out to a second tier of companies that, while they may not traditionally be seen as environmental companies because their main business is in another area, are now involved in the development of new technologies that are relevant to their own manufacturing operations, and those new technologies have the potential to be of benefit not just to the one company but to many companies across the country and around the world. So the definition of "environment industry" is expanding quite dramatically to include the research and development of new technologies such as you describe, and that is one reason we applaud the budget initiatives that are giving support to these opportunities.
Senator Cochrane: Are you doing something with companies that have already done damage to the environment?
Mr. Isaacs: Oh, yes. The traditional basis of the environment industry in Canada has been remediation -- that is, cleaning up old pollution problems.
Senator Cochrane: And if they do not clean them up?
Mr. Isaacs: We are not the police force; we are the companies that are providing the technology and the services, the know-how to clean up the problems, and we have demonstrated to government on numerous occasions that the opportunity exists to get problems cleaned up. However, obviously, those who own the problems have to be given some reason to clean them up, and that reason is either in the form of regulations requiring a cleanup or in the form of incentives or encouragement to clean up the problem, thus eliminating or preventing health problems. That is where we have perhaps not been making as much progress as we should like to see in comparison with some other nations.
Senator Cochrane: Mr. Isaacs, your recommendations are not ones that I have not heard before.
Mr. Isaacs: I am delighted to hear that you have heard them before. I agree that they are simple recommendations. Unfortunately, until the Speech from the Throne last fall, I believe our members would have unanimously agreed that environment was nowhere to be seen on the federal public policy agenda. It appears, since the Speech from the Throne, that it is coming on to the agenda, and we are pleased to see that, but it needs a strong push if we are to return Canada to the position of environmental leadership that we held 10 or 15 years ago.
Senator Wilson: For your third and fourth recommendations in particular, do you have any stronger carrots than "encourage"?
Mr. Isaacs: Indeed, there are many carrots. For example, the Government of Ontario has recently announced a program of "emissions trading" for the reduction of air emissions from industrial plants of sulphur oxides and nitrogen oxides. The details of that program are still being worked out, and whether it is a good program or a poor program is hidden in the details. However, at a conceptual level it is exactly the right way to go, because it is providing a powerful economic incentive to clean up air pollution. A company will either have to buy credits in order to continue its existing level of air pollution, which will cost them a lot of money, or, better still, if it reduces its emissions below the cap, it will have something it can sell, and that is a very good way of getting the message before financial managers and chief executive officers that pollution costs money and that cleaning up saves money and, indeed, can make money. So that type of program is one we would strongly support, and there are many more like it.
Senator Wilson: I notice that your recommendations are all to the Government of Canada. Do you deal at all with the provinces?
Mr. Isaacs: Yes, we do. We are the national association. We have member chapters in each of the provinces, and those provincial organizations are the level that deals primarily with the provincial level of government. There is tremendous overlap. I am, for example, a member of the board of the Ontario association as well as of the national association.
Senator Wilson: Is there any movement in Ontario to restore the number of personnel they used to have to enforce regulations, for example? They just stripped the whole thing.
Mr. Isaacs: That is the kind of recommendation we have been making to them on a continuous basis. Enforcement of regulations is absolutely essential. Having regulations without enforcement is worse than having no regulations at all.
Senator Wilson: So your body has only moral authority to make recommendations and it is then a matter of hoping for the best?
Mr. Isaacs: We are an association of businesses. We are, in that sense, similar to many other industry associations, except that we represent those companies that are taking measures to improve the quality of the environment.
Senator Eyton: Mr. Isaacs, I found your paper to be very interesting. First, you focused on the rankings of the ISO 14001. You made the comment that this is not necessarily indicative of the whole picture and that many good organizations may not have been tested. I think that must be the case. Your second list is based on gross national product. I would think that for five or six of those, by any measure of eco-efficiency, the standards are not particularly good. Is there another measure that would be more reassuring to me?
Second, I am associated with Noranda, and Noranda is associated, at least in part, with mining and minerals of one kind and another. In the world of eco-efficiency, mining companies are generally regarded as people with a problem. Noranda, in fact, has made exactly the kind of commitments you are talking about here. They have spent an immense amount of money cleaning up the past. For many years, our capital spending budgets dedicated 75 per cent or 80 per cent of capital spending to cleaning up the past and coming to a standard thought to be the right sort of standard. A total capital budget of approximately a $1 billion dollars a year is serious money. All of that money in the past has, in a sense, no measurable short-term return.
The Noranda people reassured themselves that this capital spending had a long-term return because, if they got on side and could talk about it, they would have better partnerships, more customers, and greater ease of selling their products. That is for the long term, but in the short term that spending is a penalty.
The past, at least in terms of Noranda's operations, has been largely dealt with now to the standard they set for themselves, which I think is a high standard. Their percentage of spending is now down, which of course helps. Their non-return spending probably runs around 25 per cent or 30 per cent of capital spending today, which is less than previously was the case.
The background to all of this was the leadership of a couple of people at and around Noranda. One was the late Peter Bronfman and the second is David Kerr, the current chief executive of Noranda, both of whom made a determined effort to ensure that Noranda was at the forefront of mining companies worldwide. They adopted a decision-making tree that in effect has two tests. The first test is whether something is environmentally friendly and defensible. Is it something with which we can live? The second test relates to efficiency. Will the decision lead to a decent return? It is double test.
In the years that I have been associated with Noranda, no decisions were made where the company was not satisfied on both counts. Perhaps I should not be so generous. In the last 10 years, I cannot remember any decision going forward that did not meet both of those counts.
Moreover, and rather interesting compared to your international scale, Mr. Isaacs, Noranda will not behave in any different way anywhere else in the world. Let me tell you that the standard they have adopted for themselves here and in North America is miles ahead of the standards in at least half of the countries on your list.
The message, I think, is clear: Noranda does take many environmental protection measures. Personally, I wish there were some better measure than the one you tabled today, because Noranda is an exemplar, a leader, and a Canadian company that does not, so far as I know, have an ISO 14001 rating.
Senator Kenny: Was that a question or a commercial?
Senator Eyton: The point is that you must look at charts like that and wonder how accurate they are relative to performance.
The Chairman: It was a question that I was going to ask; I am glad you asked it.
Mr. Isaacs: Noranda is indeed worthy of the information you have provided to the committee. They have been a leader for many years. They were a leader when they were in the forest products business as well. Everything you have said I would strongly support.
I think it is also fair to say, however, that not all companies in Canada's mining industry have positioned themselves as leaders in this field in the way that Noranda has. You are probably more familiar with that than I am.
In terms of indicators, I would make a couple of comments. First, the ISO 14001 standard is an indicator of the number of companies within a country that are implementing these kinds of programs. I indicated in my formal remarks that it is an insufficient indicator, in major part because companies such as Noranda are doing this but are not registering to the ISO 14001 standard. They have very valid reasons for not registering to that standard.
In any country, the number of companies making a move to eco-efficiency, such as you have described, is still a small percentage of the total number of companies. Therefore, we are dealing at the moment with the beginnings of a new movement, and measurement is difficult in that situation. These are not really rankings of countries. These are rankings of companies within a country.
There are other eco-efficiency indicators being developed. They are all somewhat inadequate, and, rather than going into a lot of details, perhaps I should leave it to say that I would be happy to provide the committee with more detail in writing.
In no case, however, are Canadian companies yet, as a collective, leading in the world. Europe, Japan, and the United States have more leaders than Canada, per whatever indicator one wants to use. That situation does not take away from the leadership of companies such as Noranda, which are leaders. Noranda is certainly a world leader, but the Canadian corporate community as a whole, including Noranda and others, unfortunately, is still not as far ahead as we would like to see. We can still get there.
Senator Christensen: A number of years ago, I chaired a board that was looking into and fighting a hazardous waste site in the Yukon. That went on for a couple of years. Where do we stand in Canada in developing industries that deal with the recycling of waste materials, not hazardous wastes only, but waste materials generally, and where do we stand in dealing specifically with hazardous wastes and their disposal? Where does Canada rank in those areas?
Mr. Isaacs: Canadian companies have technologies for the recycling, elimination and safe disposal of hazardous waste materials that are equal to any in the world. Indeed, in some areas we are leaders. Therefore, the technologies do exist. However, the record is somewhat mixed on how we are handling waste disposal overall. Some wastes are being handled very well. Some are perhaps not being handled as well as they could be. In other words, there are better technologies available that we are not using in all parts of the country.
In terms of the management of hazardous wastes overall, our association does not have a position. Clearly, we would like to see Canada move to the best available technologies for the management of all hazardous materials and for the elimination of the production of hazardous wastes, where that is environmentally and economically possible.
Senator Christensen: Because of transportation distances and so on, the costs in our area for recycling bottles, paper and other recyclables and the costs of transporting hazardous wastes are very high.
Mr. Isaacs: One of the issues associated with cost is the way we actually do the accounting. Unfortunately, the way we do the accounting often leads to conclusions like the conclusion you came to, that the costs are high. However, when the full costs are taken into account, including the environmental costs, the costs to public health, the costs to communities of mismanagement of hazardous materials, I think we can demonstrate that costs of proper management are almost always less than the costs of improper management.
Our accounting systems are often not well designed to show the full costs. We tend to look at the cost to one player, such as the cost to municipalities, but if we looked at the whole cost structure, we would see quite a different picture.
Senator Christensen: Another problem is selling that to the taxpayer.
Mr. Isaacs: We find taxpayers are often very supportive of sound environmental practice, but there is a communication and education job to do. There is no doubt about that.
Senator Taylor: A moment ago, Mr. Isaacs, I was going to jump in and defend our mining engineers, but Senator Eyton did a pretty good job of getting there, at least halfway. We could blame him for everything. I might add that I have a granddaughter who is a mining engineer. She goes around the world cleaning up the messes I made 20 years or 40 years ago.
There are two charts in your paper. One, prepared by the German Federal Environment Agency, shows the number of ISO 14001 certified organizations by country, and Germany ranks second. The other chart was prepared by the Hungarian Association of Environmentally Aware Businesses and shows ISO 14001 certifications per unit of GDP, and Hungary comes in second.
Is it possible that you could create a chart listing us in second place?
Mr. Isaacs: I should first like to say that Golder Associates are among our members and we are delighted that your granddaughter works for one of our member companies.
Statistics and data in the environmental area are quite difficult. Unfortunately, Canada does not always collect as much data as we should. One of the difficulties in the area of ISO 14001 registrations is that there is no central registry. Therefore, these data are based on the voluntary provision of information. We have verified the data in these two tables with the Standards Council of Canada, which is doing work in this field. Apart from the fact that they will argue that there have been quite a number of registrations since August 1999, but that they will make the point, with which we concur, that this is not a comprehensive look at the number of registrations in Canada and does not include, as Senator Eyton noted, many companies that are doing even better than ISO 14001 but that have not bothered to get certified, we agree with the numbers.
We could in fact put Canada in a table that shows more environmental performance than this overall. In fact, the OECD does some rankings of environmental performance at a national level, and Canada, in those rankings, tends to come out around the middle of the pack of G8 countries. So we are fourth or fifth in the G8, but still behind the leaders. I dare say that most Canadians would like to see Canada resuming the position of leadership in environmental performance globally.
Senator Taylor: What is the position of your organization on tax laws that encourage environmental efficiencies? I have a couple favourites that even my own government has not instituted.
First, if, for example, you dig a hole in the ground to extract oil or coal, which are inherently dirty, you can issue flow-through shares, which are a write-off for the company. However, if you build windmills or work with solar energy, you cannot issue flow-through shares. That is a significant disadvantage to environmental companies.
Second, in my opinion, our tax laws are back in the 1920s with regard to trees. If a farmer converts marginal farmland back to trees, he is at a tax disadvantage. Our tax laws still promote the cutting of trees to gain farmland. If a farmer plants a tree, he is not allowed to write off that cost, because they will not result in a realizable profit in his lifetime.
Have you any suggestions with regard to tax laws to improve our environment?
The Chairman: As a supplementary to that, have you seen the green alternative to the budget?
Mr. Isaacs: We make a submission to the finance minister each year on flow-through shares for investment in environmental activities. We have made exactly that recommendation to the Finance Minister and we strongly encourage your committee's support for those kinds of initiatives.
Senator Taylor: It is blissfully ignored.
Mr. Isaacs: We have made recommendations on changes to capital cost allowance and we are delighted to see some movement in that direction in this year's budget. That is a very positive move that will encourage polluters to invest in cleaner technologies to reduce or eliminate the amount of pollution they produce. We are very pleased to see that in the budget.
We have not made a specific recommendation on trees, probably because not many of our member companies are involved directly in forestry. There are other associations involved in that field.
Senator Taylor: There are processing companies in the United States that buy pollution credits from farmers. We do not even have that system in Canada. It is a shame when your company can get pollution credits abroad but not in your own country.
Mr. Isaacs: My company works on behalf of Canadian clients investing in trees in Chile and Brazil. Your point is well taken. We should be doing that in Canada too.
Finally, on green budget proposals from the National Round Table on the Environment and the Economy, and other bodies as well, many of those have been endorsed by our members and we have included those in our pre-budget submissions.
The Chairman: Perhaps we ought to have a CBC-sponsored town hall with the green budget people and Paul Martin.
Senator Finnerty: Do you know how the U.S. mining companies rank?
Mr. Isaacs: It is always very difficult to rank an entire industry sector. In fact, my own preference is to desegregate and look at the leaders and then look at the followers, or, worse still, those at the bottom of the pack. There is a tremendous spread of performance within sectors such as mining. The leaders are very similar to Canadian leaders such as Noranda. I would not want to give an overall assessment of the sector. It varies from company to company. However, there is a stronger concept in the U.S. industrial economy as a whole that companies should do as Noranda, Alcan and others do, and that is apply domestic standards in their operations around the world. That has been entrenched for a longer period of time in the U.S. situation, perhaps because of their legal requirements.
Senator Finnerty: Is it possible to check the record of mining companies in the U.S.?
Mr. Isaacs: There is an increasing number of lists that rank the environmental performance of companies. They are generally being prepared by ethical investment funds and other agencies that are looking at investing money. If it is a public company, one could certainly get information as to how the company is ranked from those kinds of investment funds.
Mr. Skip Willis, Director, Climate Change, Energy Advantage: I should like to expand on some of the comments made by my colleague Mr. Isaacs. We are seeing some important market drivers that are starting to have an impact on corporate attitudes and behaviour and the development of corporate strategies around the issues of sustainability. I want to focus on four current developments to demonstrate this trend.
In the package of material that has been distributed to you, the document marked "Appendix A" is a recent report from CIBC World Markets. Jeff Rubin, who is among the most respected economists on Bay Street, authored the report. In his report, Mr. Rubin focuses on the Kyoto Protocol and the challenge that Canada faces in meeting our Kyoto commitments. On the last page of his report, he identifies companies that would be winners and losers on what he refers to as the Kyoto scorecard.
The significant point is that greenhouse gas emissions are starting to appear on the radar screen of the financial markets. Nothing drives corporate behaviour faster than the perception that the markets are watching. In my daily business, I consult to private sector corporations on climate change issues. From the work that we have done, it is clear that some corporations face a major challenge in reducing their greenhouse gas emissions to the Kyoto target of 6 per cent below 1990. I am convinced that as we move towards the first compliance period, starting in 2008, the potential emissions liability that corporations could face will become an increasingly important concern of the financial markets. I also predict that within three to five years, emissions liability will become a line item on corporate financial statements because the dollar value of emissions liability will be established through a robust credit trading market.
Another driving factor is the Dow Jones Sustainability Group Index, which is also included in your material. Dow Jones established their sustainability group index to measure the sustainability of the operating and management practices of major multinational corporations. They developed a series of 73 questionnaires specific to industrial segments, and they administered those questionnaires to 2,000 corporations. Based on the answers provided, each of the corporations was rated on a scale of 1 to 74 for their overall sustainability within each industrial segment. They selected the top-rated sustainability companies, representing up to 15 per cent of the total market capitalization of the companies surveyed within that sector. They compared the market performance of these high sustainability companies to the market performance of the Dow Jones group index for each industrial sector. The projection was done retrospectively to 1993. Over the seven-year period, the sustainability group index outperformed the group index by approximately 25 per cent. That performance is shown in the graph that you have in your material marked Appendix B.
I would want to qualify that information on two points. First, the sustainability rating was done over the past two years and then projected backwards to 1993. There is, therefore, no certainty that the companies had had an equally high sustainability rating in the years before they were rated. In addition, on a global basis, a sample of 2,000 corporations is small for establishing a high level of statistical reliability. The representatives of Dow Jones believe that this data is indicative rather than predictive. Their work continues.
The significant point is that sustainability in terms of operating and management practices is being measured according to a consistent and statistically accurate methodology. As the database expands, it is highly probable that sustainability will come to be accepted as one predictor of stock market performance. To the extent to which this happens, it will, I believe, become a self-fulfilling prophecy. If investors believe that sustainability is a predictor of market performance, they will invest in companies with high sustainability ratings and sell the shares of companies with low sustainability ratings. Their investment behaviour will drive the stock market performance that it anticipates. Again, the critical point is that market sensitivity on issues of sustainability will have a significant impact on corporate behaviour.
This trend is further reinforced by the development of the sustainability reporting guidelines prepared by the Coalition of Environmentally Responsible Economies. This global reporting format was developed to help corporations prepare reports on the sustainability of their operations in a consistent manner. There are three aspects to sustainability as defined in these reporting guidelines. These are environmental sustainability, economic sustainability and social sustainability.
The aspects of environmental sustainability are largely taken from the ISO 14000 series standards that Mr. Isaacs has already discussed with you in some detail. The economic sustainability is a slight variation on the financial reporting that we are already familiar with. Social sustainability refers to the relationship between the corporation and all of its stakeholders, including employees, suppliers, shareholders and the communities where the corporations operate. This is a global initiative, and it is the hope of the Coalition of Environmentally Responsible Economies that this reporting format will become accepted in the same way that corporations currently prepare annual financial reports. This year, 20 multinational corporations, including Dupont, General Motors, BP Amoco, and others, are test reporting on this format to confirm its applicability.
Information contained in these sustainability reports will become grist for the analysts' mill in predicting future market performance. Each of these initiatives, although early in the development stage, indicates a growing awareness and sensitivity on the market's part to sustainable performance. These are the market drivers that need to be recognized and reinforced by government policy so that Canadian corporations can capitalize on this growing awareness rather than being victimized by it.
The final document I should like to reference is the Global Leaders of Tomorrow Sustainability Index. This index was presented at the recent World Economic Forum in Davos. The Global Leaders of Tomorrow Environment Task Force developed it. The prototype index, covering 56 economies in 64 data categories representing the spectrum of pollution control and natural resource management challenges, marks a first step towards developing a benchmark for gauging environmental sustainability based on competitive governmental and societal performance.
The intent in developing this environmental sustainability index is to provide a format at the national level to report the sustainability of economic performance. It is the hope of the forum that this index will become routinely reported on a national basis in the same way as gross domestic product or the consumer price index is reported.
While the index is still in the developmental phase, the pilot analysis seems to suggest that efforts to promote environmental sustainability do not have to come at the expense of competitiveness. In fact, most activities with high environmental sustainability index scores also have a high rank on the global competitiveness index.
The preliminary conclusion is that environmental sustainability is compatible with economic growth. There is some suggestion in the data that investment in environmental sustainability leads to higher competitiveness. However, more analysis will be required to confirm this conclusion. It is interesting to note in the material provided to you, marked as Appendix D, showing the relationship between sustainability and competitiveness, that national economies that score high on sustainability score high on competitiveness, and, conversely, national economies that score low on sustainability score low on competitiveness.
What does all that mean in terms of the appropriate role of government in developing environmental policy? Some might argue that, if the market is going to drive environmentally responsible behaviour, the government could stand aside and let the market forces work. Although I am a strong believer in the free market, I would not support this hands-off approach. It is important that the government send clear messages to the business community to reinforce the trends that we have identified in the marketplace.
First, in terms of moving Canada towards meeting its commitments under the Kyoto Protocol, it is critical that the government institute a National Credit for Early Action Program to reward companies that, on a voluntary basis, have invested to improve their energy efficiency and reduce their emissions of greenhouse gases. A necessary part of the credit for the early action program will be a national registry of credits that will in turn contribute to the development of a robust credit trading market. This market is important, because it rewards companies that take appropriate action and provides the opportunity for the credits to be monetized.
I recognize that emission credit trading has been characterized by its opponents as buying permission to pollute. By way of analogy, I would suggest that on a micro-scale the human body is an ecosphere in the same sense as the planet's ecosystem. I recently visited my family doctor for my annual check-up and, at the end, as he has on many previous occasions, he suggested I would be a lot better off if I lost 25 pounds. He made that comment because he recognizes that, if that 25-pound burden is removed from the system, the system will operate more efficiently. He did not suggest that I should lose 12 pounds off my stomach, 3 pounds off each leg, and so on, because he recognizes that, so long as the total weight loss is achieved, the system will benefit.
In the same sense, if Canada can reduce its emissions of greenhouse gases to meet our Kyoto commitment, the precise manner in which we achieve those reductions is irrelevant, so long as the overall reductions are met. The key point is to have a transparent system based on clear rules and third-party verification so that we know that the target reductions are actually being met.
There is also an opportunity for the government to be more aggressive in setting and enforcing emission standards of all kinds. There is a new phrase that has emerged in this debate: non-product output. Historically, this has been referred to as waste. Non-product output recognizes that corporations are producing output for which they are receiving no compensation, but for which, in fact, they are incurring costs of control or disposal. Long-term competitive advantage is accruing, and will continue to accrue, to companies that minimize their non-product output. If your non-product output is 70 per cent of your input and my non-product output is 20 per cent of my input, then you cannot compete with me. You will have to keep buying that extra 50 per cent of inputs in order to match my production. Because I have better managed my non-product outputs better, I am going to be way ahead of you.
Government can, and should, reinforce this by instituting and enforcing clear rules on air, water and solid waste emissions.
Mr. Isaacs and I are part of a technology-based, rapidly growing, environmental industry that can aid Canadian industry and export to the world markets technology-based solutions that can minimize non-product output and enhance productivity and competitiveness, and, at the same time, improve community health. It is what we refer to as our "triple win" agenda.
The Chairman: That was a very interesting presentation. I notice, however, that there is no mention here of comprehensive accounting -- accounting in which there is, I believe, an international effort that takes into account externalities. Perhaps, in response to some of the questions you are asked, you could comment on that.
Senator Taylor: My first question is a little tangential, but it is something someone from the mining industry would be up on. When you talk about sustainability in the natural resources industry, that usually means finding reserves and developing reserves to equal your production. However, the market in the last number of years has put a big emphasis on cash flow. In other words, for the company that gets in there and exhausts the reservoir as fast as possible to get cash flow, the market trades it at so many times earnings. There was a time -- and I am older than most of you people -- when people did look at reserves, but that went by the wayside, and yet reserves are very much a part of sustainability.
With the emphasis on cash flow, two things can go wrong. The first is that you have a tendency to forget the environment in order to extract the resource as fast as possible, and the second is that you do not do the work and research that is necessary to go after the marginal ore or the marginal oil that would build up your reserves. Of course, that is all led by income tax laws. We can do all the talking we want about this and that, but I am a great believer that taxes control your environment and your style of living.
Taxes are very fundamental in the forming of an individual, and our way of forming individuals in Canada has been to get out there, cut those trees down, dig that ore out, get that coal, get the cash, and get out as fast as you can. That is the way our tax laws are designed.
What do you suggest to try to change the tax laws to make us look at sustainability in a better way?
Mr. Willis: Mr. Isaacs covered much of this, but certainly an accelerated capital cost allowance that would provide incentives for purchasing environmental technology would be a step in that direction.
It is also reasonable for the government to challenge the environmental industry to demonstrate the economic return on the technologies that we have available. We are not looking for either charity or command and control regulations that would be detrimental to industry performance. We have technologies that improve the productivity and competitiveness of the companies we are selling those technologies to, and it is reasonable to challenge our industry to prove that we have the numbers to support those contentions. Where we do have the numbers to support those contentions, then an accelerated CCA would certainly be beneficial.
I agree with you that the tax system was designed a long time ago to encourage a pattern of behaviour that is probably no longer appropriate, but it is very difficult to wean industries off that.
Senator Taylor: I am sure you are aware that, with respect to carbon dioxide emissions, it is economically beneficial for a Canadian to go down into the U.S. to capture carbon dioxide from oil and gas wells, pipeline it all the way back into Canada, convert it into carbonic acid, and pump it into the ground to remove more of our oil than it is to capture our own carbon dioxide to put into the ground. In other words, there is a set of rules in the U.S. that encourages us to go down there and capture their carbon dioxide to bring it up here to use rather than to go after our own carbon dioxide.
Mr. Willis: I am certainly not familiar with the details of the petroleum industry, but I can say, from the perspective of greenhouse gases, which is my primary area of expertise, that the capture and conversion of carbon dioxide in Canada will get you exactly the same greenhouse gas credits that it will get you if you do it in the U.S.
Senator Taylor: That is not the point, though. The point is that the amount of money that you put into the carbon dioxide machinery, on which they can get a write-off in the U.S. that you cannot get here, is so much that you can afford to build a pipeline all the way back to Canada. That is what is happening in the Estevan oil field. We are taking carbon dioxide from Wyoming all the way to Estevan in order to get our oil out, while our own carbon dioxide in Alberta and Saskatchewan is going off in the air.
Senator Eyton: You both talked about the marketplace. Mr. Isaacs talked about ethical funds, and Mr. Willis talked about sustainability companies and the need for them to be recognized. I know that there have been many such funds in the U.S. and there may be one or two small funds here in Canada. I should like to get some information from you on the number of those and their success.
The background is that nothing dictates human behaviour better than financial reward, and the markets make all things transparent. Your argument is that, if you are a sustainable company, you are going to be a better performer. It is a bit difficult these days, because NASDAQ returns are so phenomenal that everyone else looks bad, but let us consider a more normal environment. Companies that meet certain standards or are invested in by ethical or green funds, it seems to me, should have a great advantage. That would spread. Other people would try to emulate them and then good practices would follow from that. What are we doing in Canada about green funds or ethical investing, and what has the record been?
Mr. Willis: We are not doing enough is the quick answer. There are some green funds. I know that Mr. Isaacs sits on the advisory board of one fund that got into Ballard Energy early and has done very well.
The Chairman: And will do better.
Mr. Willis: Yes. One of the realities is that there is an element of good luck, as you are aware, in those kinds of calls.
The point that I was trying to make in my presentation is that, to the extent that we see this work being done by Dow Jones, and to the extent that that gains momentum, we are looking at an influence on investment behaviour that I believe will go far beyond green funds or ethical funds, really to the point of saying that, within an industrial sector, the sustainability is a strong indicator of which companies are going to be the best performing companies within that sector. Are they going to compete with the dot-coms? Certainly not in the short term, but if you want to have part of your portfolio in resource industries, in heavy industries, and in other things like that, then that becomes a better predictor, and as sustainability becomes more accepted as a measure of what that performance is likely to be, as you are aware, it will become a hotter topic around the board table.
Senator Eyton: What are the examples in Canada? You mentioned the one article by Jeff Rubin at CIBC World Markets, but can we talk about the funds and some practical examples here in Canada?
Mr. Isaacs: Earlier this year we counted five ethical funds in Canada. VanCity runs the oldest, and probably the biggest, and there are others now being started up by some of the major investment brokers. There is also the Clean Environment Fund, which is the one to which I serve as an adviser. There is one new sustainable development fund that is just coming up to its first year. I cannot remember their names off the top of my head, but I can certainly provide you with a list of those.
Senator Eyton: Are they getting a decent response?
Mr. Isaacs: In terms of performance, the oldest is only five years old, and their performance over that five-year term has been as good as the performances of market funds. It is early days. One of the challenges is that sustainable development is a long-term strategy, as you indicated with the example of Noranda. Therefore, getting in as companies are beginning to implement these kinds of programs and staying with them will produce the best possible return.
There has not been the leadership or promotion of these kinds of funds in Canada that we have seen in the United States. In the United States, obviously the resource pool is much larger so that the degree of marketing can be much more effective, and also leadership from individuals such as Vice-President Al Gore and some major environmental organizations has put these things on the map for ordinary investors.
In Canada, I think you would find that a typical broker is still not wholeheartedly encouraging the individual investor to go into these kinds of funds. That is an area where some independent leadership and some independent advice could greatly assist the individual investor to understand the benefits of this approach.
Senator Taylor: I make a connection between pollution and ownership of the natural resource. Canada is somewhat similar to Russia, in that the state, in most cases, owns the natural resource. Provinces, by the very nature of our confederation, similar to the provinces in Russia and some other places, derive a great deal of their income from natural resources, so they have a vested interest in turning a blind eye to pollution, if that will increase production and royalties. As a general rule, royalties and the rent you pay for a natural resource are predicated upon the expenses that you must incur to clean up the natural resource in order to sell it.
If the government allows you to put tonnes of sulphur into the air, or to put cyanide into the creeks, you can make more money. Of course, the government can blame the corporations for the pollution even though government laws allow it. In the U.S. there is private ownership; so the government is much more vigilant in ensuring that farmers do not dump salt water into the ditches.
To what extent is pollution due to the lack of publicity given to the willingness of our provinces to exploit their resources?
Mr. Willis: That is certainly a difficult question in terms of looking at the conflict of interest that the provinces face. From our perspective, we see a growing level of public concern that is driving government regulation in terms of pollution-related issues. There was, for example, a recent announcement in Ontario on air regulations relating to SOX, NOX and the other smog precursors. That type of thing is driven by the fact that upper respiratory disease in children in Southern Ontario has increased threefold in the last 20 years. As a consequence of that, there are increasing levels of public pressure. In the absence of public pressure, I am sure that there is some of the behaviour you speak of. It goes back to the underlying economics. I believe that there is some cause for optimism, in that we are starting to see economic measures that will begin to influence behaviour in the opposite direction.
Senator Taylor: Do you believe that organizations such as yours and Mr. Isaacs' are exposing governments' lack of environmental backbone, provincially and federally, in their haste to balance budgets by selling what God put in the ground?
Mr. Willis: Our organization is quite broadly based. Certainly within our membership there are significant numbers of people who, largely out of an interest in marketing their own technology, are quite vociferous on issues of pollution.
The Chairman: I have a couple of questions arising from that. It seems to me that there is a difference between the new economy and the old economy. There is a big lag. British Columbia, for example, still feels that its major economic engine is forestry, whereas it in fact is not. It is high-tech. It seems to me that the forestry industry is one in which sustainability, competitiveness and profit are not linked. One of their huge trees may be worth $40,000 or $50,000, but it is not as valuable to cut second growth.
In Alberta and Quebec, in particular, the impact of forestry, drilling for gas, and so on is unbelievable, and I do not think that most people are aware of that. There is such a shortage of wood in Quebec that the forests of the Northeastern United States are being denuded in order to export wood to Quebec.
What does it take to get people to recognize the differences between the new and the old economies? Resources are certainly not a huge percentage of export trade.
What are the strategies, in the forestry industry in particular, to get all the externalities put into the accounting system so that the real cost of what is being done shows up on the bottom line?
Mr. Willis: The forest industry is critical in the whole greenhouse gas debate, because forests are significant sinks. They absorb the carbon dioxide that is problematic. This relates back to my comment about the need for a credit for early action program, but if we had a credit for early action program and comprehensive reporting requirements so that the forest industry was quantifying the impact of the deforestation, and that was something that they had to reflect, then, by the same measure, you would be creating the incentives for reforestation so that there would be high levels of replanting.
There is very responsible behaviour on the part of many segments of that industry, but there are also bad players. There is no penalty to the bad players in the short term, although there is more of a penalty in the long term, because they are not required to report on that kind of comprehensive basis. Putting those kinds of measures in place, putting those incentives in place, in our view, will do more to drive the kind of corporate behaviour that we are looking for, as opposed to the command and control regulations where, consistently at the provincial level, we experience problems of enforcement.
The Chairman: That is a major problem. However, the point is that there is not even sustainability, let alone environmental sustainability, because there is a shortage of wood supply in many areas. It is proceeding so rapidly that the predictions are that we will soon be running out of wood, as well as these other things.
How do you instill a sense of urgency, or even a reasonable timetable, for governments and businesses to look at these practices and assess them, not only on environmental grounds but also on economic grounds? It seems to me that this is an area in Canada where common sense has gone out the window. It is mining the resources. Maybe you would challenge that statement.
Mr. Willis: I think we have some experience in this country with taking that sort of approach. We very calmly kept fishing until there was nothing left in the nets.
The Chairman: That is a good example, and that is what is going to happen in forestry.
Mr. Willis: People came to the conclusion that that was not a sustainable practice.
Senator Taylor: Well, at least the fishermen who took all the fish out could not do as our large corporations can do, and use the gigantic vacuum hose approach, like they did to take the trees in Quebec, the nickel in Newfoundland and the oil in Alberta, and when they are done they just move their suction hose over to West Africa, or some other place, and play one off against the other. That is the sustainability that we are talking about. For the trees, they did not have to wait for a sustainable tree; they just went off and found another area, and now that is all gone too.
How do you get people to adopt sustainability within Canada, if they can move off around the world with their vacuum hoses?
Mr. Willis: I am not in a position to talk in specific terms, because of the work that I do for corporations in that industry, but I can tell you that, with respect to the greenhouse gas impact of significant deforestation, if there were a requirement for these industries to report in terms of their total greenhouse gas emissions, and deforestation would be a big part of that, you would be adding a liability to their balance sheet on an annual basis that would be in the tens or hundreds of millions of dollars. You would be changing the economics of those kinds of practices.
That is well within our capacity, if we are prepared to step strongly forward in that direction. I can tell you from my own experience that there are companies that are going through that process today, are specifically quantifying exactly what their current position is and developing strategies to make sure that they are on side. Reforestation and aforestation are large parts of that. It is like your earlier examples about mining and oil and gas, if you want the behaviour, put the incentives in place that drive the behaviour you want.
The Chairman: There is some debate as to the figures, although less and less. There is some movement now because all the wood is gone in the good areas of the boreal forest. There is a movement up in the northern latitudes, where the turnaround time might be 150 years, if at all, because nobody knows whether those trees are going to grow back. Companies are operating on the basis of a 60-year turnaround.
Are you doing research in that area to look at the data, to look at the factors involved so that you can inform companies and governments that these practices are absolutely unsustainable beyond any measure? And that does not even take into account the water problems. In Alberta, all of the lakes are being completely ruined because of the openness and the fact that they are not protected from the UV rays and so on. There are all these problems and I am not sure that either governments or companies are really aware of them, because I do not think they would do that, if they truly understood the impact.
Would you please tell us what sort of research, education and outreach you are doing in that area?
Mr. Willis: I can only answer that question in the very narrow context of the work that I am aware of and involved in. At a corporate level, there are companies that are taking a very careful look at that, but, as I say, I am not in a position to discuss which companies fall within that framework.
Mr. Isaacs: I think the question you are asking us is indeed the multibillion-dollar question facing Canada. How does one cause change? Yes, individual environmental companies and our association are looking at exactly those kinds of things and putting that information forward to companies in the sector. Because we are seen as having a vested interest, and it is obviously in our economic interest if companies adopt the kinds of strategies or technologies we propose, we are not credible.
If one looks at what has happened in the past, either we hit the wall, as we have discussed with regard to forestry, or we allow others to cause mayhem, as happened in the pulp and paper industry, for example, and was a very significant factor in causing a major change for Macmillan Bloedel from the old economy to the new economy.
That works, but it is not the way we want to go. We look for leaders. As Senator Eyton suggested earlier, Noranda moved in this direction because of the leadership of senior executives within the company. The same can be said for Shell, Dow Canada, Xerox Canada and many others.
We are here today asking you to help us find Canadian leaders who can convey the message of the new economy to Canada, to Canadians. Yes, money helps, but more than anything else we need to get the dialogue going so that Canadians are engaged to understand that we are no longer hewers of wood and drawers of water; we are protectors of forests and protectors of water resources.
The Chairman: Right. Also, we need sound science.
Mr. Isaacs: Yes, indeed.
The Chairman: I thank you both for your presentations.
The committee adjourned.