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CANADIAN CLEAN TECHNOLOGY INDUSTRY REPORT2017

SYNOPSIS

Analytica Advisors111 Russell AvenueOttawa, OntarioK1N 7X2 CANADAT 613 866 9157E [email protected] www.analytica-advisors.com

© 2017 Analytica Advisors Inc.

2017 Canadian Clean Technology Industry Report – Synopsis

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Canada’sLow-CarbonEconomy,CleanGrowthandtheCanadianCleanTechnologyIndustryOnitssurface,Canadaappearstobeundergoingsomethingofaclean-growthRenaissance.InMarch2016,thefederalgovernmentlaunchedajointfederal-provincial-territorialWorkingGrouponCleanTechnology,InnovationandJobs.Acrossthespanofsixmonths,thegroupengagedwithawiderangeofstakeholdersintheclean-technologyecosystem—fromcompanies,toaccelerators,toinvestors,toprovincial-territorialandfederalagenciesanddepartmentsfocusedoninnovationandclimatechange.Theteam’sfindingsinformedthePanCanadianFrameworkonCleanGrowthandClimateChange,andyieldedanumberofcommitmentsinthe2017budget.Chiefly,Ottawaallocated$1.8billionofscarcefederalpolicydollarsoverthreeyearsforequityinvestment,debtfinancingforworkingcapital,venturecapital,andlarge-projectfinancefocusedoncleantechnology.Inadditiontothisdirectsupport,inrecentmonthsOttawahasintroducedneworexpandedregulationstoaddressgreenhousegasesinthetransportation,builtenvironment,andelectricitysectors.Theseregulationswillnotonlyreduceemissions,theywillalsohelptoleveltheplayingfieldbycorrectingmarketfailures,improvingtheviabilityofclean-technologyenterprises.Meanwhile,provincialgovernmentsandcitiesacrossthecountryaretakingstockandestablishingpoliciestoachieveclimateobjectivesbyprioritizinglowcarboninfrastructure,pricingcarbon,andinvestingineconomicdiversificationinareassuchascleantechnology,agriculture,andartificialintelligence.Canada’sclean-technologyindustryisthenation’sfirstnewindustryofthe21stCentury.Itdirectlyemploysmorethan55,000peopleinmorethan800firmsthatusemarketforcestoadvancesocialandenvironmentalgoals.Itisahighlycompetitive,innovation-ledindustrythatiscommittedtoexportingandinvestingheavilyinglobal-scalecommercialization.Canada’scleantechnologycompaniesareworkingtobuildoutcompetitivepositionsinfast-growingglobalmarkets.Inlieuofdividends,sharebuy-backs,orexecutivebonuses,theyareinvestingintalent.Theyarecreatingandcommercializingintellectualpropertyandsolutionsthatprotectorrepairecosystemswhilegrowinganddiversifyingoureconomy.Theyareenablingeconomicrenewal.TheCanadiancleantechnologyindustrycanplayakeyroleintheglobalracetofightclimatechangeandhelpCanadameetits2020commitmentsundertheParisAgreement.AnditcanemploymanyCanadiansingoodjobswithgoodfutures,puttingtoworksomeofourbrightestandbest,andbuildingtheknowledge-basedeconomythatCanadianshopeandstrivefor.Andyet,despitethisimpressiveprogress,ourdetailedanalysisoftheindustryfindsmuchreasonforconcerntodayandintothemediumterm.Inshort,Canada’sclean-technologyindustryisawashinredink.Itsfirms,andtheknow-howandintellectualproperty(IP)theyhold,arevulnerabletoforeigntakeovers.Despiteunprecedentedinterestandengagementfromprovincialandfederalgovernments,Canada’slow-carbonRenaissanceisverymuchontheropes.ThesectorneedssmartnewpolicyfromthepublicsectorandengagementfromBayStreettobuildmarketsforlow-carbonsolutions,unlockprivatefinance,andsecuretheprosperitythatshouldaccruefrominvestmentinlow-carboninnovation.


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2017CanadianCleanTechnologyIndustryReportThe2017CanadianCleanTechnologyIndustryReport,compiledandpublishedbyAnalyticaAdvisors,concernsitselfwiththepeopleworkinginthegrowingnumberofbusinessesthatmakeupthisindustry.The2017Reportbuildsonsevenyearsofresearchconductedatthefirmlevel,thisyearonanationalcohortofover800cleantechnologycompanies.Atthecoreofthisannualreport,andthefivethatprecededit,arethecompaniesthatparticipateintheresearch.Thisyear148companies—18publicand130privatefirms—sharedtheirconfidentialfinancialinformationandplanswithAnalyticaAdvisorstobenchmarkthemselvesagainsttheirpeers.WeconductedtheresearchforthiseditionbetweenAugustandNovemberof2016,withcompaniesreportingtheirresultsfor2015andtheirplansfor2016and2017.Overthepastsixyears,341companies—or40percentoftheindustry—haveparticipatedintheresearch.Wewouldliketothankeachofthesefirms.Ittakescouragetobothreportonachievementsandreflectonhardchoices.Buttheprimaryresearchtowhichthesecompanieshaveadded,andwhichiscommunicatedinthisreport,representsauniquecontributiongloballytotheacademic,privateandpublicdomains.Throughthissharingandbenchmarking,wecandrawlessonsonhowtobuildnewIP-basedindustriesinthe21stcentury.WehaveonceagainofferedananalysisofCanada’sglobalmarketsharerankingamongthetop25exportersofmanufacturedEnvironmentalGoods,basedonglobaltradereports.Thisyear,wehaveorganizedthisanalysisaccordingtotwotimeperiods.Thefirstbeginsin2001,theyearChinajoinedtheWorldTradeOrganization,andendswiththeglobalfinancialcrisisin2008.Thesecondperiodspans2008to2015.Itincludesananalysisandrankingofthechangeinglobalmarketsharefortheseexportersduringtheseperiods.InanefforttoprovideamorerobustpictureofCanadianinnovation,thisyearwe’vealsoincludedananalysisofCanada’sglobalrankwithrespecttopatentapplications.ThisanalysisbuildsonareportbyCycleCapitalandSustainableDevelopmentTechnologyCanadaandwasperformedusingpublicdatafromtheWorldIntellectualPropertyOrganization(WIPO)fortheperiodfrom2011to2015.Asalways,wepreparethisreportfortheclean-technologycompaniesthatparticipatedinourresearch;electedofficialsandtheiradvisorswithresponsibilityforfinance,innovation,infrastructure,procurement,trade,energy,andenvironmentandclimatechange;aswellasourprivate-andpublic-sectorsubscribers.Whatiscleantechnologyandwhatisacleantechnologycompany?Cleantechnologydoesmuchmorethanproducerenewableenergy.InCanadaalone,theinnovation-basedfirmsthatmakeuptheindustryreportedmorethan$13billioninrevenuesandoperateinoneoftensectors.Thesesectorsformthebasisofthe2017CanadianCleanTechnologyIndustryReport.Theyfallunderthreebroadmarketsegments:Upstream,Downstream,andWater&Agriculture.

2017 Canadian Clean Technology Industry Report – Synopsis 33

Wedefineacleantechnologycompanyasonewithproprietarytechnologyorknow-howthataddressesoneormoreofthefollowingmarkets:

Cleantechnology:re-imaginingoursociety

Inthecomingdecades,Canadianentrepenurswillharnessdigitalandcleantechnologiestoreinventalmostallaspectsofcontemporarylife—howwelive,work,learn,play,getaround…theworks.Theclimatechallenge,andwidespreaddegradationofair,water,andland,aswellasCanada’sexposuretoclimate-relatedfinancialrisk,demandswemakesweepingchangesto“businessasusual.”

Inthenext35to85years,wewilltransitiontoaworldinwhichwenolongerburnfossilfuelstomeetourenergyneeds.Atthemoment,fossil-fuelexportsrepresent20percentofallCanadianexports.Eventually,wewillneedtoreplacethisexportrevenuewithothergloballycompetitivegoodsandservices.DoingsowillrequireCanadianleadershiponglobaltechnologystandardsthatdeliverenvironmentalbenefits,sothatCanadianintellectualpropertycanformthebasisofourfutureprosperity,justasnon-renewablenaturalresourceshaveinthepast.Canadianssupportbothclimateactionandeconomicdiversification.Cleantechnologyoffersthechancetodoboth;itisnotoneortheother.

Thoughtheyarenotyetwidelyknown,innovatorsarecreatingnewsystemstoaddressclimatechange,andcleantechnologyisplayingamajorpartinthiseffort.Withoutmuchfanfare,morethan55,000peoplenowworkforCanadiancleantechnologycompanies.Sowhyhaven’tmoreCanadiansheardofthem?Spreadingthewordispartofhowwewillre-imaginesociety,theenvironmentandtheeconomy.

Thegoodnews

Canada’sclean-technologyindustrynowboastsmorethan850technologycompanies,includingmanysmallandmediumsizedenterprises,operatingintensectorsandineveryregionofthecountry.Toplacethisincontext,700firmscompriseCanada’saerospacesector,andtheautomotivesectorboasts450.

Withrespecttorevenue,employment,andexports,theclean-techindustryremainsasignificantcontributortotheeconomy.

In2015,industryrevenueclockedinatanestimated$13.27billion(up8percentfrom$11.63billionin2014,onparwiththeyear-on-yeargrowthratefortheglobalmarketinmanufacturedEnvironmental


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Goods.Cleantechnologycompaniesdirectlyemployed55,200people.At$6.7billion,exportrevenuesfromtheseinnovation-basedfirmsexceededthehalfwaymarkin2015,with18percentofsalesoriginatingwithnon-U.S.markets.Seventy-eightpercentofCanadianclean-technologycompaniesexportgoodsandservices;93percentanticipatedoingsoby2017.Inresponsetomarketforces,companiesareacceleratingthemoveawayfromone-timesalesbusinessmodelsandcontinuetomovetowardsrecurring-revenuemodels.Salesoriginatingwithone-timesalesfellfrom54percentofsalesin2013,to47percentin2015,suggestinggrowthinmorecapital-intensivebusinessmodels.Thesamecompaniesareinvestingininnovation,spendingmorethan$1.5billioninR&Din2015,and$8.2billioncumulativelybetween2009and2015.Thelion’sshareofthelattertotal,$6.1billion,originatedwithfirmslogginglessthan$50millioninrevenue.ThebadnewsTheindustrycontinuestobenefitfromsignificantgovernmentinvestment;thepublicsectorprovidesmorethanaquarterofR&Dinvestments.Butoverall,theindustryisawashinredinkandshareholderreturnsarenegative.Retainedearningsfortheindustryhavedeclinedeachyearforthepastfiveyears.Therateofdeclinemoderatedveryslightlybetween2014and2015,butthetrendremainsdecidedlynegative.Deeperanalysissuggeststhatmarketsforlow-carboninnovationhaveyettoemerge.RETAINEDEARNINGS,CANADIANCLEANTECHNOLOGYFIRMS,2011-2015

0

-500

-1,000

-1,500

-2,000

-2,500

-3,000

-3,500

-4,0002011 2012 2013 2014

Source: Statistics Canada.

2015

N=713

-2,167

-2,630 -2,638

-3,180

-3,557

$Millions


Ouranalysisoffirm-levelfinancialextractsrevealsanegativereturnonsalessince2011.Whiletherateofnegativereturnsdiddecreasein2014and2015forthecohortoffirmsasawhole,mostoperateinunprofitablemarkets.Tous,thissuggeststhatthefederalinvestmentsinworkingcapital,largeprojectfinance,andequityandventurecapital,mustbedeployedurgentlywithaclearmandatetoaddressmarketfailures.

Ourresearchfindsthataggregatelossesarediminishingforlate-stagefirms(e.g.,ProductCommercialization&MarketDevelopment,andMarketEntry&MarketVolume)andappeartobeonasteadilyimprovingtrajectory,butreturnstoshareholdersevenformaturefirmsremainbelowthoseofthelowest-riskinvestmentsintheeconomy.Whileearly-stagefirms(e.g.,Research&DevelopmentandTechnologyDevelopment&Demonstration)arenotexpectedtobeprofitable,theirprofitabilityactuallydecreasedfrom2011to2015.

Allbutonesectorhaveexperiencedfiveconsecutiveyearsofnegativereturnsonsales.Wenotethatthosesectorswithsteadilynegative,orbarelypositive,returnsdeliverproductsandservicesthatwillbecriticalforthelow-carboneconomy.Allfallunderprovincialandterritorialjurisdictions.

Inparticular,theEnergyInfrastructure/SmartGridsector—vitaltotheclean-energytransitionandsquarelywithinprovincialjurisdiction—hasoperatedintheredforfivestraightyears.Similarly,CanadawillnotlikelymeetitsParisAgreementobjectiveswithoutahealthylow-carbonTransportationsector—aglobalhighgrowthsector—yetthissectorhasalsoseenfiveyearsofnegativereturns.Thesameholdstrueforsectorswithblendedprovincialandfederalresponsibilities,suchasBiorefinery,whichholdsthepromiseofcovertingbiomassintohigh-valueproducts.WealsologgedlossesinWater&Wastewater,Agriculture,Industrial&ExtractiveTechnologies.TheEnergyEfficiency/GreenBuildingssectornearlybrokeevenoverthestudyperiod,suggestingthatmarketsforimprovedbuildingefficiencyarefinallyforming.

ThePowerGenerationsectorofferstheexceptiontothesepersistentlynegativereturns—theonlysectorwithpositivereturnsonsalesfrom2011to2015.Thissuggeststhatastrongdomesticandglobalpolicyenvironmentprovidinginvestorcertaintyhasmadeadifferenceforinnovation-basedfirmsthatprovidesolutionstoglobalrenewable-energydevelopers.

Atatimeofnegativereturnonsalesandweakinvestorreturns,demandoncapitalishigh,andlikelytogrow.Marketdynamicsbetweenclean-techbuyersandsellershaveledtoanincreaseintheproportionoffirmsprovidingturnkeysolutions,asopposedtothosethatlicensetechnologythroughjointventuresorone-timesales.Between2013and2015,wewitnessedamarkedincreaseinthenumberoffirmswithbusinessmodelsthatrequiredthemtofinanceturnkeysolutions.Thispointstomarketconditionsthatrequireinvestorsto“doubledown”ontheirinvestment.Isitwiseforthemtodoso?ReturnonCapitalEmployed(ROCE)ratiosfortheindustrycomparedtoreturnsfortheaggregateofCanada’snon-bankingfirmswouldsuggestnot.Thishighlightsanotherfundamentalchallengeforclean-techfirmsseekingcapital:Investorscangeneratebetterreturnselsewhere.

ROCEisthe“greatequalizer”offinancialratios.Itshowsreturnsonshareholderinvestments,excludingshort-termassetsthatdonotcarryinterest.Here,again,findingspointtomarketfailures.For2015,StatisticsCanadapublishedaROCEof4.4percentfortheaggregateofallCanadianfirmsexcludingthefinancialsector.Thisishigherthanmostclean-technologyfirmsmakinginvestmentsinintellectualpropertywiththeexpectationthatreturnswouldbesuperiortotheaggregateoftheCanadianeconomy.Excludingthefinancialsector,theROCEofclean-techfirmsengagedincommercializationwasbarelyhigherthanthatofCanadianfirmsoverall.


Thepicturedoesnotimprovewhenviewedunderthelensofhighest-growthcompanies.In2015,first-quartilefirmsbyrevenuegrowthshowednegative25percentROCE.Meanwhile,firmswithfirst-quartileemploymentgrowthreportednegative15percentROCE.Early-stagefirmsaremanagingtheircapitaltightlywithrelativelybetterROCEatnegative9percent,havingmarkedlyimprovedreturnssincealowofnegative33percentin2013.

Helpwanted;millennialsencouragedtoapply

Canada’sclean-technologysectorcontinuestoproveitselfapillarofthecountry’sclean-growthfoundation,whereskilledemployeesarepaidwell.Atatimewhengrowthinhigh-value,full-timejobsremainspatchy,cleantechnologyemployeesdowell.

Directemploymentinthisindustrydeclinedslightlyfrom2014to2015,tojustabove55,000.TheindustryhascontinuedtoputyoungCanadianproblemsolverstowork.Peopleaged30yearsorundernowrepresent23percentofallemployees,upfrom20percentlastyear.Ifanything,theindustryisgettingyounger.Thatmeansthatmorethan12,700youngpeoplealreadyfeelrightathome.Theyareinvestingtheirtimeandtalent,andbuildingstrongcareers.

Currently,engineersconstitute23percentofthepeopleworkinginCanadiancleantechnology—upfrom20percentlastyear—butmanyotherrolesarerepresented.Skillsgapsremainininternationalbusinessdevelopment,internationalsales,andcapitalraising.Companiescoulddrivehigherindustrygrowthbymentoringyoungpeoplekeentohonetheirchopsintheseareas.

Canadahasbeguntostemitslossesinatrillion-dollarglobalmarket

WithaCAGRof4percentfrom2008to2015,globaltradeincleantechnologyasmeasuredbyexportsdoubledduringthisperiod,tomorethan$1.15trillion.ButCanada’smarketshareofcleantechnologygoodsdeclinedby12percent,from1.6percentto1.4percent.Amongthetop25exporters,ourglobalrankingheldsteadyat16thplace.

Canadaisnotaloneinfeelingtheheat.Thefigurebelowdepictsrecentchangesinglobalmarketshareofclean-technologymanufacturedgoodsexports.Atcurrentgrowthrates,theUnitedStateswillsoonovertakeGermanyastheworld’ssecond-largestexporterofclean-technologygoods.Top-rankedChinacontinuestodominate,with21percentofexportsversussecond-rankedGermany,with11percent,andthethird-rankedUnitedStatesat10percent.

Duringthestudyperiod,CanadaovertookDenmarkinmarketshare,butwassurpassedbySingapore.


CHANGEINGLOBALMARKETSHARE,MANUFATUREDENVIRONMENTALGOODSEXPORTS,2008-2015

InvestmentsininnovationforthelowcarbonanddigitizedeconomyareatriskiftheyfollowtrendsforCanada’spatentapplications

Inadditiontotheirleadershipofglobalclean-technologyexports,UnitedStates,Japan,China,GermanyandKoreaalsoholdthetopfiveslotsintheworldinpatentgenerationforallfields,whichsuggeststhatinadditiontotermsoftradeandmarket-basedpolicies,intellectualpropertyplaysakeyroleinglobalcompetitiveness.

WithaCAGRof4.5percentbetween2011and2015,globalpatentapplicationsgrewtomorethan217,000.ButjustasCanadadroppedinglobalclean-technologyexports,ourshareofpatentapplicationsfellfrom1.6percentto1.3percent—a19percentdecline.Amongthetop20applicants,ourglobalrankingfellfrom11thto12thplace,andwewerethe4thbiggestloserofshare.China,theRepublicofKorea,andtheNetherlandsallgainedmarketshare,withtheUnitedStatesandIsraelonlyslightlylosingground.

MALAYSIA

CHINA

MEXICO

SOUTH KOREA

SINGAPORE

U.S.A.

THAILAND

HONG KONG

HUNGARY

TAIWAN

POLAND

SPAIN

CZECH REPUBLIC

CANADA

UNITED KINGDOM

NETHERLANDS

SWITZERLAND

ITALY

GERMANY

AUSTRIA

JAPAN

DENMARK

FRANCE

BELGIUM

SWEDEN

35%

28%

22%

20%

19%

7%

6%

2%

-23%

-11%

-12%

-16%

-18%

-18%

-22%

-24%

-24%

-27%

-27%

-28%

-33%

-5%

53%

54%

12%

Countries Canada overtook during the period

Countries that overtook Canada during the period

20%10% 30% 50%40% 60%0%-20% -10%-40% -30%

Data Source: World Trade Atlas. Source: Analytica Advisors.Reporting total includes 187 countries. Results from the top 25 exporters reported.

Angela

Highlight


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GLOBALTOPRANKINGCOUNTRIESFORPATENTAPPLICANTIONS,2011&2015

CHANGEINMARKETSHAREBYCOUNTRY,PATENTAPPLICATIONS,2011TO2015

2011 2015 2011 2011 Patent 2011 2015 2015 Patent 2015 Rank Country Applications % of Total Rank Country Applications % of Total

2011 Total: 182,112 2015 Total: 217,229

1 United States of America 48,896 26.85% 1 United States of America 57,121 26.30%

2 Japan 38,873 21.35% 2 Japan 44,053 20.28%

3 Germany 18,846 10.35% 3 China 29,837 13.74%

4 China 16,403 9.01% 4 Germany 18,003 8.29%

5 Republic of Korea 10,446 5.74% 5 Republic of Korea 14,564 6.70%

6 France 7,436 4.08% 6 France 8,421 3.88%

7 United Kingdom 4,848 2.66% 7 United Kingdom 5,290 2.44%

8 Switzerland 4,007 2.20% 8 Netherlands 4,334 2.00%

9 Netherlands 3,502 1.92% 9 Switzerland 4,265 1.96%

10 Sweden 3,462 1.90% 10 Sweden 3,842 1.77%

11 Canada 2,922 1.60% 11 Italy 3,072 1.41%

12 Italy 2,695 1.48% 12 Canada 2,820 1.30%

13 Finland 2,079 1.14% 13 Australia 1,741 0.80%

14 Australia 1,739 0.95% 14 Israel 1,685 0.78%

15 Spain 1,728 0.95% 15 Finland 1,584 0.73%

16 Israel 1,452 0.80% 16 Spain 1,530 0.70%

17 Austria 1,346 0.74% 17 India 1,412 0.65%

18 India 1,329 0.73% 18 Austria 1,399 0.64%

19 Denmark 1,314 0.72% 19 Denmark 1,327 0.61%

20 Belgium 1,191 0.65% 20 Belgium 1,180 0.54%

NOTE: China's patent applications are estimated to be 43,168 for 2016.

Source: World Intellectual Property Organization.

CHINA

REPUBLIC OF KOREA

NETHERLANDS

UNITED STATES OF AMERICA

ISRAEL

ITALY

JAPAN

FRANCE

SWEDEN

UNITED KINGDOM

SWITZERLAND

INDIA

AUSTRIA

DENMARK

AUSTRALIA

BELGIUM

CANADA

GERMANY

SPAIN

FINLAND

4%

-2%

-3%

-4%

-5%

-7%

-9%

-11%

-25%

-13%

-15%

-16%

-17%

-19%

-20%

-36%

-11%

17%

52%

-5%

20%10% 30% 50%40% 60%0%-20% -10%-40% -30%

Source: World Intellectual Property Organization.


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Keyfindingsandchallengesfromthe2017Report

Isthepartyover?No,butit’stimeforarealitycheck

Inpreviouseditionsofthereport,wehighlightedindustrygrowthoffourtimesthatoftheoverallCanadianeconomy.ThisgrowthcoincidedwithdecliningglobalGDPanddecliningCanadianGDPin2015.Themoodandthenumbershavesincechanged;thecompetitiveenvironmentisgettingtougher.Between2013and2015,theindustry’sCAGRwas3percent.AlthoughCanada’sclean-technologyindustrystilldemonstratedstrongresilienceinfiscal2015,theheadwindsweanticipatedinpreviouseditionsmanifestedaslowreturnoncapitalemployed.TheCanadianclean-technologyindustryisnowmovingtotheslowestofthethreegrowthscenariosthatwefirstpublishedin2011.Undertheslow-growthscenario,weproject2022revenuesat$18billion.Thisisalongwayfromthe“$50billionindustryby2022”goalthatweproposedunderahighgrowthscenariointhe2013,2014,and2015editionsofthisreport.Thewidespreadadoptionofanincreasingpriceoncarbonwillhelptobeginreversingthistrajectory.Butitwilltakemuchmoretoestablishasustainableindustry.Governmentmustbegintherapidphase-outoffossil-fuelsubsidies.Itmustalsodevelopastrategytoenablefirmsengagedinemergingtechnologymarketstoactivelyparticipateinglobalstandards,sotheycansecurerestrictedaccesstomarketsfortheirinnovation.Provincialandmunicipalprocurementshouldplayakeyroleintheinclusionoflowercost,low-carboninnovationininfrastructureprojects.Equallyimportant,BayStreetneedstocometothetable;assetownersmustrequirereportingonmaterialcarbonemissionsandmonitoringofleadingindicatorsofcarbonreductions,suchasinvestmentsininnovationtodeliverreducedemissions.RealigningfinancialflowsinCanada’sfinancialsectorwithclimategoalsshouldsupportthegrowthofcompaniesdeliveringsolutionstoclimatechange—includingthosewithhighcapitalrequirements.Despitethisnews,theindustryremainsasourceofsustainableandgrowingexportsascommodity-ledindustriesfacelowerdemandandinternationalcompetition.Andtheclean-technologyindustrycontinuestostepup.Revenuesfromrecurring-revenuebusinessmodelshavegrown.Tosustainthese,firmswillrequirerapidaccesstosignificantlyhigheramountsofdebtintheformofprojectfinanceasproposedinthe2017FederalBudget.Astheindustrytakesonbiggerturnkeyprojects,andasfirmsscaleup,companieswillfindthemselvesconstrainedbyalackofdebtfinancing.DebtmarketshavebeenveryslowtoforminCanadaandourfirmshaveincreasinglylookedtoventure-debtproviders,foreignbanks,andinternationalfinancialinstitutions.Budget2017proposedaBDCworkingcapitalfundaswellasEDClargeprojectfinancefunds.Allneedtobeupandrunningassoonaspossiblewithclearmandatestoaddressmarketfailures.AspartofitsInnovationAgenda,thefederalgovernmentisnowreviewingitsconsiderablearrayofinnovationpoliciesandprograms.Pastprogramshaveproducedknow-howsupportingcleantechnologieswiththepotentialtodeliverbroaderenvironmentalandeconomicbenefits.IfgovernmentsetsacoursetoembedCanadianintellectualpropertyatthecoreofinternationalstandards,climateandenvironmentalregulation,infrastructure,andpublicprocurementpolicies,thenweexpecthealthy


1010

shareholderprofitswillfollow,alongwithanincreaseinforeigndirectinvestment—whichwillboosttheeconomyoverall.Ifpolicymakerscansmoothlyhandoffofthebatonfromthedomainofinnovationtothatofstandards,regulation,andinfrastructure,Canadamightreversenegativeproductivityindicatorsandregainpatentapplicationmarketshare.Centraltothathand-offwillbepoliciesthattranslatepublicinvestmentsininnovationintoprosperityandbenefitsforsociety—atatimewhendemandforhydrocarbonsmustinevitablydeclineandmarketsforothernaturalresourcesmaydeclineduetocarbonpricesonenergyusedforglobalshipping.Shouldgovernmentdropthatbaton,cleantechnologywillgothewayofotherleadingCanadianinnovation-basedindustriesthatscaledupelsewhere.Thefederalbudgetincluded$1.8billioninfundingforventurecapital,workingcapital,equityandlargeprojectfinance.Thesefundswillneedtobeginflowingimmediately.AsupportingsuiteofpoliciestosecureCanada’scleaninnovationintheformofstandardsandregulationmustfollowsuitveryquickly.Morewell-paid,export-drivenmiddle-classjobs,butmissedopportunitiesThissectorcontinuestoproveitselfaclean-growthengine,anditcontinuestosupportCanadianfamilies.ThesearethekindsofjobsthatCanadaneedstore-invigorateitsmiddle-classhome-buyers,consumers,andfuturegenerationsofsavers.Between2014and2015,directemploymentintheCanadiancleantechnologyindustrydeclinedslightlyby400jobs,to55,200jobs.Still,employmentinthecleantechnologyindustryexceedsdirectemploymentintheforestryandloggingindustries,aswellassectorssuchaspharmaceuticalsandmedicaldevices.Iftheindustryregainsthemomentumthatdelivered11percentemploymentgrowthinthe2011–2013periodandachievesan8percentmid-growthscenario,theindustrywilldirectlyemploy95,000peoplebefore2022.Further,richpotentialexistsforindirectjobcreation.Canadianclean-technologycompaniesmanufactureafull51percentoftheirownbillofmaterialsandsourceanother31percentdomestically.Thiswillchangeovertime,andmaterialssourcedgloballywilllikelygrow,butifproperlyestablishedthroughglobalstandardsbodiesanddomesticrulesandregulations,thisinnovation-drivenglobalindustrycouldcontinuetodeliverdividendsfromintellectualpropertyforsometimetocome.Shouldtheindustry’semploymentgrowthnotbouncebackinthecomingyears,the4percentlow-growthscenarioforindustryemploymentsuggeststhattheindustrywouldemploy72,000peopledirectlyby2022.Thatis42,000fewerjobsthanthehigh-growthpredictionsofpreviousyears.That’s42,000middle-class,high-valuejobsthatCanadaneeds,butmayneversee.Canadianfinancialinstitutionsmissinganopportunity?Financingremainsadominantconcernforclean-technologycompaniesinCanadaandelsewhere.PreviousreportshavehighlightedtheopportunitytoincreaseequityinvestmentinCanadianinnovation-basedindustries.Regrettably,thesituationremainsthesameand,ifanything,hasworsenedintheareaofdebtfinancing.


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DebtfinancingisnowanincreasinglyimportantaspectofthegrowthoftheCanadianclean-technologyindustry.Themarketdemandsdeploymentofknow-howandintellectualpropertyviaturnkeyservicecontracts,includingfinancing.Ascompaniesscaleuptheseoperations,accesstodebtwillplayanimportantroleintheirabilitytogrowandexport.Andthere’stherub.Thisyear’sreporthighlightsagrowingproblem:Canadianbanksandfinancialinstitutionsarenotengagedwiththesector.Thereisincreasingevidencethatinternationalinstitutions,whichhavebecomefamiliarenoughwiththesectortobuildunderwritingcapacity,aresteppingintothegapleftbyCanada’sprivate-sectorbanks.ThesemarketdevelopmentsmaypresentbothchallengesandopportunitiesforCanadianfirms.Internationally,bankingregulatorsareassessingthepotentialimpactofclimateonlendingportfolios.InChina,forexample,policymakersarealsoconsideringhowbesttoreviewcapitalratios,toloosencreditrequirementsforcarbon-reductionprojectloans—andbyextensionreducethecarbonexposureoflendingportfolios.ThismaybeawaytobreakthelogjamforCanadianfirmsneedingaccesstodebtthatwilloutstriptheworkingcapitalfundandlargeprojectfundprovidedforinBudget2017.Inthemeantime,itisworthbearinginmind:

• TheaverageinterestratepaidbyCanadiancleantechnologycompaniesonworkingcapitalloansincreasedfrom6.8percentin2013to8.5percentin2015.

• GrowthCapitalremainsthetop-listedbarrierforCanadiancleantechnologycompanies,

followedbyCapitalRaisingTalentandVentureCapitalSeriesseed,A,B.Forty-threepercentofcompaniessurveyedsoughtventurecapitalin2015,and45percentofthosesecuredit.Fifty-twopercentofventurecapitalinvestorswerebasedinCanada,28percentintheUS,9percentintheEU,7percentinAsia,andtheremaining4percentwerefromelsewhere.

Stillgloballyambitious,butnotouttoruletheworldOurresearchrevealedthatmanyclean-technologycompaniesarerefocusingtheirattentionawayfromdominatingglobalmarkets.Thisreflectsintensepressureonmarginsasdescribedabove.Between2009and2015,Canadianfirmsfocusedlessondominatingglobalmarkets,andmoreonuncoveringandexploitingnicheopportunities.OurresearchfindsthatthenumberofCanadianfirmsthathavedonesohasnearlydoubled—from16percentin2009to31percentin2015.ButCanadianclean-technologyfirmsarelessinterestedinbecomingmeresuppliersinglobalvaluechainsandbuildingtospecification.Theyinsteadremainfocusedondevelopinganddeliveringcompletesolutionsbasedonintellectualpropertyandknow-how—albeitwithagreaterfocusonnichemarkets.AccessingglobalvaluechainsisalegitimatepriorityofSMEsinemergingmarkets.TobettersupporttheambitionsofCanadianfirms,federalandprovincialgovernmentswillneedtomoreeffectivelyintegratepolicy.Jointinfrastructure-investmentinitiativesmustconsidertheroleofnewlycommercializedsolutions.Forexample,thefederalgovernmentmustdulyconsidervalueformoneyinevaluatingnewinvestmentsinwaterandwastewaterandtransportationinfrastructureinnovation.


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Forexample,considerationofbothcapitalexpenditures,operatingexpendituresandapriceoncarboncanprovideamoreequalplayingfieldforinnovationaspartofinfrastructureprocurement.Fromatradeperspective,weshouldbeawareofkeypoliciesforourtradingpartnerswhenitcomestoprocurement.Since1958,theUnitedStateshashadlegislationthatrequiresconsiderationofsmallandmediumsizedcompaniesinallpublicprocurement—aswellasallprocurementbyfirmsreceivingsignificantpubliccontracts.CanadamustconsiderU.S.approachesinitsNAFTAIInegotiationstrategy.

Stillanexport-fuelledindustrywithlotsofuntappedgrowthpotential

Forthesecondyearinarow,exportsexceededdomesticrevenues—reaching$6.7billion,or51percentofrevenues.Eighteenpercentofsaleswenttonon-U.S.markets.Theindustryexpectsthatexportswillgrowfrom51percentofallindustryrevenuesin2015,to57percentin2017.

Theproportionofcompaniesactivelyexportinggrewto78percentduring2015,upfrom68percentduring2013butdownfrom2014.ThisfindingreflectsthelowervalueoftheCanadiandollarin2015.Theindustryhasanambitiousforecastforthenexttwoyears.Fully93percentofcompaniesexpecttobeactivelyexportingthisyear.Itwillbeinterestingtonoteiftheindustryachievesthisgoal,giventheCanada-E.U.TradeAgreement,growingU.S.“BuyAmerica”sentimentandtherenegotiationofNAFTA,theimpactofBrexitonforeigndirectinvestmentflows,andcurrencyfluctuations.

Clearly,Canadianclean-technologycompaniesareaccomplishedexporters.Itislessclearthattheywillhaveaccesstodomestic-marketopportunitiesanddebtfinanceasaspringboardtobuildstronginternationalcredentialsinthedeliveryofcompletesolutions.Toaccomplishthisfeat,governmentwillneedtomodernizeregulationandpursuefinancialinnovationthatreflectsinternationalbestpracticesonclimate-relatedfinancialriskdisclosureforbanksandotherfinancialintermediaries.Assetownerssuchaspensionfundsandinsurancecompaniesmayexaminehowassetmanagersmonitorinvestmentinclimate-relatedinnovationaimedtomakematerialreductionsincarbonemissions.Thismayprovidealeadingindicatorofcarbon-riskreduction.

Withnosignofaglobalclean-technologyslowdown,andanaccelerationofpolicyandinvestmentinthewakeoftheParisAgreement,thechoicesmadebyprivatesectorleaderswillhaveanimpactonthesector’spotential.Inthelow-growthscenario,exporting70percentofindustryrevenueswouldrepresent$13billioninexportsby2022.Amid-growthscenariowouldunlockexportsontheorderof$19billion.

DecliningmarketshareinCanadianclean-technologyexportswouldsuggestthemid-growthscenariogoalmaynowbeoutofreach.Weremainconvincedthatwithsmartprivateandpublicsectorpolicy,Canadacanturnthisshiparound,growmarketshare,andonceagainattainitsfairsliceofglobaltradeincleantechnology.

WillothersbenefitfromCanada’sR&Dinvestment?

Asnotedabove,between2009and2015theindustryloggedacumulative$8.2billioninR&D.Firmswithlessthan$50millioninannualrevenuescomprised$6.1billionofthistotal.Tous,thissituationsuggeststhatmanyfirmsaremakingthemselvestargetsforacquisitionbyforeigncompanies.


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Innovation-basedfirmsinvestinintellectualpropertyratherthanfixedassets,whichwillimpacttheiraccesstoasset-basedlendingandthereforetheirabilitytodeliverfullyfinancedturnkeysystems.Butifallthefinancinggoesintoturn-keysystems,what’sleftovertofinanceR&DandIP?WithoutaseriousstrategytoprotectIPthroughpatentsembeddedinglobalstandards,thereiscauseforconcern.IntheabsenceofcoordinatedpoliciestospurIPgenerationandprotectionaswellasnewmarket-mechanismsforfinance,push-basedpoliciesthatfocusoninvention—withoutastrategytogenerateprosperityfromideas—riskcreatinganR&Dbubble.AndasmoreR&Disinvestedintheindustry,weexpectcompanieslackingasolidbaseintheCanadiandomesticmarket,especiallythosewithstrongIPprotectionstrategies,willbesoldoracquired.CountriessuchasChina,theKoreanRepublicandtheNetherlandsaremovingsmartlytodeploypoliciesforthelowcarbonanddigitaleconomy,togenerateandprotectIP.ChinaandtheKoreanRepublichaveachievedcompetitiveresultswiththeirinvestmentsininnovationpolicy.It’shightimeCanadatooknote.ConclusionCanadacanapplynumerouspowerfulpolicyleverstosignificantlygrowthenation’sclean-techsector.Wecanandshouldbuildasignificanteconomicsector,relevantacrossthecountry.Ournationaccountsfor2percentoftheglobaleconomy.WiththedeclineofCanada’sglobalmarketshareinEnvironmentalGoods,Canadashouldaimtoachieveanequivalentglobalmarketshareincleantechnology.Ifweweretoachive2percent,Canadacouldcreatea$50billionindustryby2022,totheimmensebenefitofoureconomyandsociety.Tobuildthisgloballycompetitive,multi-billiondollarindustry,wewouldneedtonurturedozensofCanadianclean-technologycompaniestoenablethemtoreachthe$100millionrevenuethreshold.Thiswasourclarioncallsevenyearsago,whenwecompletedthefirsteditionofthisresearch.Itremainsourgoaltoday.Theclean-technologysectorhasmadeapowerfulbeginningandsetanambitiousgoal.Butwearesufferingasetback.Thesectorisswimminginredinkandreturnsdon’treflectunstintingpublicinvestments.Atthesametime,conditionshaveneverbeenriperforthesectortogrowwingsandtakeflight.Itistimetotakethenecessarystepstocapitalizeonourknow-how,getbacktotheblack,andrealizethisonce-in-a-generationopportunity.2017RecommendationsContextforthe2017CanadianCleanTechnologyReportRecommendations:•Canadiansunderstandtheimperativetomovetoalow-carboneconomy;•Canadaistheworld’sfourthmostGHG-intensiveeconomyperGDPandthemostGHG-intensiveeconomypercapita.Mitigatingandadaptingtoclimatechangerequireschangestoexistingsystems;


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•Canadahasmanyfirmsproducinginnovativegoodsandservicestoprotecttheair,waterandland.Theshareholdersofthesefirmsareexperiencingtheeffectoflowpricesonnegativeexternalitiesandothermarketfailuresduetoasymmetricinformationandlackoftransparencyincapitalmarkets;•CanadaremainscommittedtomultilateralismviaparticipationinprocessessuchastheUNFrameworkonClimateChangeandthe2030AgendaforSustainableDevelopment.Totheseends,werecommendpolicymakers:TranslateCanada’sParisAgreementcommitmentsacrosstheeconomy: A.FinanceCanadaandtheirprovincialcounterpartsshouldestablishaformalconsultationwiththeCanadianfinancialindustryonthedegreetowhichfinancialflowsareconsistentwithCanada’sParisClimateAgreementcommitments,includingthepotentialimpactofclimate-relatedinnovationtoreduceclimate-relatedfinancialriskB.FinanceCanadaandNaturalResourcesCanadaandtheprovincesandterritoriesshouldestablishaformalconsultationwiththeCanadianenergysectoronhowtounwind$3.3billioninfiscalsubsidiestothefossilfuelindustryandaconsultationwithstakeholdersonglobalbestpracticesfortheredeploymentofsavingsfromtheunwindingoffossilfuelsubsidies.C.EnvironmentandClimateChangeCanadashouldengageprovincialcounterpartsinaformalconsultationontheUN2030SustainableDevelopmentGoalstoestablishdatarequirementstoassesscurrentachievementsattheprovincialandmunicipallevelandestablishfuturegoals.D.EnvironmentandClimateChangeCanadashouldformallyconsultontheroleandimpactthatinnovationwillplayinCanada’sefforttomeetUN2030SustainableDevelopmentGoalsandimplementthePan-CanadianFrameworkonCleanGrowthandClimateChange.Thedepartmentcoulddosoinconjuctionwithwithprovincialcounterparts,andemployasimilarformatandmethodologyastheconsultationsconductedwithemissions-intensive,trade-exposedsectors.E.GlobalAffairsCanadashoudinstructExportDevelopmentCanadatoholdconsultationsonhowbesttoredirect$3billioninpublicallyfinancedworkingcapitalloansthatarecurrentlyextendedtointernationalpetroleumcompanies.F.InfrastructureCanadashouldidentifyglobalbestpracticesinassessingthesustainabilityofinfrastructureprojectstoinformprojectproposals.CriteriamaybeidentifiedthroughtheG20InfrastructureHub.Examplesofprojectevaluationcriterialincludearisingpriceoncarbonforthelifeoftheinfrastructureaswellasalignmentwith2030AgendaforSustainableDevelopment.G.Innovation,ScienceandEconomicDevelopmentwiththeirprovincialcounterpartsshouldengageinformalconsutationsontheimpactofmarketfailuresforemergingcleantechnologymarketsontheabilityofCanadianfirmstofinancepatentapplications,patentmaintenanceandtheabilitytoparticipateinglobalstandardsbodies.


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Establishreportingandaccountabilitymechanismstomakeresourceproductivityadriverofprivate-sectorinnovationinvestment:H.Provincialandfederalauditorsgeneralshouldincluderesourceefficiencyindicatorsintheirclimate-changeaccountabilityframework.I.NaturalResourcesCanadashouldconductaconsultationwithprivate-sectorstakeholderstoestablishabaselinefortimelyreportingonresourceproductivitycomparedtoOECDpeers.Scopewouldincludeindicatorssuchaswater,andallformsofenergy,includingelectricity,liquidfuels,andothermineralssuchasrareearths.Anassessmentofpatentsassociatedwiththeseproductivityareasshouldbeconducted.J.AttheG7andG20,Canadashouldpromotethedevelopmentoftoolstobuildthefoundationsofproductivity,includingassessmentsoftheimpactofstructuraleconomicbarrierstoinvestmentininnovation.ThesebaselineswouldsubsequentlyinforminnovationpolicyinvestmentsatInnovation,ScienceandEconomicDevelopmentCanada.Investinmultilateralprocessestoimprovethebusinessenvironmentforprivate-sectorinvestmentthroughreducedpolicyrisk:K.EnvironmentandClimateChangeCanadashouldparticipateinpeerreviewsforeliminatingfossil-fuelsubsidies,UN2030SustainableDevelopmentGoals,andtheUNFCC’sFacilitativeDialogue.Whereverprivatesectorconsultationsarepartoftheseprocesses,thedepartmentshouldincluderepresentativesfromclean-technologyfirmsandtheirshareholders.L.NaturalResourcesCanadashouldassumeleadershiponmultilateralenergy-efficiencyandresourceproductivity/circular-economyinitiatives,includingthroughtheG20platforms.Note:WeoriginallypublishedtheaboverecommendationsonEnvironment&ClimateChangeCanada’s“Let’sTalkClimate”consultationwebsite.InJanuary2017,theCentreforInternationalGovernanceInnovation(CIGI)publishedapolicypapercontainingrecommendationstoensurepublicspill-overbenefitsfromlow-carboninnovation.Thatpaper,“PolicyPaper114:GeneratingGrowthfromInnovationfortheLow-carbonEconomy:ExploringSafeguardsinFinanceandRegulation,”isavailableontheCIGIwebsite.

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