Financial and Market Tools for Sustainability

Bob Page, Vice President, Sustainable DevelopmentTransAlta Corporation (Calgary, Alberta)

Building the Business CaseWorld Environment Center / International Environment Forum

MontrealOctober 15, 2004

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Introduction

My thanks to WEC and Alcan

Very much a business approach – what are the “tools” I am not addressing ecological, social, ethical, etc. equally important

I am a pragmatist and practitioner not theorist – how to make business management systems work

Many in business still skeptical or even antagonistic to sustainable development

– Erodes the drive for economic efficiency in a competitive market economy

But both business and government in a period of structural change – the future is hard to define – regulation to market mechanisms

SD is moving from the margin to the centre, forces at work – but still a long way to go

Elections in both Canada and the US this year – policy uncertainty

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Who is TransAlta

We generate electricity in Canada, the US, Mexico, and Australia

From coal, natural gas, hydro, wind, and geothermal

We are the largest wind power owner in Canada and a major geothermal player in California

We are active on the Kyoto Mechanisms – CDM in Africa, Asia, and Latin America and emissions trading

We were founding members of WBCSD and IETA

We are members of the Business Environment Leadership Council of the Pew Center on Global Climate Change in Washington, DC

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The Business Tools for Sustainability

Long Term Planning for SD

– Sustainability makes sense to any company practicing long term planning and execution

– It does not make sense to those focused solely on the next quarter’s results

– Challenge for some SME’s – lack the resources

– SD financial results are real, but not immediate

– Note Michael Porter’s work on environmental investment and competitiveness

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The Business Tools for Sustainability

SD as Risk Management

– SD is a form of risk management of environmental risks and liabilities

– Design and planning to avoid and pre-empt usually cheaper than to clean up

– Strong management required to limit human error or technical failure – eternal vigilance / paper trail

– A major environment event like the Exxon Valdez involves huge multi-billion dollar cost plus huge hit to your corporate reputation

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The Business Tools for Sustainability

Financing SD Change

– My greatest challenge is mobilizing the capital to finance our SD change (like renewables)

– Companies must be profitable to have the resources and credit worthiness to finance technology and other change

– SD projects must meet the hurdle rate of return as other projects (15% for NY Stock Exchange)

– One successful project then helps to finance the next

– Innovation and profitability are interdependent

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The Business Tools for Sustainability

Monitoring, Reporting, and Accountability

– Old business axiom – if you do not monitor and report you cannot manage

– This is essential for Environmental Management Systems (EMS) and there must be direct accountability at each stage

– Like financial systems it requires external auditing to ensure effectiveness of procedures

– Sarbanes-Oxley and SEC now require public disclosure of environmental risks and procedures to manage for investor confidence

– Government reporting of all emissions / each jurisdiction different

– Integrated system from plant floor to board of directors

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The Business Tools for Sustainability

Environmental Accounting and SD

– One of the challenges for SD is communicating environmental risks in financial terms to CFO

– Are emission credits to be disclosed on the balance sheet when they do not fit generally accepted accounting definitions

– This is critical in internalizing environmental risks and assets

– It is critical for officers of the company to communicate effectively in decision making

– We are working with Canadian Institute of Chartered Accountants to ensure proper terminology and no off balance sheet reporting (Arthur Andersen and Enron problems)

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The Business Tools for Sustainability

Moving to Market Mechanisms

– One of the barriers to SD has been the clash between government regulation/intervention and market forces which drive our economy

– Now with market mechanisms like emissions trading we can begin to harness market forces to achieve environmental goals – but we have barely started

– Pew Centre study of emissions trading in the US found that environmental goals were achieved faster and at less cost than with regulation alone

– It is also an incentive to go beyond compliance because economic value of credits generated

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The Business Tools for Sustainability

Investors and Environmental Performance

– Investors are getting increasingly interested in environmental costs and SD performance (sign of well managed company)

– Dow Jones and FTSE Sustainability Index – define SD criteria and then assess corporate performance – advise investors

– Growing group of pension and mutual funds apply SD criteria to investment decisions

– Mobilizing the power of investors to push corporations into more SD approach – factor in stock purchasing

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The Business Tools for Sustainability

Consumers and Environmental Performance

– Consumers drive the investment decisions of producers – product sales and market forces watched closely

– Product labeling and environment / energy / green standards for products

– Dilemma of price vs. environmental standards / green power sales in Calgary

– Consumer demand is the ultimate market mechanism but assumes knowledge and conviction

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The Business Tools for Sustainability

Policy Changes and Investment Certainty

– Investors / managers seek certainty for their capital investments but environmental policies tend to change frequently often adding cost or production constraints

– Canada signed Kyoto in 1997 and ratified it in 2002 but policy still very uncertain

– Investors like to see major changes timed with capital stock turnover (our power plants 40 year life) – but policy changes can be every 2 to 3 years

Incent Early Actors

– Companies who take early action should not be penalized for their social responsibility

– The defining of baselines and business as usual may exclude credit for early actors (SD disincentive)

– This is a real possibility with Canada’s climate change plan

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The Business Tools for Sustainability

Sustainability and the Fiscal System

– The Annual Budget of Canada’s Minister of Finance is the most important influence on investor trends and even sustainability trends

– Business monitors these statements closely – if there was a clear signal for ecological tax reform then business would factor it in

– Incentives work better than punitive taxes (CCA and pollution abatement equipment)

Eco-Efficiency and By-Product Synergy

– There are a number of very specific tools now emerging from WBCSD and other business bodies

– Eco-efficiency is a clear win/win situation – cut in energy or resource use is a direct cost saving and competitive edge

– By-product synergy – wastes which escape into the atmosphere to cause pollution are captured and converted into benign commercial products (long term drive to eliminate all wastes)

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The Business Tools for Sustainability

The Social Factor in SD

– SD includes integration of economic, environmental, and social factors – the last is the most difficult for many companies (CSR)

– SD requires multi-stakeholder process for projects to get broad input to better define issues / needs social license to operate – CASA in Alberta

– Particularly important in cross-cultural situations – First Nations

SD: Education and Public Awareness

– Need for more and better SD materials in schools – future consumers

– Universities in Environment Schools not Business Faculties – only 4 in Canada with serious SD curriculum

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The Business Tools for Sustainability

Globalization

– We all see the public controversies of economic globalization and the role of multi-national corporations

– Globalization of communications – exploited brilliantly by ENGO community – websites and email

– Business has not organized as effectively as NGO’s – ICC – WBCSD – IEA

– Weakness of international organizations like UNEP and serious fragmentation of global environmental efforts (over 200 nations)

Adversarial vs. Collaborative Relationship

– SD assumes an ability for industry / governments / civil society to work together

– Ideology of government regulation vs. market mechanisms – dialogue of the deaf

– Even when we use the same words we do not understand each other

– SD requires new innovative policy as well as new innovative technology

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Innovation – The Key to Unlocking Sustainability

Innovation is the key to SD progress – but it assumes a vision, a determination, and a risk taking philosophy

The economist Joseph Schumpeter once described innovation as “waves of creative destruction” – of the old technology / jobs

It assumes a willingness to move from the tried and true to gamble on achieving breakthroughs – courage to take on the risks of innovation

It assumes deep pockets, long term commitment, and shareholder patience

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Innovation – The Key to Unlocking Sustainability

There will be winners and losers – first movers often fail – R&D budgets run out before commercialization

You can get the science right but fail badly if social issues or public acceptance not achieved such as Monsanto and Genetically Modified Crops

SD is a comprehensive strategy which provides investor certainty because it integrates the economic, environmental, and social factors and input

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Conclusions

SD is a revolutionary concept integrating the principles and the forces of the economy with those of ecology into a symbiotic whole

It is operating in an era of social and political change much wider than SD

Its ambiguity is both its strength and its weakness for it is open to various interpretations

We all love its bold vision – but implementation often involves difficult and uncomfortable tradeoffs

– Giving up what we are accustomed to and feel comfortable with – inertia is our greatest challenge – As Pogo once said “We have seen the enemy and it is us”

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Conclusions

While SD is not perfect, it is like Churchill’s definition of democracy: “The worst system except for all the rest”

But we must not underestimate the power of an idea whose time has come – vested interests may slow but they cannot reverse the flow of history

With leaders like WEC we must renew our determination, renew our efforts – there is only one planet with life and we only get one chance to protect its sustainability – thus sustainability is the ultimate security issue