THE ENVIRONMENT

GREEN IS THE COLOR OF MONEY

Business is discovering environment policy

DEIRDRE McMURDY December 16 1991
THE ENVIRONMENT

GREEN IS THE COLOR OF MONEY

Business is discovering environment policy

DEIRDRE McMURDY December 16 1991

GREEN IS THE COLOR OF MONEY

Business is discovering environment policy

THE ENVIRONMENT

For many Canadian corporations, green has been more than the traditional color of money in 1991. Annual reports from steelmakers to food processors included extensive entries on their environmental policies and their programs to invest in new, environmentally friendly technologies. But the report to shareholders that Lavalin Industries Inc. of Montreal filed included no such corporate commitment—an omission that was especially glaring for the owner of a large petrochemical refinery on the outskirts of the city. And as Lavalin spiralled into bankruptcy this autumn, the absence of information about the practices of its subsidiary, Kemtec Petrochemical Corp., took on a new significance. When creditors seized control of Kemtec with the intention of selling its assets to recoup outstanding debts of $385 million, they found themselves hampered by a contaminated refinery carrying a potential cleanup cost of $80 million. Said Michael Deck, a professor with the University of Toronto’s faculty of management: “A clear trend is emerging where society is going to have to take into account the cost of damage to the environment, after ignoring it for years.” Gradual changes in legislation and the attitude of corporate shareholders are forcing Canadian companies to pay more than lip service to the environment. The spectre of expensive cleanup operations and protracted lawsuits has elevated the environment from an abstract moral issue to one of fundamental business practice. To attract new investment capital from the public and retain their existing base of shareholders, company officials have learned that they must have a solid record of environmental performance, as well as an explicit environmental policy governing their operations.

Indeed, several Canadian-based mutual funds, self-styled “ethical funds,” have invested only in companies with proven reputations for environmental responsibility. Said Jean Morissette, vice-president of Desjardins Trust in Montreal, which recently launched an environmental mutual fund: “A company that effectively manages the environment is usually well managed overall and will provide superior returns in the long term.”

For his part, Deck is working to bring about

changes in the attitude of the business community towards the environment. After 11 years as a full-time minister with the Anglican Church of Canada, he exchanged his pulpit for a classroom two years ago. Deck said that through his business ethics course, which is a compulsory part of U of T’s business curriculum, he is encouraging a new generation of business managers to balance the pursuit of corporate profits with the needs of the society in which they operate. For most students, he said, that translates into a strong emphasis on the environment.

Responsible: Deck predicts that environmental records will soon be a standard measure of corporate performance, as debt levels and earnings already are. But for most Canadian investors, they are still a new consideration. For one thing, Canada does not have the same tradition of socially responsible investing that took root in the United States at the time of the Vietnam War. As part of the resistance to that conflict, many American investors learned to identify companies that supplied the military campaign and deliberately withheld invest-

ment capital from them. As part of that movement, a number of mutual funds, guidebooks and newsletters emerged in the United States that are now being adapted to include environmentally correct companies.

For Canadian investors, as a result, gathering the information required to make so-called green investments can be a challenge. Unlike financial data, for which there are strictly established standards, the disclosure of environmental information is still largely at the discretion of the company. In addition, there is no central public agency that comprehensively monitors the quality of that information. Robert Leon, a veteran stockbroker with Wood Gundy Inc. in Toronto who tracks environmentally sound investments, said: “A lot of people are overwhelmed by the work involved. If you do it for them they accept it, but very few of them know where to start on their own.”

In Canada, the most detailed source of data about corporate environmental records is David Nitkin, founder of Toronto-based EthicScan Canada Ltd. Since 1988, Nitkin has compiled comprehensive computer files on 1,500 Cana-

dian companies. To maintain his database, Nitkin scours newspapers, trade journals and court reports, and sends out detailed questionnaires to company managers and workers. Declared Nitkin: “You have to dig and pry for information from Canadian corporations.” He added: “Even when they agree to co-operate, there is seldom one person with the ability to answer a comprehensive list of questions about the operation.”

When assessing what Nitkin calls “the green quotient” in a company, he looks for such active measures as special environmental committees composed of directors, managers and

employees, and whether a company has had an in-depth environmental audit of its practices performed by an outside expert. Nitkin and his staff of she also review a company’s record as a polluter, including any fines or lawsuits. The labor-intensive nature of his work makes it a relatively expensive and sophisticated service for the average individual investor. Nitkin’s newsletter sells for $300 a year, and each data search costs about $60. As a result, most of his 25 regular clients are large-fund managers or charities that want to screen their sources of corporate donations.

Ethical: For smaller investors, however, there are organizations, including the Social Investment Organization of Toronto, that offer direction in designing an investment portfolio by using environmental or ethical standards. Through that nonprofit group, which has been operating across Canada since 1989, investors can obtain guides on how to design an environmentally favorable portfolio, attend seminars

and workshops on emerging issues and contact financial experts who specialize in environmental investing.

According to Marc de Sousa-Shields, a coordinator at the Social Investment Organization, the 360-member group received 750 requests for information in the first nine months of 1990. For the same period this year, it has received more than 1,500 requests. Said de Sousa-Shields: “Awareness about the environment is growing by leaps and bounds. You don’t need a degree in chemistry to be alarmed about the ozone layer or the pollution of all our lakes.” He added that such companies as the

Loblaw Cos. Ltd. grocery chain have developed new green product lines and advertised them extensively, further popularizing environmental issues.

While some skeptics dismiss environmental investing as a temporary fad, those involved in the movement are adamant that it is only just beginning to hit its stride. Declared Patrick Ireland, the co-ordinator of the Winnipegbased Investors Group: "People are only starting to realize that this is an option in investing. It’s a trend, not a fad, because it is accompanied by a fundamental shift in values.” The Summa Fund was started by the Investors Group in 1987 in response to a growing demand from clients who were anxious to avoid investing in South Africa, or in companies that were involved in the manufacture of weapons, tobacco or alcohol.

Despite the emergence of a new awareness about environmental investing, many money managers report that Canadian investors re-

main reluctant to invest in the green movement if it means a lower rate of return on their investment. Declared Toronto investment counsellor Irwin Michael: “No one ever said to me that they would accept less return because it was an ecological investment. If it costs them, they’ll tell you to go green with someone else’s money.” And Morissette of Desjardins Trust said that a consumer study his firm carried out when it introduced its environmental mutual fund last year revealed the same attitude.

Balance: It is possible, however, for investors to balance their consciences and strong financial returns. Although the ethical and environmental screens used by the Investors Group’s Summa Fund exclude investment in 55 per cent of the companies listed on the Toronto Stock Exchange, it has performed strongly. For the 12 months ending Sept. 30, Summa posted a return of 25.2 per cent, compared with the average overall return of 11.6 per cent for the exchange. The Ethical Growth Fund, available through the Vancouver City Savings Credit Union, also has a long record of strong performance. It has returned just over 10 per cent compounded annually over the past five years, and its returns rank fourth among all Canadian equity mutual funds. Said Ireland: SÍ “I defy anyone to show you « can’t make money being § green.”

à While mutual funds blend I a portfolio with a variety of < investments, there are environmentally friendly options for those who prefer to select their own investments. In the environmental arena, the greatest need for investment capital is among small operators who are trying to develop new environmental technologies. Because of the relatively high risk attached to such ventures, Environmental Technologies International of Toronto is taking an innovative approach to attract investors. To spread the risk among several projects, the umbrella company has assembled six junior technology companies that it manages under one roof. Said John Scheel, senior vice-president at the firm: “Raising money to finance one environmental technology is difficult. But by combining them, if one is slow off the mark, another will kick in with returns.” And as steadily more Canadian companies provide environmentally sound options, more Canadian investors seem willing to gamble that they can do financially well by doing good.

DEIRDRE McMURDY