Innovation

Canada’s cleantech industry is bigger than you think

It employs more people than the forestry, pharmaceutical or medical devices industry. So why don't more Canadians know about it?

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(Creative Commons/US Navy)

(Creative Commons/US Navy)

Prior to 2014, Canada’s clean technology industry was growing at four times the rate of the country’s overall economy. Currently, it has 774 firms—that’s in comparison to the aerospace industry’s 700 and the automotive industry’s 450—and employs more Canadians than the forestry, pharmaceutical or medical device industry.

If these numbers surprise you, you’re probably not alone. The 2016 Canadian Clean Technology Industry Report—released by Analytica Advisors—aims to address the the lack of support for, and awareness of, Canada’s cleantech sector.

The Canadian clean technology industry operates across ten sectors, and the term is used to encompass all companies that use renewable solutions: everything from recycling to renewable energy to green transportation.

Though the industry experienced a growth rate of 10% from 2013 to 2014, it’s expected to slow to 5% between now and 2020. There are a number of factors contributing to that decline, but observers and leaders in the industry says financing is the chief hurdle right now.

“We know that the number one barrier that the industry has identified is financing,” says Celine Bak, CEO of Analytica Advisors. Analytica’s report identifies Canadian financial institutions “not rising to the challenge” of supporting cleantech companies, and charging too much for debt financing, as a major issue facing the industry.

Audrey Mascarenhas is the CEO of Questor Technology Inc., a company that generates energy by burning methane and other harmful waste gases. Questor has seen a consistent annual growth of 20% since its founding in 2004—until last year, when it experienced its first revenue decline.

Mascarenhas says that, while her company currently receives financing from Canadian banks, it wasn’t always that way. “It wasn’t easy in the early days, when we weren’t profitable,” she says. “I would say there is risk aversion [to cleantech] in the Canadian banking system. No one really understands or believes in the potential of cleantech in this country—it’s not on our radar screen.”

“Banks, as many people say, are in the business of pricing a risk,” says Bak. “Risk is all about experience. Lenders say, ‘Well, we haven’t seen 40 of these [new cleantech] projects. Generally we don’t lend unless we’ve seen 40.’” This presents a real problem to cleantech companies trying to get off the ground: “If we think about this as a new industry, we don’t have, in almost all cases, dozens of implementations for people to judge how risky something is,” Bak explains.

That’s not unusual, says David Rozin, director of knowledge-based industries for RBC. “The clean technology sector is not unlike other emerging sectors,” he says: they can be reliant on government funding and dedicated early-stage investors for some time before a viable ecosystem develops. “When these clean technology companies have reached the commercialization stage, we have dedicated experts who work with businesses to scale and continue growing.”

Kate Ballotta, spokesperson for the Canadian Bankers Association, says the clean technology sector presents specific challenges for Canadian banks. “As the report notes, it can be challenging to provide debt financing to firms who do not yet have balance sheets that banks can use as security, or the cash flow to be suitable for traditional debt financing,” she says.  “These companies are typically in the early stage of the business life cycle and are more suitable for equity financing—a market which banks do not actively finance.”

Invisible at home

According to Bak, 43% of Canada’s cleantech revenues are domestic. The remaining 57% is international—34% from the U.S, and 23% from the rest of the world. “That’s not characteristic of an industry that’s made up of small firms,” she says. “It tells us something about just how hungry these companies are to do well internationally—but also that they’re struggling to find a market domestically.”

Mascarenhas identifies 50% of her company’s revenue as coming from outside of Canada. For Daryl Wilson, CEO of hydrogen-generator company Hyrdogenics, it’s 95%.

“We’re anticipating in the near future that we’ll see growth in our business in Canada, but for our 20-year history most of our business has developed outside of the country,” he explains. “Most of our business is focused in Europe, where historically there has always been a much higher focus on renewable energy and reduction of climate change impact.” Wilson says he recognizes the growing shift to recognize climate change in Canada, but adds that it’s an ongoing process.

“We end up creating companies that spend more of their time being successful outside the country, and that leads eventually to companies getting acquired, because the market conditions are too difficult domestically,” says Bak. “If we do that for all of our companies, then we will have missed the opportunity to build them at home.”

Mascarenhas agrees: “If you look globally, it’s one of the fastest-growing industries,” she says. “It’s the silent industry in Canada; we’re not even aware that this industry spends almost as much in R&D as the auto industry, or the aerospace industry.”

Mascarenhas believes that the innovation system in Canada is broken. “We haven’t done a great job helping small- to medium-sized enterprises (SMEs) grow,” she explains. “The U.S. is heavily focused on that right now, because they’re seeing SMEs as their economic growth engines for creating jobs and growing their economy and growing their GDP. I think we’re starting to say that, but we haven’t done anything really to support it. We spend a lot of money in R&D, but we’re putting it all in universities, which are really good at ideas, and writing papers, but they don’t build businesses.”

All three agree that more needs to be done to support the industry at home. “My company, right now our revenue is around $8.5 million. My big fear now is, how do I scale up and grow?” says Mascarenhas. “I have the potential to grow, and we’re already working globally, but I’m stuck because I don’t have the resources. It would be great to have an Economic Development Officer or someone to stand beside me saying, ‘Okay, I’m going to go help you open up more offices.’”

“There’s a number of positive policy initiatives that could help our growth,” agrees Wilson. “One of them would be spending on infrastructure in Canada that purposefully supports innovation and builds on Canadian and clean technology solutions.”

Wilson also wants to see a culture-shift in how Canadians go about marketing their own cleantech solutions. “Canadians are naturally somewhat risk-averse, so we need to get over that and take some chances on our own stuff more than we do,” he says. Wilson’s company has successfully sold hydrogen fuel cell rail technology in Germany. “As we tried to sell that in Canada for the last three years, we faced a lot of opposition with Canadian buyers saying, ‘Where else have you done this? We’re not prepared to take the risk of doing this for the first time.’” The solution? “We need to tell our own story better than we do,” he says. “It’s not Canadian to be self-promotional, but we need to promote ourselves much more strongly, because elsewhere in the world we are recognized as innovators and leaders, but on our home soil we don’t promote our solutions to the degree that we should.”

Bak has faith that the industry will continue expand, and that Canadians will come to recognize its growth. “The industry has been absolutely focused on investing in R&D and in innovation, and it continues to do that,” she says. “It’s attracting more and better quality lending terms, and that will make it possible for it to be a really good investment for Canadians who are wanting to put their money where it can make a difference—to society, to the environment, and also to them as investors.”

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