As recently discussed on our securities blog, on October 27, the Canadian Securities Administrators (CSA) issued Staff Notice 51-333 – Environmental Reporting Guidance to provide guidance to reporting issuers on satisfying existing continuous disclosure requirements with respect to environmental concerns. Specifically, Staff Notice 51-333 is intended to assist issuers in determining what information about environmental matters needs to be disclosed by reporting issuers based on the requirements found in National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101) and National Instrument 52-110 Audit Committees (NI 52-110).
The Ontario Securities Commission's (OSC) nascent focus on investors' concerns regarding climate change considerations has been apparent for some time. In February 2008, the OSC released Staff Notice 51-716 – Environmental Reporting, which outlined the results of a targeted review to determine the degree to which reporting issuers were adequately disclosing "environmental matters". Meanwhile, in December 2009, the OSC published Staff Notice 51-717 – Corporate Governance and Environmental Disclosure, which detailed the OSC's plans to enhance environmental and corporate disclosure requirements of reporting issuers.
In Staff Notice 51-333, the CSA emphasize that the standard (as outlined in NI 51-102) to be met by reporting issuers in determining if environmental matters must be disclosed is whether or not the matter is "material". The CSA offer several principles to guide the determination of materiality, namely that: (i) there is no bright line test, (ii) materiality is context- and timing-dependent; and (iii) trends, demands, commitments, events and uncertainties depend on the probability that such trend, etc., will occur and the expected magnitude of its effect.1
In the context of a wide range of environmental issues, the CSA focused Staff Notice 51-333 on the following types of disclosure:
- Environmental Risks and Related Matters. The five key disclosure requirements in NI 51-102 that relate to environmental matters are: environmental risk, trends and uncertainties, actual and potential environmental liabilities, asset retirement obligations and the financial and operational effects of environmental protection requirements, including the costs associated with these requirements.
- Environmental Risk Oversight and Management. Two key sets of disclosure requirements provide insight into a reporting issuer's oversight and management of environmental risks: environmental policies implemented by the issuer and the issuer's board governance. A reporting issuer should explain the purpose of its environmental policies and the risks they are designed to address and evaluate and describe the impact that the policies may have on its operations. The reporting issuer should disclose the board of directors' (or any delegate committee's) responsibility for the oversight and management of environmental risks.
- Impact of adoption of International Financial Reporting Standards (IFRS). As reporting issuers make the mandatory transition to IFRS for financial years beginning on or after January 1, 2011, issuers may be required to accrue more environmental liabilities at higher amounts and provide more disclosure regarding these liabilities.
- Forward-Looking Information Requirements. Issuers are advised that disclosing goals or targets with respect to greenhouse gas emissions or other environmental matters may be considered forward looking information or future oriented financial information and would be subject to the disclosure regime for such information in NI 51-102.
- Governance Structures Around Environmental Disclosure. Staff Notice 51-333 provides reporting issuers with recommendations regarding governance structures with respect to environmental matters, including reliable internal controls and disclosure procedures. The reliability of these systems is a necessary underpinning for securities regulatory filings, including CEO and CFO certifications under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings. Directors and certifying officers need to know that management has implemented systems, procedures and controls to gather reliable and timely environmental information to be able to certify that the reporting issuer's filings do not contain any misrepresentations.
The CSA's Staff Notice 51-333 demonstrates that, regardless of whether or not they are subject to greenhouse gas emissions or other environmental reporting requirements, issuers must seriously consider the effect of environmental matters and climate change on their business and ensure that such matters are adequately disclosed to investors.
We will continue to follow the progress of the Canadian securities regulators in their development of a robust disclosure regime for climate change related matters. Look for further analysis and observation in future bulletins.
1. The CSA derived the guiding principles from National Policy 51-201 Disclosure Standards, decisions of the Canadian securities regulatory authorities, such as the OSC's decision Re YBM Magnex International Inc. (2003), 26 OSCB 5285, and from a review of discussions of environmental materiality in guidance documents from the Canadian Institute of Chartered Accountants and the U.S. Securities and Exchange Commission.
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