On October 27, 2010, the Canadian Securities Administrators (CSA) released CSA Staff Notice 51-333; Environmental Reporting Guidance (the Notice). The purpose of the Notice is to provide reporting issuers (other than investment funds) with guidelines on fulfilling existing continuous disclosure obligations that relate to environmental matters under securities legislation.1
Given the interest of several provincial regulators in environmental disclosure2, the Notice is timely. The CSA released the Notice given the growing impact that environmental matters have on reporting issuers, the changing regulatory environment relating to environmental matters and growing investor concern with environmental issues. The Notice enumerates a series of factors which reporting issuers can take into account when formulating the extent of their environmental disclosure.
2. ENVIRONMENTAL INFORMATION REQUIRED TO BE DISCLOSED
The decisive factor in determining whether information must be disclosed is materiality. The materiality test is objective - information related to environmental matters is considered material if the omission or misstatement of such information is likely to influence a reasonable investor's decision to buy, hold or sell securities of the issuer. The Notice sets out a non-exhaustive list of guiding principles that are intended to assist issuers in determining the materiality of environmental information:
- No Bright-Line Test: Issuers should take into account both quantitative and qualitative factors when making the materiality determination as there is no quantitative threshold to rely on when doing so. The materiality of information may vary on a case by case basis
- Context: Some facts may be material on their own, but where this does not appear to be the case, issuers should consider materiality in light of all available information
- Timing: Early disclosure of a matter may be important to a reasonable investor where the impact of the information might be expected to increase over time
- Trends, Demands, Commitments, Events and
Uncertainties: The materiality determination
respecting a known environmental trend, demand, commitment, event
or uncertainty requires an analysis of the:
- probability of occurence of the trend, demand, commitment, event or uncertainty and
- anticipated extent of its impact.
- Err on the Side of Nateriality: When in doubt, issuers should consider information to be material and disclose it.
2.2 Environmental Risks and Related Matters
The Notice discusses five key disclosure requirements related to environmental issues that are set-out in National Instrument 51-102 Continuous Disclosure Obligations:
- Environmental Risks: A reporting
issuer must disclose risk factors that pertain to the issuer and
its business, which include environmental risks. Such risks usually
fall within five categories:
- Litigation risks
- Physical risks
- Regulatory risks
- Reputational risks
- Business model risks.
Issuers must disclose both the risk and the factual basis for it and should avoid using boilerplate language when disclosing such risks.
- Trends and Uncertainties: Issuers
must disclose trends and uncertainties related to environmental
issues that may reasonably have a material impact on their
financial performance and future prospects. The time period that
should be considered depends on each issuer's particular
circumstances and the specific trend or uncertainty under
consideration. An issuer should disclose the following:
- what has been, and is reasonably likely to be, the impact of environmental trends or uncertainties on revenues, expenditures and cash flows
- the impact environmental trends or uncertainties have on its
financial condition and liquidity, if any.
- Environmental Liabilities: Environmental liabilities include actual and/or potential legal obligations to make expenditures related to, notably, compliance obligations, remediation obligations, obligations to pay fines of various nature, compensation obligations and obligations to pay damages. Issuers should consider disclosing environmental liabilities that are reflected in the issuer's financial statements, specifically those that involve a critical accounting estimate (as defined in Form 51-102F1), as well as potential environmental liabilities that are not reflected in the issuer's financial statements.
- Asset Retirement Obligations (ARO): An ARO is a legal obligation to perform certain acts (excluding the promise to pay cash) that result from the retirement of an asset. An asset is retired if it is sold, abandoned, recycled or disposed of. Issuers must disclose AROs in their financial statements, if applicable. Where an ARO is material to an issuer, it should also discuss the ARO in its MD&A in addition to the requisite financial statement disclosures. If an ARO is to be incurred over multiple reporting periods, the information should be disclosed for all periods that may be materially affected.
- Financial and Operational Effects of Environmental
Protection Requirements: Issuers must disclose the
financial and operational impact of environmental protection
requirements on the issuer's capital expenditures, earnings and
competitive position. This disclosure should include information
about the costs associated with the environmental protection
- a quantification of the costs (if material to investors)
- any anticipated trends related to the costs and
- the potential effect of the costs on the issuer's financial
and operational results.
2.3 Risk Oversight And Management
In order to inform investors about whether management is sufficiently focusing on environmental risk management, issuers are required to disclose two categories of information about an issuer's oversight and management of environmental risk:
- Environmental Policies Fundamental to Operations: An issuer must disclose any environmental policies that it has adopted and that are fundamental to its operations. The CSA interprets the term "policy" broadly. The disclosure should include a discussion of the impact or potential impact of the policy, its purpose, its effectiveness, the risks it is intended to address and the method of monitoring and updating the policy.
- Board Mandate and Committees: An issuer should disclose how its board manages environmental risk and should describe any board and management- level committees to which the board has delegated responsibility for oversight and management of environmental risks.
2.4 Impact of Adoption of IFRS
Reporting issuers will be required to apply IFRS accounting standards as of January 1, 2011. The changeover from GAAP to IFRS may change the treatment of environmental liabilities for issuers, which could, in turn, necessitate more disclosure with respect to such liabilities than was the case under GAAP.
2.5 Forward-Looking Information Requirements
When disclosing environmental goals and targets which may be considered material, issuers must ensure that they comply with regulatory requirements pertaining to forward-looking information and future oriented financial information, if applicable.
3. GOVERNANCE STRUCTURES AND ENVIRONMENTAL DISCLOSURE
3.1 Review, Approval and Certification of Disclosure
An issuer's environmental disclosure is subject to review by its audit committee, approval by its board of directors and certification by its CEO and CFO. Each of these parties should consider the following factors when performing their oversight responsibilities with respect to environmental disclosures:
- the environmental matters that are reasonably likely to impact the issuer's business and operations in the foreseeable future
- the magnitude, sources and nature of the issuer's current and anticipated environmental risks and liabilities
- the past and anticipated impact of environmental matters on revenues, expenditures and cash flows
- the impact, if any, of environmental matters on the issuer's financial condition and liquidity
- any assessments made by management regarding the materiality to investors about the information on environmental matters, and the consistency of disclosures made in the financial statements, MD&A and AIF with such assessments.
3.2 Controls and Procedures
Reporting issuers must establish and implement adequate controls and procedures in order to collect dependable and timely environmental information for the purposes of analysis, decision making and disclosure.
3.3 Integration of Financial and Voluntary Reporting
Reporting issuers may disclose information pertaining to environmental matters outside of their disclosure documents, such as in voluntary reports, in responses to surveys and on their websites. Any environmental information disclosed outside of disclosure documents that may be considered material must also be disclosed in the issuer's disclosure documents.
Issuers must also ensure not to include any misrepresentations in any information they disclose in voluntary reports, in responses to surveys and on their websites because such information may be subject to securities legislation respecting forward-looking information as well as civil liability for secondary market disclosure.
The Notice is a further contribution to the existing body of guidelines such as the 2008 Canadian Institute of Chartered Accountants Guide, the Global Reporting Initiative Sustainability Reporting Guidelines and the Carbon Disclosure Project.3 Its publication is perhaps a signal that regulators have emerged from the financial crisis and are returning their attention to matters with longer term horizons.
1. The Notice does not create any new legal obligations for reporting issuers nor does it modify existing ones.
2. Including the Ontario Securities Commission (OSC) which in 2008 released Staff Notice 51-716, a review of 35 public companies' compliance with continuous disclosure obligations related to environmental matters. Staff of the OSC concluded that the majority of the public companies reviewed fell short of expectations with respect to environmental disclosure. The OSC indicated its intent to continue to monitor environmental matters in continuous disclosure documents, raising the possibility of future enforcement actions.
3. See Alfred Page, Adam Chamberlain and John Vellone, "Environmental and Climate Change Disclosure in 2008" in Stanley Berger & Dianne Saxe, eds., Key Developments in Environmental Law: 2008-2009 Edition (Aurora: Canada Law Book 2009) 1.
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