Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation/Environmental Law, November 2010
The Canadian Securities Administrators (CSA) recently published Staff Notice 51-333 – Environmental Reporting Guidance to provide guidance with respect to environmental disclosure obligations in connection with issuers' continuous disclosure (CD) documents and the governance structures that can facilitate the preparation of effective disclosure. The Staff Notice clarifies existing disclosure requirements but does not create any new requirements or modify any existing ones.
CSA Staff noted that the determining factor for whether information is required to be disclosed is materiality and that only material environmental information needs to be included in CD documents. CSA Staff also noted that some issuers have found it challenging to determine materiality with respect to environmental information. Consequently, the Staff Notice includes the following guiding principles to assist issuers in determining whether information is material:
- No Bright-Line Test – There is no uniform threshold at which information becomes material and issuers should consider both qualitative and quantitative factors in determining materiality.
- Context - Materiality must be determined in the particular circumstances of an item's omission or misstatement, including the aggregate effect of multiple facts that may not be material on an individual basis.
- Timing – Materiality depends on the relevant conditions at the time of reporting; however, where the impact of an environmental matter is expected to grow over time, early disclosure may be appropriate.
- Trends, Demands, Commitments and Uncertainties – The materiality of a known trend, demand, commitment or uncertainty may depend on its time horizon. Issuers should consider both the probability that an event will occur and its anticipated magnitude.
- Err on the Side of Materiality – Where an issuer is in doubt as to whether particular information is material, they should err on the side of materiality and disclose the information.
The following areas for potential environmental disclosure are highlighted in the Staff Notice.
Environmental Risks and Related Matters
- Issuers should consider whether they need to disclose risk factors related to environmental matters in their CD documents. Meaningful disclosure about each risk and its factual basis should be provided, and boilerplate language avoided.
Trends and Uncertainties
- Management's Discussion and Analysis (MD&A) should disclose material information that may not be fully reflected in the financial statements and trends and risks that have affected the financial statements or are reasonably likely to affect them in the future.
- The relevant time period will depend on the issuer's circumstances and the trend or uncertainty under consideration.
- For environmental liabilities disclosed in financial statements, issuers should include in their MD&A an analysis of any applicable critical accounting estimates.
- Environmental liabilities not included in financial statements because their long-term or contingent nature makes them difficult to quantify may nonetheless require disclosure in MD&A.
- Individual liabilities that are not material in themselves may point to an underlying trend or risk that may be material over the long term.
Asset Retirement Obligations (AROs)
- If an ARO is material to an issuer, in addition to the required financial statement disclosure, the issuer should provide supplemental disclosure in its MD&A, including, where available and material, remediation costs and the current and estimated future impact of these costs on the issuer's financial results.
- AROs may be material long-term obligations requiring disclosure in the table of summary contractual obligations included in the issuer's MD&A.
- AROs may be critical accounting estimates for which an analysis should be provided in the issuer's MD&A.
Financial and Operational Effects of Environmental Protection Requirements
- Annual Information Forms (AIFs) must include disclosure of the financial and operational effects of environmental protection requirements on the issuer's capital expenditures, earnings and competitive position in the current financial year and the expected effect in future financial years, including the costs associated with these requirements and anticipated trends.
Management and Oversight of Environmental Risks
Environmental Policies Fundamental to Operations
- Environmental policies fundamental to an issuer's operations must be disclosed in its AIF.
- CSA Staff expressed the view that "policy" should be interpreted broadly and might include policies relating to sustainable development, community relations, the use and disposal of hazardous materials, prevention of spills, recycling, water conservation or reduction of greenhouse gas emissions.
Board Mandate and Committees
- In providing disclosure with respect to board mandates and standing committees, issuers should indicate the board's responsibility for oversight and management of environmental risks, if applicable, and any board or management-level committee to which responsibility for oversight and management of environmental risks has been delegated.
Impact of International Financial Reporting Standards (IFRS)
- CSA Staff noted that under IFRS issuers may be required to accrue more environmental liabilities, at higher amounts, and provide more disclosure regarding these liabilities.
- The Staff Notice identifies some key differences between IFRS and Canadian GAAP and details on how they may have a material impact on financial reporting.
Forward-Looking Information (FLI) Requirements
CSA Staff noted that, when disclosing environmental goals or targets, whether in CD documents, voluntary reports or otherwise, if such information is material, the document containing it must comply with FLI and future-oriented financial information requirements.
CSA Staff stated that meaningful disclosure of material environmental matters, where applicable, in an issuer's AIF and MD&A is important to achieve fair presentation of the issuer's financial condition in all material respects and for CEOs and CFOs to be able to certify that the issuer's CD documents do not contain any misrepresentations.
To support the review, approval and certification process, an issuer must have adequate controls and procedures in place to provide rigour around its disclosure of environmental matters.
Where issuers provide voluntary disclosure of environmental matters, such as in reports, responses to surveys or on their websites, they must consider whether any of the information must also be included in their CD documents. Issuers should ensure that any voluntary disclosure is consistent with disclosure in CD documents, and should be aware that such voluntary disclosure may be subject to secondary market liability.
Issuers should consider the guidance provided in the Staff Notice when preparing CD documents. Given the prominence of this issue, issuers should also continue to monitor future regulatory guidance on disclosure of environmental matters.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.