Public companies face numerous ongoing disclosure requirements pursuant to Canadian securities regimes. Included in these requirements is an obligation to disclose certain environmental information, where material. As Canada proceeds with the implementation of its commitments under the Kyoto Protocol, which came in to force in February 2005, public companies affected by climate change regulations and emerging carbon markets should be particularly aware of their environmental public disclosure obligations.
- Public Disclosure Requirements Generally
- Environmental Disclosure
- The Impact on Public Companies
In April 2005, the Canadian Government (the "Government") released Project Green – A Plan for Honouring Our Kyoto Commitment (the "Plan"), Canada's plan to reduce greenhouse gas emissions ("GHGs") by 270 megatons ("MT") by 2012. A significant component of the Plan is to require Large Final Emitters ("LFEs") – certain companies from the mining, manufacturing, oil and gas, and thermal electricity sectors ("Climate Change Sectors") representing just under 50-percent of Canadian GHGs – to reduce GHGs by 45MT between 2008-2012.
Implementation of the Plan is now underway. Regulations under the Canadian Environmental Protection Act, 1999, which as of November 22, 2005 lists GHGs as toxic substances, will limit GHG emissions by LFEs. Notice of Drafting Instructions for the LFE Regulations was published in the Environmental Registry on November 28, 2005.
The Plan includes a GHG offset system to encompass all sectors of the Canadian economy. Under the offset system, a project proponent in any sector of the economy may be issued tradable GHG credits by implementing a GHG emission reduction or removal project. The offset system together with the LFE system would create a domestic carbon market with international linkages. As well, the government is creating a $1 billion Climate Fund Agency to enable the federal government to participate in the market as a purchaser of domestic and international GHG credits.
Prior to the election call, the Liberal Government indicated that it expected some of these initiatives to be in place for early 2006, while the balance were intended to be in place in 2007, prior to the first Kyoto Protocol Commitment Period of 2008-2012. In the long term, the international community agreed to the Montreal Action Plan of December 2005, (arising from the 11 th Conference of the Parties and the 1st Meeting of the Parties to the Kyoto Protocol), a commitment for further international action on climate change and greenhouse gas reductions by industrialized countries beyond 2012.
The possibility of a change in Canada's government due to the upcoming federal election (on January 23, 2006) raises some uncertainty concerning Canada's approach to the Plan and the implementation of our Kyoto commitment. The Conservatives and the Liberals have differed on their approach to Kyoto, with the Conservatives more inclined to direct Canadian resources to domestic air quality management and air contaminant reduction then to buying greenhouse gas emission allowances from foreign jurisdictions as a result of an aggressive Kyoto commitment. How this preference might affect a Conservative government approach to Kyoto implementation is unclear.
Public Disclosure Requirements Generally
Securities laws across Canada, and the standards set by organizations such as the Canadian Institute of Chartered Accountants (the "CICA"), require public companies to disclose material information. The purpose of disclosure rules is to require transparency of a public company's financial risks and prospects in order that the investing public has timely and accurate disclosure of all material information (i.e., that which could reasonably be expected to affect the market price or value of publicly traded securities).
The information that must be disclosed is "material" information. Two categories of materiality are used in the Securities Act (Ontario) (the "Act"): material facts and material changes. A material fact is one that would reasonably be expected to have a significant effect on the market price or value of an issuer's securities. A material change is generally a change in a public issuer's business, operations or capital that would reasonably be expected to have a significant effect on the market price or value of the issuer's securities, including a decision to implement such a change made by a public issuer's board of directors or senior management who believe that confirmation of the decision by the board of directors is probable ("Material Information"). Under Canadian securities laws, disclosure of Material Information occurs on a periodic and timely basis in press releases, material change reports and other public reports, including financial statements and financial documents such as Annual Information Forms ("AIF") and Management's Discussion and Analysis ("MD&A") (collectively, "Disclosure Documents"). As of December 31, 2005, under Part XXIII.1 of the Act, public companies and their directors and officers, among others, are liable to class action proceedings in respect of misrepresentations (which include an ommission or the failure to make timely disclosure of a material change) in such Disclosure Documents and in certain public oral statements (please see the MarketCaps issue dated September 1, 2005 (Volume 1, Number 7) for a further description of this liability regime).
Many types of information related to a company's business could be considered material, including its environmental practices. Environmental information could be considered Material Information, and if so, must be publicly disclosed, where it could reasonably be expected to influence an investor's decision regarding a company's securities or the market price of such securities.1. As processes for meeting Canada's commitments under its Kyoto obligations come into effect, it is expected that more environmental information will be considered to be Material Information under applicable securities laws.
In addition to the recognition that compliance obligations require the reporting of environmental information where it is material to the markets, management of public companies are recognizing that the communication of environmental performance information and corporate environmental risk and opportunity management strategies makes good business sense. There is certainly an increasing expectation that this information will be communicated, and indeed the trend in Canada and globally is for enhanced environmental reporting.2
In many circumstances, the disclosure of material environmental information affords the investing public insight into the sustainability of a company's earnings. As the management of climate change risks and opportunities - in addition to the other environmental issues which are emerging as challenges to corporate sustainability, such as toxic substances management, waste management, air and water emissions - becomes inextricably linked to a company's financial performance and future prospects, disclosure of environmental information will not only be dependent on its materiality to decisions of investors, it also will be increasingly relevant to the decisions of other public company stakeholders.3
The Impact on Public Companies
It is proposed that public issuers, particularly LFEs and others affected by the new carbon constrained market, will have to account for GHGs in their financial statements. It is also proposed that they will be required to indicate the contextual "impact of GHG-related strategies, risks and obligations on past and future financial performance" in fundamental disclosure documents such as MD&As.4
To fulfill their public disclosure obligations, management will have to have a clear understanding of their company's GHG emission inventories to enable them to, among other things, calculate and fulfill future GHG emission regulatory reporting requirements and quantify potential consequences upon operations.5 GHG compliance strategies may be required: companies may be required to be buyers of GHG credits for compliance or may need to establish capital budgets to ensure adequate GHG reduction technologies or production process modifications to meet emission constraints. On the other hand, management may determine that the carbon market affords it GHG trading opportunities and may therefore participate as a trader with investment or income objectives.
In all circumstances, management will have to ensure that it appropriately identifies and reports material environmental information. The MD&A disclosure obligation - to provide a discussion of current and potential future performance trends, demands, commitments, events or uncertainties that could or will reasonably materially effect a company's business – requires management to address the environmental context of its operations material to its current performance and the sustainability of its earnings.
The looming sustainability challenge of carbon constraints, and the risks and opportunities of carbon markets, will present new corporate environmental disclosure challenges. Some will perform better than others; the market will ultimately determine the new winners and losers, as it should, on an informed basis.
1. Dr. R. Repetto, et al. for the Commission for Environmental Cooperation, Environmental Disclosure Requirements in the Securities Regulations and Financial Accounting Standards of Canada, Mexico and the United States (25 March 2002) at 13.
2. Stratos, Building Confidence – Corporate Sustainability Reporting in Canada:http://www.stratos-sts.com/pages/publica012.htm; see also the Global Reporting Initiative: http://www.globalreporting.org/.
3. Interview of Julie Desjardins, independent consultant in performance measurement and reporting and a Program Director of CICA (28 November 2005) [hereinafter Desjardins].
4. CICA, Interpretive Release – Disclosing the Financial Impact of Climate Change and Other Environmental Issues (Draft for Comment, March 2005) at 6.
5. Desjardins , supra note 3.
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