Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Environmental Law, December 2008
Earlier this month, the Canadian Institute of Chartered Accountants (CICA) released a publication that provides another reminder to public companies to consider disclosing climate change issues in their Management's Discussion and Analysis (MD&A). The publication is entitled Building a Better MD&A, Climate Change Disclosures (Report) and updates a 2005 CICA Discussion Brief. The Report is quite blunt in its description of the ultimate impact of climate change on Canadian companies. It states:
"Climate change issues will impact some industries and companies more than others. But sooner or later climate change will affect, either directly or indirectly, the business operations and financial performance of many Canadian companies, large and small, in most sectors."
As a result, there is a need for companies that are potentially affected by climate change to provide timely and appropriate environmental disclosure. CICA notes that the challenge facing most companies lies in determining what information to disclose and under what circumstances. For example, securities regulators look to disclosure set out in a company's MD&A or its Annual Information Form (AIF). However, a company may have also disclosed environmental information in its sustainability report, corporate website or in its responses to surveys such as the annual survey conducted by the London-based Carbon Disclosure Project. If disclosure is not made in a company's MD&A or its AIF, investors may actually interpret that to mean that the information is not material. The challenge lies in balancing the availability of reliable climate change information with the informational needs or demands of investors, bearing in mind that different methods of disclosure are subject to different levels of oversight. In response to that challenge, the Report emphasized the following:
"As an overriding principle for answering this challenge, a company will need to determine what, if any, climate change information is likely to be material to investors in their decisions to invest or continue to invest in the company."
The Report notes the practical problem that climate change disclosure is still an emerging and evolving area. Indeed, for many companies, disclosure may be a multi-year, staged process of improving upon previous disclosures.
What Do Investors Want?
The Report is largely based upon input from institutional investors and market analysts. It found that these persons increasingly want information that will enable them to assess the impact of climate change to a company, as was evidenced by a 2007 petition to the U.S. SEC by a broad coalition of investors seeking the SEC to compel publicly traded companies to improve their climate change disclosure. In that context, five informational areas were identified, including:
- Business Strategy
- Actual Greenhouse Gas Emissions
- Financial Impacts
- Governance Processes.
1. Business Strategy
Investors are seeking information involving a company's business strategy. More particularly, they are seeking information geared towards management's communication of how it has factored climate change issues into its strategic analysis.
Investors want to understand the risks that climate change poses to a company. Information involving risks can be partitioned into four subsets, as follows:
- physical risks
- regulatory risks
- reputational risks
- litigation risks.
Physical risks are those related to the impact of climate change on a company's operations. For example, a ski hill or beachfront business may be impacted by a climate change-induced weather modification or a severe weather event.
Regulatory risks relate to changing environmental laws and regulations. If such laws and regulations have changed or are about to change, the impact of those changes or potential changes on a company's business and operations are of interest to investors.
Reputational risks involve brand loyalty and the public's perception of a company's operations. If a company emits significant amounts of greenhouse gases, it may be subject to public backlash leading to decreased demand for its products.
Litigation risks involve the threat of class actions or other lawsuits brought by government bodies, communities, and shareholders. Once again, if a company emits significant amounts of greenhouse gases, it may be particularly susceptible to such suits.
3. Actual Greenhouse Gas Emissions
Investors are interested in receiving both direct and indirect greenhouse gas emissions data as well as emissions intensity data for the period covered by an MD&A. Investors are interested in emissions trends, anticipated emissions targets and industry sector comparisons. They are also interested in the veracity and completeness of emissions data. Once a company discloses its greenhouse gas emissions, it is important that it disclose the assumptions and methodologies used to calculate those emissions. If those assumptions and/or methodologies change in a subsequent time-period, that change should be referenced in the subsequent MD&A.
4. Financial Impacts
Investors want to know if climate change will have a financial impact on a company. That impact could range from an effect on cash flow to overall company viability. The Report notes that in the face of regulatory uncertainty, it is reasonable for a company to provide a range of financial estimates based on stated assumptions and scenarios.
5. Governance Processes
Investors want to understand the internal processes a company has allocated to identify and manage climate change issues. More particularly, they want to know if the processes are consistent and reliable and if and how senior management is advised.
What information should a company disclose and how should it be presented?
In preparing an MD&A, the Report states that a public company must consider materiality, continuity of disclosure, and forward-looking information. Materiality refers to disclosure that would influence an investor in his or her decision to invest or continue to invest in a company. In considering materiality in the context of climate change, a company needs to consider both short-term and long-term impacts. Continuity of disclosure involves consistency with prior disclosures. As for forward-looking information, it should only be provided if there is a reasonable basis for it. Once again, due to potential variability, the Report notes that it is reasonable for a company to disclose forward-looking climate change information using a range of possible outcomes.
As further guidance, the Report recommends that a company review its internal memoranda and reports such as risk management reports and board minutes to ensure that all pertinent information is considered. Finally, the Report includes the recommendation that a company review disclosures made by its competitors as well as industry publications and reports prepared by market analysts. The overall theme and recommendation of the Report is that a company undertake as thorough a review as possible to assist in determining materiality and ultimately determining what should be disclosed in its MD&A.
Helpful questions a company can ask itself regarding climate change disclosure
The final section of the Report sets out a series of questions that senior management and company directors should ask themselves when dealing with climate change disclosure. Those questions include:
- How has the company determined which climate change issues are material and disclosed in the MD&A? Has materiality been assessed in both quantitative and qualitative terms?
- Has the company addressed the potential impact of climate change issues on both its short-term and long-term financial condition and performance?
- From period to period, is there comparability and consistency in MD&A disclosures about climate change?
- Has the company ensured consistency of MD&A " climate change disclosures with those in other public reports it has issued? Has the company implemented appropriate systems, " procedures and controls to enable timely, complete and reliable reporting of climate change information in the MD&A?
Overall, the Report serves as a useful guide to assist companies in dealing with climate change disclosure. However, it does not offer much that is new concerning such disclosure and public companies are left to their own devices to keep on top of quickly changing or vague information concerning the actual impact of climate change on their businesses. Until such time as North American policy makers decide how and when they will regulate greenhouse gas emissions, the situation will remain unaddressed.
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