Focus continues to intensify on this December's climate
change talks in Copenhagen. Regardless of what may transpire by
year's end, climate-change considerations will remain a
hot-button issue and will garner long-term political, legal and
media attention. Towards Copenhagen and beyond, it seems safe to
say that Canadian companies will continue to be faced with new
legislative requirements enacted to address climate change issues.
As an example, many Canadian companies are, or soon will be,
required to report greenhouse-gas (GHG) emissions.
Against this backdrop, Canadian companies should consider whether
they are adequately preparing themselves to report GHG emissions
and/or to comply with other foreseeable climate change obligations.
Additionally, Canadian reporting issuers should address whether
they are giving adequate disclosure to investors about
environmental matters that may have a material impact on
them.
Canadian industrial emitters face deadline for emissions reporting
The Department of the Environment has given notice that Canadian
industrial emitters of GHGs have until June 1, 2010 to report their
2009 GHG emissions. The reporting deadline, which was established
by Environment Canada, applies to facilities that emit over 50,000
tons of carbon dioxide equivalent (CO2e) per year.
Environment Minister Jim Prentice has indicated that more detailed
regulations will be released prior to the Copenhagen talks.
The Western Climate Initiative releases essential requirements of mandatory reporting
The partners of the Western Climate Initiative (WCI) are
comprised of seven U.S. states and four Canadian provinces, namely
British Columbia (B.C.), Manitoba, Ontario and Quebec. Other U.S.
states and Canadian provinces (Saskatchewan and Nova Scotia) are
currently WCI observers.
The WCI has recently released its final version of the first group
of Essential Requirements for Mandatory Reporting (ERMR). The ERMR
requires owners and operators that are subject to the mandatory
reporting requirements to submit annual GHG emission reports by
April 1 of each year for emissions in the previous calendar year.
The initial reporting requirements will apply to the owner or
operator of a facility that emits 10,000 metric tons of
CO2e or more per year in combined emissions, from one or
more of the listed source categories, in any calendar year starting
in 2010. Accordingly, companies subject to the ERMR that commenced
operations prior to 2010 will be required to report their 2010 GHG
emissions by April 1, 2011.
Subsequent to the year 2010, the ERMR contemplates that the
reporting requirements will also apply to: (1) all importers of
electricity (both retail providers and marketers) that import
electricity into the WCI region, (2) any supplier that within the
WCI region distributes transportation fuels in quantities that when
combusted would emit 10,000 metric tons of CO2e per year
or more, in any calendar year starting in 2010, and (3) any
supplier that distributes within the WCI region residential,
commercial and industrial fuels in quantities that when combusted
would emit 10,000 metric tons of CO2e per year or more,
in any calendar year starting in 2010.
The impact of the ERMR regime
In order to comply with the WCI-imposed obligations, the B.C.,
Manitoba, Ontario and Quebec provincial governments are each moving
forward with legislation designed to implement the ERMR regime. For
example, the B.C. government has announced its intention to
introduce a mandatory GHG-emissions reporting regulation during the
fall of 2009. The Ontario government has recently stated that its
intention is to harmonize Ontario reporting requirements with those
of the WCI (as well as with any U.S. federal trading system).
Quebec has passed Bill 42 (An Act to amend the Environment
Quality Act and other legislative provisions in relation to climate
change), which establishes the reporting of GHG emissions by
certain categories of emitters to be determined by
regulation.
It should be noted that other Canadian provinces have also moved
towards the adoption of legislation that will require companies to
report GHG emissions. For example, in 2004, Alberta passed the
Specified Gas Reporting Regulation, which continues to
require industrial facilities that emit more than 100,000 tons of
CO2e in a calendar year to submit annual emission
reports. Additionally, on August 14, 2009, the government of Nova
Scotia released the Greenhouse Gas Emission and Air Pollutant
Regulation. This regulation requires facilities located in
Nova Scotia that emit more than 10,000 metric tons of
CO2e in a calendar year to submit annual emission
reports.
Measuring and reporting GHG emissions is a labour-intensive process
In order to comply with the various provincial and/or federal
legislation that may apply to them, companies will need to
determine whether or not they emit the quantity of GHGs that
triggers the various legislative reporting requirements. In order
to do so, companies will need to measure their GHG emissions in
accordance with the prescribed methods set out in the various
legislation applicable to them. Measuring GHG emissions will be
labour-intensive and will require that a detailed and mapped-out
process be followed. Additionally, while governments have generally
recognized the importance of standardized measuring methods (so as
to help ensure the fair operation of multi-jurisdictional carbon
cap-and-trade programs), there is no certainty that all legislation
will contain common measuring techniques.
In the event a company is subject to GHG reporting requirements,
the applicable legislation will also set out other obligations that
the company will need to spend time considering. Typically, these
obligations will include monitoring, record-keeping and retention
requirements, as well as data-verification requirements. It can
also be expected that GHG legislation will increasingly require
emitters to reduce their GHG emissions towards established targets
and/or to cover their GHG emissions with prescribed emission
allowances, units or credits.
Canadian reporting issuers and the impact of climate change
As was stated by the Canadian Institute of Chartered Accountants
(CICA) in a Management's Discussion and Analysis (MD&A)
disclosure guide published in November 2008 (the Guide), investors
are increasingly seeking more detailed and nuanced information
about how reporting issuers view the impact of climate change, in
order to assess its effect on a company's current and future
financial conditions, results of operations and cash flows. The
CICA noted that the business impact of climate change will require
reporting issuers - even those that do not directly produce GHG -
to implement strategies, both to adapt to the effects of climate
change on the reporting issuer's business and, in other cases,
to take action to mitigate the extent of their GHG emissions. The
CICA Guide outlines five types of information in MD&A that
should address climate-change issues:
Business strategy. MD&A should present investors with an
overview of the climate-change factors that the reporting issuer
has factored into its business strategy.
Risks. MD&A should describe the risks presented by climate
change on the reporting issuer, including physical risks (e.g.
changes to weather patterns), regulatory risks (e.g. heightened
regulatory oversight and scrutiny), reputational risks (e.g.
negative customer perceptions of reporting issuers failing to
address climate-change issues), litigation risks (e.g. lawsuits
against heavy GHG emitters) and any other material risks.
GHG emissions. To the extent that it is material to evaluating the
performance and future prospects of a reporting issuer, a reporting
issuer's direct and indirect GHG emissions and related
intensity data should be discussed in MD&A.
Financial impacts. The impact of climate change on financial
operations, cash flows and the financial condition of the reporting
issuer should be discussed in MD&A, along with the future
financial implications.
Governance processes. MD&A should describe the governance and
organizational processes used by the reporting issuer in
identifying and managing climate-change issues.
While Canadian securities regulators have not yet specifically
mandated the disclosure of climate-change strategies in a reporting
issuer's public disclosure record, the requirements of National
Instrument 51-102 Continuous Disclosure Obligations (NI
51-102), including the requirements applicable to a reporting
issuer's MD&A, are sufficiently broad so as to capture such
issues.
A reporting issuer's MD&A, for example, is required to
discuss the effect of "known trends, demands, commitments,
events or uncertainties" on the reporting issuer's
"financial condition, results of operations and cash
flows." Moreover, a reporting issuer's annual information
form (AIF) is required to disclose such things as the
"financial and operational effects of environmental protection
requirements" on its financial position, including capital
expenditures. An AIF is also required to detail risk factors, such
as environmental risks, and "regulatory constraints.and any
other matter that would be most likely to influence an
investor's decision to purchase" the securities of the
reporting issuer. As climate-change concerns continue to escalate
and, as a result, increasingly stringent legislation is enacted ,
regulatory authorities may in the future require Canadian reporting
issuers to provide more prominent and expansive disclosure with
respect to the impact that climate change will have on their
business.
In February 2008, the Ontario Securities Commission (OSC) issued
Staff Notice 51-716 - Environmental Reporting, outlining
the results of a targeted review by OSC staff of the degree to
which Canadian reporting issuers were adequately disclosing
information about so-called "environmental matters" in
their annual financial statements, MD&A and AIFs. The OSC's
written findings suggest that, at the time, the disclosure of
certain Canadian reporting issuers with respect to potentially
material environmental matters was inadequate and, in certain
instances, consisted of insufficient, boilerplate disclosure.
Staff Notice 51-716 should continue to serve as a signal to
Canadian reporting issuers that, regardless of whether or not they
are subject to specific GHG-emission or other environmental
reporting requirements, it is necessary for them to seriously
consider the effect of environmental matters and climate change on
their business and to ensure that such matters are adequately
disclosed to investors.
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