Canada: The Continuing Discussion Of Continuous Disclosure: The Influence Of The CSA’s

This article was originally published in the March 2011 issue of Environews, the official newsletter of the Ontario Bar Association Environmental Law Section.

Reporting issuers, especially those whose businesses involve material or potentially material environmental matters, should carefully consider CSA Staff Notice 51-333, Environmental Reporting Guidance¹ (the Notice), which the Canadian Securities Administrators (CSA) published in 2010. As many reporting issuers prepare their annual information forms (AIFs) and other continuous disclosure in 2011, now may be the first time that they are considering the Notice in the context of their disclosure.

The Notice is one of a series of developments in the last few years that have sought to increase the amount and quality of environmental continuous disclosure (CD) in various jurisdictions, including Ontario. For example, in 2008, the Ontario Securities Commission (OSC) released the results of a review that identified a number of shortcomings in the CD of 35 reporting issuers in environmentally intensive industries.² More recently, in response to a resolution of the Ontario Legislature, the OSC considered whether new CD requirements were needed for environmental matters. The OSC concluded in a 2009 report to the Minister of Finance that no new requirements were needed. However, the OSC indicated that, on the basis of its consultations and other work, it would prepare guidance on compliance with the existing CD requirements for environmental matters.³ After further consultations and study, the Notice⁴ was issued by the CSA.

The stated threefold "motivation" for the Notice's guidance is that (1) issuers are increasingly recognizing the current and potential effects associated with environmental matters (as was highlighted by BP's oil spill in the Gulf of Mexico); (2) the environmental regulatory landscape is constantly changing, which requires issuers to assess their CD in light of ongoing regulatory developments; and (3) investors are increasingly interested in how environmental matters affect issuers – an interest that has manifested itself in a number of ways, such as shareholder resolutions and disclosure surveys.⁵

The Notice provides that it "does not create any new legal requirements or modify existing ones" for reporting issuers; rather, it purportedly clarifies existing CD requirements.⁶ According to the Notice, its purpose is to assist reporting issuers (other than investment funds) in "(1) determining what information about environmental matters needs to be disclosed; and (2) enhancing or supplementing their disclosure regarding environmental matters, as necessary."⁶ In practice, the Notice, along with other developments, will likely result in some reporting issuers assessing their environmental CD differently in 2011 than in the past. In addition, the examples of disclosure provided in the Notice will likely assist some issuers to improve their environmental CD.

Materiality

The Notice reaffirms that materiality is the determining factor in whether environmental information should be disclosed. The Notice also reaffirms that environmental information is likely to be material (to an issuer) if a reasonable investor's decision whether or not to buy, sell or hold securities of the issuer is likely to be influenced or changed if the information was omitted or misstated.⁷

Given that some issuers have found determining materiality in the environmental context to be challenging, the Notice provides the following "guiding principles" as a non-exhaustive list of factors to be considered:

• No bright-line test. There is no uniform quantitative threshold at which a particular type of information becomes material. Issuers should therefore consider both quantitative and qualitative factors in determining materiality. In other words, it is a judgment call based on all the relevant factors, including those mentioned below.
• Context. Materiality requires assessing facts individually as well as cumulatively so issuers do not "lose sight of the forest for the trees" by considering the materiality of individual facts only in a piecemeal or reductionist manner.
• Timing. Materiality determinations require an assessment of the prevailing relevant conditions and the effect of the passage of time on the impact of an environmental matter.
• Trends, demands, commitments, events and uncertainties. As with other types of CD, the Notice indicates that materiality in cases of a known environmental trend, demand, commitment, event or uncertainty depends on an analysis of (1) the probability that one of these situations will occur; and (2) the anticipated magnitude of its effect. While the probability would seem (to the authors) to be based on the occurrence happening within a certain timeframe, interestingly, this time aspect is not expressly mentioned in the Notice's discussion of this guiding principle.
• Err on the side of materiality. The CSA encourages issuers to err on the side of materiality and if there is any doubt about whether particular information is material, to disclose it.⁸

Key Environmental Matters

The Notice identifies five key requirements in National Instrument 51-102, CD Obligations, which may, in appropriate circumstances, require disclosure of environmental matters:

• environmental risks (to be disclosed in an issuer's AIF pursuant to section 5.2 of NI 51- 102F2)
• trends and uncertainties (to be disclosed in an issuer's Management's Discussion & Analysis, or MD&A, pursuant to section 1.2 and 1.4(g) of NI 51-102F1)
• environmental liabilities (to be disclosed in an issuer's financial statements and discussed in MD&A)
• asset retirement obligations (to be disclosed in an issuer's financial statements and discussed in MD&A)
• financial and operational effects of environmental protection requirements (to be disclosed in an issuer's AIF under item 5.1(1)(k) of Form 51-102F2).

The Notice indicates that since each of these areas provides insight into an issuer's environmental risk profile, each of these areas must be disclosed if it is material.⁹

Environmental Risk Oversight and Management

The Notice suggests that investors would like information to assess whether directors are appropriately focusing on risk management, including environmental risk management. The Notice indicates that disclosure of the following provide insight into an issuer's environmental oversight and management: (1) environmental policies implemented by the issuer that are fundamental to its operations; and (2) how the board manages environmental risk.¹⁰

The Impact of International Financial Reporting Standards

For financial years beginning on or after January 1, 2011, reporting issuers are required to use the international financial reporting standards, rather than existing Canadian GAAP (generally accepted accounting principles). The Notice indicates that this changeover in accounting standards may require reporting issuers to accrue more environmental liabilities, at higher amounts, and provide more disclosure about these liabilities.¹¹

Forward-looking Information Requirements Relating to Goals or Targets

The Notice reminds reporting issuers that disclosure of environmental goals or targets, if material, may be considered "forward-looking information" within the meaning of NI 51-102. Such disclosure may therefore be subject to the CD obligations applicable to forward-looking information.¹²

Governance Structures for Environmental CD

The Notice observes that an issuer's environmental CD is subject to three levels of oversight: (1) review by the audit committee (in its review of the financial statements and MD&A); (2) approval by the board of directors; and (3) certification by the issuer's chief executive officer and chief financial officer. To support these functions, the Notice indicates that directors and certifying officers must know that systems, procedures and controls have been implemented to gather reliable environmental information for management analysis and decision-making purposes and disclosure to investors, regulators and other stakeholders.¹³ Interestingly, the Notice notes, "Some issuers have invested significantly in establishing reliable measurement and reporting systems related to environmental information, but as yet many have not."¹⁴ Examples of Environmental Disclosure

The Notice includes examples of environmental disclosure based on hypothetical facts. These examples are not intended to set a floor or ceiling for an issuer's disclosure or to become boilerplate language, which the Notice generally discourages.

Discussion Likely to Continue

The Notice emphasizes and augments certain important concepts relating to environmental CD. It also represents another example of increasing focus by securities regulators on environmental disclosure. As a result, we expect increased attention to environmental disclosure in CD reviews by securities regulators in upcoming years.

Footnotes

1 Canadian Securities Administrators, 51-333_environmental-reporting.pdf>.

2 OSC Staff Notice 51-716 Environmental Reporting, 51-716_enviro-rpt.jsp>.

3 OSC Staff Notice 51-717 Corporate Governance and Environmental Reporting, /SecuritiesLaw_sn_20091218_51-717_corp-gov-enviro-disclosure.htm>.

4 Supra note 1 at 3-4.

5 Ibid. at 3.

6 Ibid.

7 Ibid. at 5.

8 Ibid. at 7.

9 Ibid. at 8.

10 Ibid. at 16.

11 Ibid. at 18.

12 Ibid. at 20.

13 Ibid. at 22-23.

14 Ibid. at 23.

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The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.