On February 27, 2008, the Ontario Securities Commission ("OSC") released OSC Staff Notice 51-716 Environmental Reporting ("Staff Notice 51-716") outlining the results of a targeted review of 35 public companies' compliance with continuous disclosure requirements related to environmental matters under National Instrument 51-102 Continuous Disclosure Obligations.
Staff Notice 51-716 considered public companies' continuous disclosure obligations related to contingent environmental liabilities, asset retirement obligations, financial and operational effects of environmental protection requirements, environmental policies fundamental to operations, and environmental risks. The OSC concluded that the majority of the public companies reviewed fell short of expectations with respect to environmental disclosure. The OSC intends to continue to monitor environmental matters in continuous disclosure documents, raising the possibility of future enforcement actions. Staff Notice 51-716 provides valuable direction for issuers who wish to avoid becoming subject to such enforcement action.
Public companies should consider the guidance in Staff Notice 51-716 when preparing their financial statements, Management's Discussion and Analysis ("MD&A") and Annual Information Form ("AIF") to ensure that disclosure of environmental matters complies with securities legislation and provides investors with meaningful information for making investment decisions.
The Materiality Threshold
Materiality remains the determining factor for including information in continuous disclosure documents. Information is likely material if a reasonable investor's decision as to whether or not to buy, sell or hold securities of the public company would likely be influenced or changed if the information was omitted or misstated.
While the materiality threshold has remained the same, the factors that would influence a reasonable investor's decision are changing. Some large pension funds, as well as a small number of ethical funds, are now factoring environmental, social, and governance considerations into investment decisions. In addition, a small number of ethical funds now explicitly consider ESG issues in making investment decisions. These include funds offered by mainstream investment management groups such as Acuity Investment Management and Phillips Hager & North, as well as specialized ethical investing firms such as Meritas and The Ethical Funds Company. OSC staff is of the view that public companies should consider both quantitative and qualitative factors in determining materiality generally, and particularly for disclosure relating to environmental matters.
Increased Scrutiny On Environmental Disclosure
Staff Notice 51-716 emphasizes that the OSC will continue to scrutinize environmental matters in continuous disclosure documents. Given that the majority of public companies reviewed fell short of expectations, the OSC's discussion in Staff Notice 51-716 provides valuable direction for issuers who want to avoid being the subject of an enforcement action in the future. Specifically, the OSC emphasizes three common issues related to the inadequacy of current disclosures and the expectation to meet future requirements:
- Boilerplate Disclosure is Insufficient.
Boilerplate disclosure of environmental issues is
insufficient to meet a public company's continuous
disclosure requirements. For example, when reporting
environmental risks, such as those relating to compliance
with environmental laws, the OSC noted that simply disclosing
that the company is subject to environmental laws and
regulations and that provisions for expenses associated with
environmental obligations have been established is
insufficient.
- Emphasis on Quantification of Costs. OSC
staff suggests that public companies should replace
boilerplate language with a quantification of the costs
associated with environmental issues where quantitative
information is reasonably available and would provide
meaningful information to investors. This is true even where
environmental estimates are "highly uncertain." For
example, a discussion of the financial and operational
effects of environmental protection requirements should
include a quantification of the costs associated with
environmental protection requirements and the potential
impact of these costs on financial and operational
results.
- Emphasis on How Environmental Issues Impact on a
Public Company. OSC staff place an emphasis on
public companies providing an evaluation and description of
the impact or potential impact that costs associated with
environmental issues may have on the issuer's
operations. Public companies are now expected to specifically
identify how the estimate relates to the company, and a
failure to do so is considered insufficient because it does
not provide meaningful information to investors.
Greener Ahead?
While management and audit committees should take a closer look at environmental issues in their current disclosure obligations, taking into account Staff Notice 51-716, these environmental disclosure obligations are likely to continue to evolve. Public companies should be thinking about more concrete disclosure of information regarding carbon footprints and what systems they will need to have in place as the green march continues and more detailed and accurate environmental costing approaches are developed.
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