The Ontario Securities Commission (the "OSC") recently released Staff Notice 51-333 Environmental Reporting Guidance (the "Staff Notice"), which provides clarification on the continuous disclosure responsibilities of reporting issuers with regard to environmental matters. While the Staff Notice does not officially introduce any new law or obligations, it does provide greater detail regarding what environmental information must be disclosed, including information specifically related to greenhouse gas emissions and climate change related matters. As such, it will be particularly relevant to reporting issuers who are preparing their 2010 annual reports and who are exposed to environmental risks and opportunities.
This Staff Notice is the product of a multi-year on-going effort by the OSC to improve the disclosure of environmental matters by reporting issuers. As discussed in a previous bulletin, the OSC issued a staff notice in February 2008 discussing its review of the climate change disclosure of 35 reporting issuers, which the OSC found to be wanting. Almost three years later, the new Staff Notice 51-333 is intended to help such issuers improve the quality of their disclosure of contingent environmental risks like those posed by climate change.
The OSC issued the Staff Notice only a few months after the U.S. Securities and Exchange Commission released interpretive guidance on existing SEC disclosure requirements for reporting companies relating to the issue of climate change (see our previous bulletin regarding same).
Both the Staff Notice and the SEC interpretive guidance emphasize that no new disclosure rules are being created. Instead, the documents are intended to help issuers understand how the longstanding disclosure principle of materiality can apply to issues posed by climate change. While the SEC interpretative guidance was focused on climate change, the OSC Staff Notice addressed a broader array of contingent environmental liabilities and opportunities.
These clarifications of disclosure requirements come amidst a changing regulatory landscape and the increasingly present impacts of a wide array of environmental matters on issuers. As a consequence, investors increasingly view environmental issues as being material to their investment decisions.
OVERVIEW OF STAFF NOTICE
In response to the growing appreciation of the potential materiality of environmental issues, the OSC discusses the OSC's expectations with respect to: (1) what environmental information should be disclosed and (2) what governance structures around environmental disclosure should be implemented.
1) Disclosure of environmental information
The key question when considering whether certain information must be disclosed is "materiality", that is whether the information in question would likely influence a "reasonable investor's decision whether or not to buy, sell or hold securities of the issuer". There is no bright-line test for materiality and context, timing as well as the trends, demands, commitments, events and uncertainties of both the issuers and the marketplace in general will influence whether a particular piece of information is considered material.
Issuers should asses the materiality of environmental information pertaining to all of the following:
- environmental risks, including: potential litigation, physical risks to processes and supply chains, regulatory risks (e.g., costs of complying with greenhouse gas emissions regulations), reputational risks, and risks to the current business model of the issuer;
- trends and uncertainties, including an assessment of whether such trends and uncertainties will have, or are reasonably likely to have, a material impact on the issuer's liquidity, capital resources or results of operations;
- environmental liabilities, including any legal obligation to make a future expenditure due to the past or ongoing manufacture; use, release or threatened release of a particular substance, or other activities that adversely impact the environment;
- asset retirement obligations; and
- financial and operational effects of environmental protection requirements on the issuer's capital expenditures, earnings and competitive position in the current financial year and the expected effect in future years (including the quantification of same to the extent possible).
The Staff Notice also emphasizes that investors have a right to know what policies a company has in place to address environmental issuers and to understand the governance mechanisms (e.g., board mandate, committees, etc.) that have been implemented to oversee and manage such risks and opportunities.
The OSC also notes that, under IFRS, issuers may be required to accrue more environmental liabilities, at higher amounts, and provide more disclosure regarding these liabilities.
Finally, the OSC cautions that environmental goals and targets publicized by companies, even if not included in mandatory securities filings, may constitute forward looking information. FLI requirements relate to disclosure "regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action". Specific disclosure requirements may apply to such forward looking information.
2) Governance structures
The Staff Notice emphasizes that an issuer's environmental disclosure must be subject to three levels of oversight:
- review by the audit committee;
- approval by the board of directors; and
- certification by the CEO and CFO.
To ensure that these three levels of oversight operate effectively, issuers must implement procedures and controls to ensure that reliable and timely environmental information is made available both for management analysis and decision-making and for disclosure to investors, regulators and other stakeholders.
Finally the Staff Notice notes that information disclosed voluntarily (e.g., on websites, in response to surveys like the Carbon Disclosure Project, etc.) should be accurate and may be material (and thus subject to inclusion in mandatory disclosure filings).
In order to assist reporting issuers in the preparation off their annual reports, the Staff Notice includes an appendix that provides examples of what disclosure is likely required of specific entities. Although the examples are for illustrative purposes and are non-exhaustive of the disclosure requirements applicable to a particular issuer, many will find them helpful in understanding what types of information must be disclosed. Among other matters, the examples provided in the appendix highlight how anticipated climate change regulations, as well as the repercussions of a changing climate itself may be material and could constitute forward looking information.