1 Introduction

Over the past few decades, public companies have had to provide information to investors on all material aspects of their business activities, their financial performance and their future projects. This continuous reporting is done through periodic disclosure in the form of public documents and releases describing material changes.

In 2005, the Autorité des marchés financiers du Québec adopted National Instruments (NI) 51-102,1 52-1092 and 58-1013 to specify the nature and scope of information to disclose, to make certain officers accountable for information-gathering and for the accuracy of communications, and to require the disclosure of governance practices. The Québec Securities Act and NI 51-102 provide that a reporting issuer must provide periodic reports of continuous disclosure, including an annual information form (AIF) and a management discussion and analysis form (MD&A), which must be filed annually.

As we will see below, NI 51-102 Forms and Policy Statement 51-102 have specified the environmental content of periodic disclosures.

However, many stakeholders are still unsatisfied with the scope and the generic character of environmental disclosures.4 Some authors even talk about a "disclosure gap" to describe this lack of consistency between regulatory requirements and disclosures filed.5 These discrepancies are also observed in climate change risk disclosures.6

In response to the pressures made by various segments of society,7 financial market authorities have looked at environmental disclosures by companies whose activities affect the environment and have severely criticized them.8

On October 27, 2010, the Canadian Securities Administrators published CSA Staff Notice 51-333, Environmental Reporting Guidance to assist reporting issuers in meeting their existing obligations to disclose environmental information. Notice 51-333 provides guidelines to assess the materiality of environmental information and examples of adequate disclosure. It also points out that, as of January 1, 2011, reporting issuers may have to disclose more information about environmental liabilities, as the International Financial Reporting Standards may require greater accruals for environmental liabilities, compared to the Canadian GAAP.

It is in this evolving context, which appears to be moving towards increased environmental disclosure, that we shall address two issues that consistently arise when directors, officers and advisors of corporations consider the information gathered and identify the information to be reported, namely (a) evaluating the threshold of materiality of information beyond which disclosure is required, and (b) the breadth of forward-looking information to be disclosed.

2. Material Information

Securities laws and regulations define what is material information, the disclosure of which is required. Canadian and American courts have shed some light on the materiality threshold and on the analysis required to determine the materiality threshold in a given context.

  1. Statutory Definition

The materiality threshold above which information must be disclosed is defined in Québec in the Securities Act (QSA),9 as well as in Forms 1 and 2 of Regulation 51-102.10

The QSA provides that a reporting issuer must periodically disclose information about its business and internal affairs in compliance with regulatory requirements.11

Regulation 51-102 provides that material information must be disclosed in the annual information form (AIF) and the MD&A.12

In the AIF, the reporting issuer must (i) describe the environmental requirements applicable to the corporation as well as their effects on capital expenditures, earnings and competitive position of the corporation;13 (ii) mention environmental and social policies fundamental to operations, as well as steps taken to implement these policies;14 (iii) list material environmental and public health risk factors relating to the company’s operations;15 and (iv) describe all civil and regulatory proceedings, current and contemplated.16

The MD&A must give material information on the current and future activities of the corporation, including the information that complements and supplements the financial statements and that may not be fully reflected therein. It must discuss important trends and risks that could affect the financial statements or that are reasonably likely to affect them in the future.

Each AIF and MD&A must be certified by the chief executive officer and the chief financial officer as to the adequacy of the management and data collection systems and, to their knowledge, as to the accuracy of the disclosures.17 This certification includes the collection and disclosure of information on the environmental performance and responsibilities of the company.

Public companies that fail to report material information in an AIF or in a MD&A could be subject to penal proceedings18 by the AMF, a statutory civil action taken by investors19 and civil liability proceedings under Article 1457 of the Civil Code of Québec (CCQ). The AIF and the MD&A are core documents within the meaning of Section 225.3 of the QSA.

The forms to Regulation 51-102 set out the following test to determine if information is material: "Would a reasonable investor's decision whether or not to buy, sell or hold securities in your company likely be influenced or changed if the information in question was omitted or misstated?"20

This regulatory test of what constitutes material information to be reported in periodic continuous disclosure documents, based on the decision of a reasonable investor, is different from the test for what constitutes a material fact under the QSA, which is used in public offerings of securities.21 Assessing a material fact is based on its impact on the market, meaning that information must be disclosed if it has the potential of changing the value or the price of the securities of the corporation. The rights to undertake statutory civil proceedings under the QSA are based on the existence of a misrepresentation, itself defined as any misleading information on a material fact22 and therefore capable of affecting the value or the price of securities.

The Canadian definition of material information is similar to that adopted in the United States.23 Canadian courts often refer to the more abundant American case law to establish the parameters of materiality.24 We shall do the same in this article.

Even though the reasonable investor standard is an objective one, its appreciation is based on the facts and circumstances of each case. The decision to disclose information, or not to disclose it, must result from a rigorous analysis of all relevant facts and the potential impact of such information. This decision must also take into consideration the expectations and concerns of a reasonable investor.

In a recent ruling,25 the Ontario Securities Commission (OSC) describes the assessment of the materiality of a statement as follows:

Accordingly, the assessment of the materiality of a statement is a question of mixed fact and law that requires a contextual determination that takes into account all of the circumstances including the size and nature of the issuer and its business, the nature of the statement and the specific circumstances in which the statement was made. The reasonable investor standard for determining materiality articulated in TSC Industries has been accepted and applied by the Commission in a number of decisions.

The notion of "reasonable investor" is evolving and does not only include economic components. It also reflects social values and fluctuating market trends, at a given time. The person who must determine the impact of information on the decision of this virtual person must therefore try to understand the economic expectations of investors generally, as affected by contemporary social concerns, and determine what would be capable of influencing this person.

  1. Case Law

The courts have set out certain principles that define the materiality threshold of information to be disclosed and that illustrate what they believe to be consistent with a reasonable investor's behaviour. Although these decisions do not address environmental information directly, they are helpful to understand how to assess materiality. We set out some of these principles below.

  1. Potential Impact

In Kripps v. Touche Ross,26 it was decided that for information to be material, it is not sufficient to establish that it "could potentially" influence the decision of a reasonable investor; it must be demonstrated that it "probably would."

  1. Excessive Disclosure

In YBM,27 excessive disclosure that includes immaterial facts is qualified as "counter-productive." This approach results in overwhelming the reasonable investor, watering down material information and creating confusion in the investor's mind. The court specified that judgment and common sense should prevail.

In TSC Industries, the judge states the following:

…if the standard of materiality is unnecessarily low, not only may the corporation and its management be subject to liability for insignificant omissions or misstatements, but also management’s fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decision-making.28

  1. Company-Specific Risks

Continuous disclosure reports must contain information describing material risks that are specific to the company. It is insufficient, if there are company-specific risks, to mention risks shared by the whole industry or risks affecting all companies within a given geographical area.29 In this decision, there was a report from one of the Board committees on the corruption of certain employees who would have had links with organized crimes in Eastern Europe.

  1. Time of Determination

The determination of materiality of information must take into consideration the information available at the time of reporting, and not after the filing of disclosure documents, when all the information becomes available.30

  1. Indemnity Agreements

In Levine v. N.L. Industries,31 the court decided that the reporting issuer may take into account indemnity agreements given by a solvent person, in this case the government, in the determination of the materiality of information. If the indemnity agreements are such that they remove potential liability, disclosure of potential liability is not required. This case involved a uranium-processing facility operated in violation of federal environmental laws by the subsidiary of a reporting issuer, and potentially resulting in significant compliance costs.

  1. Statutory Violations

American courts have decided that existing violations of environmental laws, in the absence of litigation, could constitute material information to be disclosed.32

  1. Environmental Information

Since the 1980s, American courts and the Securities Exchange Commission (SEC) have rendered several decisions on the disclosure of environmental information.

Some of them address the accounting treatment of environmental information, such as the failure to audit, assess and disclose in financial statements and continuous disclosure documents the costs of groundwater contamination remediation,33 and the inappropriate use of reserves for site clean-ups.34

Other decisions examine the materiality of environmental information and the necessity of disclosing it. In SEC v. Allied Chemical Corporation,35 the company had failed to disclose the discharge of contaminants in the environment, for which the company knew the impact. In re Occidental Petroleum Corporation36 involved one of the worst environmental disasters in the United States, commonly called the Love Canal case. The court decided that the company should have disclosed the leaching of chemical waste in the groundwater of a residential area.

In Endo,37 the company disclosed that it had retained certain environmental liabilities after the sale of one of its subsidiaries, but did not believe that these liabilities were material. This general information was deemed insufficient due to the significant economic value of these liabilities, which were then assessed at $60 million.

Failure to disclose the estimated material cost of measures required to ensure regulatory compliance of a plant’s air emissions38 was also found inadequate.

However, it was decided that a chemical product manufacturer must not describe general risks associated with his activities in the continuous disclosure documents, since these risks are common knowledge and more detailed information on these risks is easily accessible in other types of documents.39

  1. Forward-Looking Information

Another considerable challenge for those who prepare continuous disclosure documents is determining if they must disclose a liability or a fact that has not yet materialized, if they have knowledge of facts that could lead to its realization. Of course, they must disclose only if this forward-looking information is material, but what are the bounds of foreseeability? How far must corporate officers look into the future?

Forward-looking information is defined under Section 5 of the QSA as disclosure regarding possible events, situations or operating results that is based on assumptions about future economic conditions and courses of action. Forward-looking information that would have to be disclosed if material could come from various sources, including all documents published by the reporting issuer and made public, as well as information presented on the reporting issuer's website.40

When forward-looking information is disclosed, it must be identified as such and worded cautiously by specifying that the results may vary from forecasts and mentioning risks that could influence these results.41 Assumptions used and the policy for updating forward-looking information must also be stated.42 These specifications may give rise to certain defences in the event of statutory civil recourses.43

Forward-looking information may be divided into two categories: (i) contingent liabilities that must be disclosed in financial statements, the MD&A or the AIF;44 and (ii) information that is to be disclosed in the MD&A for the purpose of providing comments and a context to the financial statements, including important trends and risks that have affected the financial statements and that are reasonably likely to affect them in the future.45

For example, the rehabilitation costs for an industrial site on which activities will be terminated in short order and the expenditures for upgrading the effluent treatment equipment anticipated for the next three years are contingent liabilities, the disclosure of which is required if the expenses are material. On the other hand, the eventual adoption of regulatory standards requiring greenhouse gas (GHG) reductions and establishing a cap-and-trade system for offsets corresponds to a trend, a prospective risk, the disclosure of which is required in the MD&A if the financial consequences of their adoption on the company is or will be material.

  1. Foreseeability

American case law has developed a test to determine if a fact or a future trend must be disclosed; called the double-negative standard, it has been recognized and recommended by the SEC.46

This test reads as follows:

  1. Is the fact or future trend likely to come to fruition?
  2. If management cannot make that determination, it must presume that it will and make an objective evaluation of the consequences.
  3. Disclosure is not required if a material effect on financial condition or results of operations in not reasonably likely to occur.

In Danier,47 the board of directors had approved the wording of a prospectus that was filed for a public offering of securities. After the filing of the prospectus, but prior to the closing date of the public offering, the board of directors found out that the financial results of the last quarter were lagging behind the forecast set out in the prospectus. The Supreme Court of Canada decided that it was a material fact that, if known at the time the prospectus had been prepared, should have been disclosed. As this forward-looking fact was not foreseeable, it could not have been disclosed.48

Neither regulation nor case law establish a time limit beyond which a reporting issuer must not question material facts or beyond which disclosure of a forward-looking information is not required. In Policy Statement to NI51-102, it is specified that the reporting issuer must consider the nature of its industry and its operating cycle to determine the time period.49 In the United States, Regulation S-K provides that a two-year period is sufficient for an estimate, except where the absence of disclosure of a future fact that would happen more than two years later is misleading.50

  1. The Specific Case of Climate Change

Observation by the scientific community of global warming and of the resulting climate and physical phenomena has led to social debates on the permanence of warming, its causes and ways to stabilize warming. The debate is mostly on the future impact of this phenomenon.

In the European Union, a regulatory regime requires the progressive reduction of GHG and permits the trading of allowances and offsets to attain reductions.

In Canada, two provinces, British Columbia and Québec, have implemented a carbon tax. A third province, Alberta, has adopted a statutory regime to reduce GHG emissions based on the intensity of reductions that is less stringent than the European rules and is the only mandatory regime in North America. There is no federal regulatory regime yet,51 except for the obligation imposed on certain large emitters to report their GHG emissions on a yearly basis.52

Many voluntary initiatives and programs include government,53 institutional investors54 and industrial55 stakeholders who promote emissions reduction, the dissemination of information on emissions and the adoption of regulatory standards requiring reductions.

The Canadian Institute of Chartered Accountants (CICA) has already emphasized the importance of considering the challenges related to climate change when preparing the MD&A and provided guidelines on the issues that may require disclosure.56

More recently still, the SEC published a guide explaining the application of existing disclosure rules to climate change matters.57 The SEC recommends a review of facts, trends and liabilities, current and future, related to climate change that could have a material impact on a public company, in order to determine if they must be disclosed in the AIF or the MD&A.58

Although the requirement to disclose information related to climate change is the subject of controversy,59 it would be wise to consider the current and future consequences of this issue on the financial results of a public company, where a significant part of its operations and markets are in jurisdictions that have already adopted GHG regulation.

A few American court decisions,60 as well as the settlement agreement of a criminal action initiated by the Attorney General of the State of New York against energy producers,61 establish precedents that heighten the importance of climate change issues.

The instances and quality of environmental disclosures related to climate change have increased over the last few years.62

  1. Conclusion

Social pressures in North America and Europe for more precise and comprehensive disclosure of material environmental information have intensified over the last few years, including with regard to the disclosure by public companies in continuous information documents.

More specifically, investors are seeking a more stringent and uniform system for reporting environmental information, one that would enhance the reliability of disclosed information.63 Investment brokers are developing ethical investment fund products that require in-depth analysis of the environmental and social performance of public companies, which they can only conduct superficially if disclosures are inadequate.64

It therefore seems to us that the expectations and the behaviour of the reasonable investor are evolving and the decision made today by this investor to buy, sell or hold securities issued by a public company is more influenced by material environmental information, than it was even a few years ago. It also appears that the reasonable investor is no longer influenced only by the economic consequences of environmental information, but also by non-financial factors, such as environmental performance and its impact on a company's reputation.