This proxy season, public issuers and their counsel will be scrutinizing the recent publication by the Canadian Securities Administrators (CSA) of CSA Staff Notice 51-333 Environmental Reporting Guidance (CSA Notice). Although the CSA Notice does not (and cannot) create new disclosure requirements, it does breathe life into the existing continuous disclosure obligations of public issuers for environmental matters in their public filings.
Securities regulators state that the environmental reporting guidance responds to developments in the marketplace that recognize the impact of environmental matters on public issuers’ performance and operations, changing environmental regimes domestically and internationally, and increased investor interest in environmental reporting.
The CSA Notice follows the Ontario Securities Commission (OSC) Staff Notice 51-716 Environmental Reporting (OSC Notice) published in February of 2008 after the OSC completed a targeted review of 35 Canadian public issuers. In December 2009, the OSC signaled 1 it intended to issue another staff notice providing guidance on compliance with existing environmental disclosure requirements under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) by December 2010, in time for reporting issuers preparing annual continuous disclosure filings for 2010.2 The guidance is applicable to issuers that are not venture issuers as defined in NI 51-102.
The CSA Notice expands earlier guidance for environmental disclosure under NI 51-102 and also provides integrated guidance for relevant disclosure requirements and governance matters under National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101) and National Instrument 52-110 Audit Committees (NI 52-110).
It is significant that the CSA Notice has the support of securities regulators from other jurisdictions besides Ontario, and is no longer confined to public issuers which distribute securities in Ontario. The environmental guidance will also apply to public issuers in the jurisdictions of Alberta, British Columbia, Manitoba, Québec and New Brunswick.
Enhancements to OSC Notice
The format of the CSA Notice is a vast improvement over its predecessor as the expanded guidance groups the environmental disclosure requirements under NI 51-102 into five key requirements supported by examples as well as samples of disclosure in an attached Appendix which are presented for illustration purposes. The continuous disclosure requirements most likely applicable to environmental matters are found in the form requirements for management discussion and analysis (MD&A) attached to the financial statements and the annual information form (AIF). The CSA reinforces that only material environmental information is required to be disclosed.3
- Environmental risks – Public issuers that are required to file an AIF, are required to disclose risks relating to their business and operations.4 Environmental risks that may impact a public issuer’s business and operations can be grouped into (i) litigation risk; (ii) physical risk; (iii) regulatory risk; (iv) reputational risk; and (v) business model risk. The CSA Notice sets out a table identifying each of these risks with relevant questions for an issuer to help direct a considered response for each environmental risk.
- Trends and uncertainties – Public issuers must provide a narrative explanation (MD&A) along with the financial statements for the period covered that includes the issuer’s financial condition and future prospects.5 The CSA Notice advises that public issuers should examine trends and uncertainties respecting environmental matters that may affect the issuer’s future performance. The guidance includes a table of questions related to an issuer’s revenues and expenses that may be impacted by environmental matters.
- Environmental Liabilities – Environmental liabilities can include actual or potential legal obligations to make future expenditures due to activities that have caused, are causing, or may cause an adverse effect on the environment. The CSA Notices provides that environmental liabilities involving critical accounting estimates require specific analysis that should be quantified if possible.6 The CSA is of the view that asset retirement obligations (discussed below) are, in most cases, critical accounting estimates to be included in MD&A.7
- Asset Retirement Obligations (AROs) – An ARO is a requirement to perform certain procedures in relation to assets that are sold, abandoned, recycled or disposed of. For example, AROs for a mine could include costs relating to the reclamation of tailings ponds and ongoing monitoring of groundwater and surface water quality. The CSA Notice states that public issuers should provide supplemental disclosure in their MD&A about AROs and provide a description of the asset to be reclaimed, restored, abandoned or disposed of. AROs that are long term obligations should be included in a table that sets out summary contractual obligations.8
- Environmental Protections Requirements – The AIF requires public issuers to disclose the financial and operational effects of environmental protection requirements on the issuer’s capital expenditures, earnings and competitive position in current and future financial years.9 Guidance suggests that costs associated with these requirements should be quantified if possible (i.e. pollution abatement equipment).
The CSA Notice sets out expectations for directors and officers of public issuers for management and oversight of environmental risks that attach to their legal disclosure obligations. The financial statements, MD&A and the AIF are the continuous disclosure documents that will contain material disclosure related to environmental matters. The board must approve annual financial statements and MD&A. The board or, by delegation, the audit committee, must approve interim financial statements and MD&A and the audit committee must review these documents before public disclosure. The chief executive officer and chief financial officer must certify that the issuer’s financial statements, and financial information included in the MD&A and AIF, fairly present the issuer’s financial conditions, results of operations and cash flow. Boards, audit committees, other standing committees and certifying officers will need to be cognizant of the materiality of information on environmental matters contained in these documents.
The AIF10 requires a description of an issuer’s environmental policies that are fundamental to its operation and how they have been implemented. The CSA Notice recommends that issuers explain the purpose of their policies, the environmental risks the policies are meant to address and how the policies are being monitored and updated. This may well involve a discussion of the role of the board in reviewing the approval, implementation and amendment of environmental policies as well as any delegation of responsibility for oversight.
Boards that adopt a written mandate are responsible for adopting a strategic plan and identifying the principal risks (including environmental risks) of the issuer’s business. Any written mandate and all standing committees and their function must be disclosed in the issuer’s AIF or in the management information circular.11 If the audit committee’s responsibility for risk management includes environmental risk management this must be disclosed in the text of the audit committee’s charter in the AIF.
Effect of IFRS
Since the publication of the OSC Notice, reporting issuers are now subject to the changeover to new standards for the preparation and reporting of financial information. Starting with financial years commencing on January 1, 2011, reporting issuers are required to use International Financial Reporting Standards (IFRS) rather than Canadian GAAP. Regulators anticipate that, under IFRS, issuers may be required to accrue environmental liabilities at higher amounts and provide more note disclosure of provisions and contingent liabilities related to environmental matters in their financial statements.
The CSA Notice includes new commentary respecting forward-looking information (FLI)12 and future-oriented financial information (FOFI) or financial outlooks as these requirements apply to continuous disclosure documents, voluntary reports and websites. Regulators warn issuers that disclosure of environmental goals or targets, such as greenhouse gas reduction targets, could qualify as FLI or FOFI and therefore must comply with NI 51-102. This is of concern to public issuers that use voluntary reporting and websites for the disclosure of environmental matters. The guidance asks public issuers to take note of their voluntary disclosure of environmental matters to ensure consistency with its continuous disclosure documents, to ensure material environmental disclosure in voluntary disclosure is also included in continuous disclosure filings and that any FLI complies with NI 51-102.
Climate Change Disclosure
Curiously absent from the CSA Notice is the discussion of any dedicated climate change disclosure guidance. In early 2010 the Securities Exchange Commission (SEC) released interpretative guidance respecting existing disclosure rules that may require a company to disclose the impacts that business or legal developments related to climate change would have on its business. The CSA has not followed in lock-step with the SEC. However, the Appendix to the CSA Notice does provide some specific disclosure examples under “regulatory risk” for an issuer subject to greenhouse gas emission regulation. The example contemplates quantification of future compliance cost and estimates of carbon prices.
Future of Environmental Disclosure under Securities Legislation
The CSA Notice provides extensive guidance for substantive continuous disclosure requirements relating to environmental matters and for governance structures around environmental disclosure. Current mandated securities disclosure includes MD&A for financial statements and CD&A (compensation discussion and analysis) for executive compensation disclosure. It may be that the CSA Notice is the first tangible step to a future mandatory environmental discussion and analysis (ED&A) as part of a public issuer’s continuous disclosure filings.