On February 28, 2008, the Staff of the Ontario Securities Commission (“OSC”) released a Staff Notice on Environmental Reporting (the “Notice”). Issuance of the Notice followed the OSC’s review of 35 reporting issuers’ compliance with current environmental reporting obligations contained in National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”). The issuers reviewed were businesses in the following sectors: environmental services, industrial products, mining, oil and gas, steel, transportation services, and utilities.
The Notice sets out the OSC’s most thorough guidance to date on environmental disclosure for reporting issuers. Some of the key OSC findings include:
- Estimates of Environmental Liabilities: Many TSX-listed issuers did not include in their annual management’s discussion and analysis (“MD&A”) a detailed analysis of the issuer’s critical accounting estimates of environmental liabilities reflected in their financial statements, as required by NI 51-102. Boilerplate language stating that issuers are responsible for their share of environmental costs and that insurance is being maintained will not suffice. Issuers must quantify accounting estimates where quantitative information is reasonably available, explain the level of uncertainty in making the estimate, and provide a detailed discussion of the estimate (e.g., a sensitivity analysis or estimate range).
- Potential Environmental Liabilities: Many reporting issuers only discuss potential environmental liabilities if they are included in the issuer’s financial statements. The Notice states that material contingent environmental liabilities should be included in an issuer’s MD&A or annual information forms (“AIF”) even if the liability has not been accrued in financial statements or disclosed in the notes to the financial statements.
- Asset Retirement Obligations (“AROs”): The Notice notes that disclosure varied widely among reporting issuers with AROs. The OSC commented that if an ARO is material to an issuer, the issuer should attempt to enhance understanding of the obligation by providing supplemental disclosure in its MD&A (e.g., a comprehensive discussion of material commitments, events or uncertainties that are reasonably likely to have an effect on the issuer’s business).
- Effect of Environmental Laws and Risks: Among the most interesting findings and comments in the Notice are those that pertain to reporting on the financial and operational effects of environmental protection requirements. Of the continuous disclosure documentation reviewed by the OSC, the AIFs of most issuers provided only a qualitative discussion of the effects of environmental protection requirements on their businesses as a risk factor. They did not quantify costs or the impact or potential impact on their financial or operational results. Again, boilerplate language stating that issuers are subject to environmental laws and have established provisions for expenses associated with their environmental obligations will not suffice. The Notice advises that if any risks relating to environmental laws are material to an issuer, a detailed discussion should be provided, including whether or not the issuer is in compliance, and any costs of compliance.
Reporting issuers should review their environmental disclosure (or lack thereof) to see whether their current disclosure measures up to the OSC’s expected disclosure in the Notice’s findings and comments. However, it is clear that environmental disclosure needs to be reviewed on an ongoing basis in light not only of company operations, but also of key environmental law and policy changes.
Perhaps the best example of this is the pending roll-out of the federal government’s regulations to limit greenhouse gas (“GHG”) emissions in a number of key industrial sectors, including electricity generation, oil and gas, forest products, smelting and refining, iron and steel, iron ore pelletizing, potash, cement, lime, and chemicals production. The federal government intends to start publishing draft regulations (with mandatory and enforceable GHG reduction targets) by spring 2008. The current plan is to finalize all regulations by 2010. These fixed targets will, for many issuers, provide a clear picture of their company’s compliance costs in relation to Canada’s climate change agenda. As these costs become more quantifiable over the next couple of years, the OSC will expect to see these costs reflected in the continuous disclosure of reporting issuers.