Increasing environmental awareness has significantly affected the manner in which businesses operate and plan for the future. With environmental regulation at the forefront of the public conscience, companies and investors have requested clarification of the continuous disclosure (“CD”) requirements relating to environmental matters. On October 27, 2010, the Canadian Securities Administrators (“CSA”) released CSA Staff Notice 51-333: Environmental Reporting Guidance (the “Notice”).
The purpose of the Notice is to provide guidance to reporting issuers on existing CD requirements relating to environmental matters under securities legislation. The Notice will assist issuers in: (1) determining what information about environmental matters must be disclosed; and (2) enhancing or supplementing their disclosure regarding environmental matters. The Notice does not create any new legal requirements or modify existing requirements.
In determining whether information must be disclosed, the determining factor is an objective test of materiality. Information relating to environmental matters is likely material if a reasonable investor’s decision whether to buy, sell or hold securities of the issuer would likely be influenced or changed if the information was omitted or misstated. It is also important to note that the materiality of certain information may vary between industries and even between issuers within an industry. For example, an event that is material for a smaller issuer may not be material for a larger issuer.
To assist issuers in determining whether information is material and should be disclosed, the CSA sets out some guiding principles. These principles include:
- Context – Although some facts are not material on their own, materiality must be considered in light of all the facts available;
- Timing – Consider whether the impact of an environmental matter might reasonably be expected to grow over time, in which case early disclosure of the matter might be important to reasonable investors;
- Trends – Issuers should try to anticipate and react to environmental trends that may lead to regulatory change; and
- Pre-caution – If there is any doubt about the materiality of certain information, issuers should err on the side of caution and disclose the information.
Environmental Risks and Related Matters
There are five key disclosure requirements in National Instrument 51-102 Continuous Disclosure Obligations (“NI 51 102”) that relate to environmental matters. These requirements include:
- Environmental risks – All relevant environmental risks should be considered in deciding what to disclose. Generally, risks that may impact an issuer’s business and operations come from five categories: litigation, physical, regulatory, reputation and business model;
- Trends and uncertainties – There is no specified future time period that must be considered in assessing the impact of a known trend or uncertainty that is reasonably likely to occur. An issuer should disclose: (1) what has been, and is reasonably likely to be, the impact of environmental trends or uncertainties on revenues, expenditures and cash flows; and (2) the impact environmental trends or uncertainties have on its financial condition and liquidity, if any;
- Environmental liabilities – These liabilities may include a 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. The CSA believes that a discussion of material potential environmental liabilities should be included in an issuer’s CD documents, regardless of whether the liability has been accrued or noted in the financial statements;
- Asset retirement obligations (“ARO”) – Assets are considered retired if they are sold, abandoned, recycled or disposed of. The CSA believes that if an ARO is material to an issuer, the issuer should disclose the ARO in both the financial statements and the MD&A. If environmental remediation costs are applicable, material, and information about these costs is reasonably available, that information should also be disclosed; and
- Financial and operational effects of environmental protection requirements – With respect to existing provisions relating to environmental laws, issuers should disclose material estimated capital expenditures for environmental control facilities for the issuer’s current fiscal year, succeeding fiscal year and for such future periods as the issuer may deem material.
Risk Oversight and Management
The Notice provides information to help issuers assess whether directors are appropriately focusing on risk management, including environmental risk management. The Notice states that two sets of disclosure requirements provide insight into an issuer’s oversight and management of environmental risks:
- Environmental policies implemented by the issuer – If an issuer has implemented environmental policies that are fundamental to its operations, Form 51-102F2 Annual Information Form requires the issuer to describe these policies and the steps it has taken to implement them. The term “policy” should be construed broadly to include policies for sustainable development, community relations, the use and disposal of toxic or otherwise hazardous materials, prevention of spills, recycling, conservation of water and the reduction of greenhouse gas emissions; and
- Board governance – Disclosure regarding the oversight and management of environmental risks should indicate the board’s responsibility for such oversight and management and any management level committee to which responsibility for such oversight and management has been delegated. The disclosure should also provide insight into: the development and periodic review of the issuer’s risk profile; the integration of risk oversight and management into the issuer’s risk profile; and the board’s assessment of the effectiveness of risk management policies.
The changeover to International Financial Reporting Standards (“IFRS”) from existing Canadian GAAP may have a significant impact on financial reporting and other business activities of reporting issuers. IFRS contain some important differences from Canadian GAAP for recognition and measurement of provisions, including environmental provisions. Under IFRS, issuers may be required to accrue more environmental liabilities, at higher amounts, and provide more disclosure regarding these liabilities. For a more comprehensive discussion of some of the key differences under IFRS, refer to page 19 of the Notice.
Forward-looking Information (“FLI”) Requirements
In considering whether an issuer’s future plans or targets can be considered FLI, the issuer should make the following assessments:
- Is the goal or target possible to achieve based on assumptions about future economic conditions and courses of actions?
- If yes, is the target or goal material information?
If the target or goal is material information, the document containing the target or goal must comply with the FLI requirements in NI 51-102. If the target or goal is future oriented financial information (“FOFI”) or a financial outlook, the disclosure document must comply with the FOFI requirements in NI 51-102.
Governance Structures around Environmental Disclosure
An issuer’s environmental disclosure in CD documents is subject to three levels of oversight: review by the audit committee (NI 52-110); approval by the board of directors (NI 51-102); and certification by the CEO and CFO (NI 52-109). As part of this oversight, committees, boards and management should ask the following questions:
- What assessment has management made of the materiality to investors of information about environmental matters? Are disclosures made in CD documents consistent with this assessment?
- Is the material information in voluntary reports also disclosed in a timely basis in securities regulatory filings?
- How has management ensured that information reported on corporate websites or in voluntary reports is consistent with that provided in their CD documents?
- Does FLI in the voluntary reports comply with FLI requirements under securities legislation?
Issuers should consider the Notice when preparing their CD documents to ensure that their disclosure of environmental matters complies with securities legislation and provides investors with meaningful information for making investment decisions. The Appendix to the Notice provides examples of entity-specific disclosure and should be consulted by issuers that are having difficulty determining materiality or the extent of their disclosure obligations.