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Money and the Environment

Publicly traded companies on the Toronto Stock Exchange must improve their environmental reporting, to comply with a Ontario Security Commission directive issued earlier this year. Most of the same rules also apply to venture issuers. OSC Staff Notice 51-716 noted, with disapproval, a wide range in the quality of issuers’ environmental disclosure. The OSC warned that “boilerplate” discussions of environmental issues are no longer acceptable because they do “not provide meaningful information to investors”.

The OSC requires improved disclosure to shareholders in five areas that often overlap:
• Financial liabilities related to the environment;
• Asset retirement obligations;
• Financial and operational effects of environmental protection requirements;
• Environmental policies fundamental to operations, and
• Environmental risks.

Issuers must now give quantitative estimates of their liabilities whenever quantitative information is reasonably available, even if the estimate is highly uncertain. Issuers must discuss “material contingent environmental liabilities” in their Management Discussion and Analysis and/or Annual Information Form, whether or not the liabilities have been accrued or disclosed in the financial statements. This includes liabilities that are not individually material, if collectively they may indicate a material risk or trend.

Asset retirement obligations must be recognized in the financial statements as soon as a reasonable estimate can be made. To put this into context, issuers must provide a “comprehensive” discussion of material commitments, events or uncertainties, including AROs, that are reasonably likely to have an effect on their business. Given the large costs frequently associated with decommissioning old facilities, these amounts could be substantial.

Issuers must do more to quantify the costs of compliance with environmental laws and with their voluntary environmental commitments. They must also do a more detailed evaluation and disclosure of environmental risks: “If any risks relating to environmental laws are material to an issuer’s operations, the issuer should include a detailed discussion that provides meaningful information to investors.” This “may include whether or not the issuer is in compliance with these laws and any costs of compliance.”

Finally, the OSC reminded chief financial officers and audit committees that they are personally responsible to ensure that their financial statements and MDMA adequately quantify and disclose material environmental matters.

The OSC did not think it necessary to add specific wording about climate change, as proposed by the “Petition for Interpretive Guidance on Climate Risk Disclosure” filed with the US SEC on 18 September 2007, even though investors managing in excess of $6 trillion have called for better climate change disclosure. After all, risks and liabilities associated with climate change are included in the “environment”, and therefore may be captured by the OSC notice. In fact, the biggest impact of the OSC Notice may be on disclosure of costs and risks associated directly or indirectly with climate change.

Of course, even if companies are required to disclose the financial implications of climate change, that doesn’t mean that they will be very good at it. Who, two years ago, would have predicted so quick an impact of climate change on food prices? And what will be the impacts of climate change on the availability and cost of water? The OSC has also had some conspicuous enforcement failures in the last few years. Nevertheless, the new notice is a significant step forward and should improve environmental disclosure by Canadian issuers.

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