Corporate Knights

Canadian Security Regulators Signal Canadian Public Companies to Increase Environmental Disclosure

Written by Laura Zizzo and Travis Allan

The recent high-profile duck deaths in Syncrude’s tailing ponds are a tragic reminder that environmental risks matter in business. Environmental carelessness can affect corporate profits through fines, bad publicity and regulations that increase a company’s operating costs. Information about a given company’s environmental risks, including climate change risks, should now be more readily available from Canada’s publicly traded companies following new guidance from Canada’s securities regulators. This may get more companies and their investors thinking about climate change and its relationship to business.

Canada’s Securities Administrators including the Ontario Securities Commission (OSC) released CSA Staff Notice 51-333 Environmental Reporting Guidance (the Guidance) on October 27, 2010, which sets out expectations for Canada’s public companies to disclose material environmental and climate risks to investors and the public. This Guidance will hopefully encourage companies to take a more proactive approach to disclosing environmental risks generally, and particularly climate change risks.

If the Guidance is followed, it should improve disclosure of climate risks, which have long been under-reported. A 2009 report by the Climate Change Lawyers Network, the British Columbia Investment Management Corporation (bcIMC), Ceres, and the Climate Action Network Canada concluded that many of Canada’s public companies (also referred to as Reporting Issuers) have not adequately addressed climate change risks in their regulatory filings. The report concluded:

A material gap exists between the carbon disclosure sought by investors and that provided by reporting issuers in Canada. As the impacts of climate change become more severe and the policy response greater, this gap in disclosure will continue to undermine both the efficiency of capital markets and the confidence of those who participate in them.

The Guidance

The Guidance is intentionally broad to encompass present and future environmental risks, and is not limited to climate change. However, since climate change is a major environmental concern it is destined to be an important disclosure topic going forward. For instance, many public companies that emit large amounts of greenhouse gases should now warn investors that they may be subject to emissions caps in the future if they are operating in provinces that have stated plans to limit emissions, as the Climate Change Action Plan has done in Ontario. Companies will also need to warn investors if their physical operations or distribution systems are at risk from the physical effects of climate change, such as decreased water supply or sea level rise.

The Guidance lists five general categories of environmental risks: litigation, physical, regulatory, reputation and business model. It also states, “As with any other type of disclosure, material risks should be disclosed in a meaningful way, avoiding boilerplate disclosure. An issuer needs to disclose both the risk and the factual basis for it.”

Some of the situations requiring disclosure provided in the Guidance include:
• A company operating in areas with plans to introduce a cap-and-trade system
• A company that relies on a commodity produced in a country that is particularly susceptible to hurricanes and other extreme weather events.

But what constitutes a “material” environmental risk? According to the OSC's rules, “If a reasonable investor’s decision whether or not to buy, sell or hold securities of the reporting issuer would be influenced or changed if the information were omitted or misstated, then the information is likely material.” In other words, if a company is subject to a large lawsuit for which it could be required to pay a significant fine (compared to its overall financial picture) or other serious threats that could cause it to lose (or gain) a large amount of money, including reputational threats, that information must be disclosed to investors. Syncrude’s exposure to reputational risks and fines as a result of the highly publicized duck deaths is a good example. Syncrude’s owners are large companies and the potential fines stemming from the duck deaths are relatively small compared to their revenues. Still, the duck deaths are clearly relevant, or material, to investors who might worry about the Syncrude’s ability to manage environmental issues and its reputation among consumers and other businesses.

How Can Companies Comply?

To provide meaningful information to investors, a company must understand both its contribution to climate change and the potential effects that climate change could have on its operations. Companies may need to conduct an audit of their GHG emissions and review stated government policy to understand their regulatory risks adequately. Companies may also need to consult climate scientists to determine what climate change risks could threaten specific operations and industries.

What if Companies Fail to Comply?

Companies that fail to provide adequate continuous disclosure can be subject to a variety of penalties both from securities regulators and through civil cases, such as securities class actions. Enforcement actions via securities regulators are newsworthy events to which markets often react strongly. As a result, companies take their securities disclosure obligations extremely seriously. We expect environmental disclosure to be expanded as a result of this important Guidance.

Laura Zizzo and Travis Allan are partners at Zizzo Allan Climate Law LLP, a law firm focusing on climate, environmental, energy and clean-tech law and policy.