There are gaps and omissions in the reporting of environmental costs faced by Canadian companies, according to a staff notice recently published by the Ontario Securities Commission.

Various environmental disclosure requirements were already spelled out by the OSC in National Instrument 51-102: Continous Disclosure Obligations. But corporate disclosure documents recently studied by OSC staff contain “varying degrees” of disclosure regarding environmental policies, liabilities and risks, according to the notice. In some instances, required disclosure items were not addressed at all.

OSC staff are concerned that too many companies are relying on boilerplate disclosure, and that disclosure often lacks detail and financial quantification of environmental liabilities, the notice says.

“Overall, the OSC found adequate compliance with environmental disclosure requirements and the staff notice is intended to be an educational tool for issuers,” says Laurie Gillett, manager of public affairs at the OSC. “The notice sets out guidance that issuers should consider when preparing their continuous disclosure documents in the future. Hopefully, the information will be used to raise the bar on environmental disclosure.”

Such disclosure is mandatory. Canadian securities law requires that environmental information be disclosed in the management’s discussion and analysis section of annual reports of public companies, and should cover any known trends, demand, commitments, events or uncertainties that could affect the company’s business or future performance. In addition, according to a summary by Toronto-based law firm Torys LLP, public companies must also discuss in their annual information form any material information regarding:

> financial and operational effects of environmental protection requirements both in the current financial year and the expected effect in future years;

> environmental policies fundamental to an issuer’s operations and the steps taken to implement them; and

> environmental risk factors and regulatory constraints.

The recent notice summarizes the findings of OSC staff who reviewed the MD&A and AIF documents of 35 reporting issuers regulated by the OSC. Of these, 22 were listed on the Toronto Stock Exchange and 13 were venture issuers whose shares did not trade on a major exchange. Each of the issuers operated in one of the following industries: environmental services, industrial products, mining, oil and gas, steel, transportation services and utilities. The OSC staff also reviewed each company’s Web site to see if it was consistent with the other documents.

“Information relating to environmental matters is probably material if a reasonable investor’s decision whether or not to buy, sell or hold securities would probably be influenced or changed if the information is omitted or misstated,” the OSC staff said in its report.

Among the details of the report, OSC staff notes that in disclosing accounting estimates, companies should also include a discussion of material contingent on environmental liabilities, whether or not such liabilities have been accrued in the issuer’s financial statements. Where it is reasonably possible, a company should also include an estimate of the costs associated with environmental protection requirements, as well as the anticipated impact of these costs. In disclosing their fundamental environmental polices, companies should evaluate the impact of these policies on operations and, if possible, include an estimate of the costs. Companies should disclose environmental risk factors, it adds, and when risks relating to either domestic or international environmental laws are material to operations, a description of such laws should be included.

“The OSC is on the right track,” says Michael Jantzi, president of Toronto-based Jantzi Research Inc. , an independent firm founded in 1992 to evaluate the environmental, social and governance performance of global securities.

“If [global] companies want to list on a public exchange, they need to report on a wide range of social, environmental and governance issues,” Jantzi says. “Canada is not trailblazing. It’s simply falling into line. A lot of companies are moving in the right direction, but the OSC is putting a bigger, brighter spotlight on the issue.”

Some companies provided much more detail than others in their environmental reporting, according to the OSC report. For example, in discussing reclamation costs, one issuer stated that its operations are subject to environmental laws in the various countries in which it has both closed and open mines. The issuer then stated that technical issues made the reclamation costs of closed mines uncertain, which together with possible changes in environmental laws, made determining specific costs difficult. Nevertheless, the company provided a breakdown of its estimated reclamation costs for its closed mines and its open mines, and provided the basic methodology for its estimates. It also noted that it had recognized reclamation costs immediately for closed mines, but had amortized any costs for open mines over the life of the mine.

@page_break@“In contrast, many of the other TSX-listed issuers we reviewed included boilerplate discussion of environmental estimates in their MD&A, with minimal or no analysis, or did not discuss the environmental estimates at all,” the OSC staff report says. “For example, in its MD&A, one issuer simply stated that it is responsible for its share of environmental costs and maintains insurance for environmental risks, but that there is no guarantee that the insurance will cover all environmental claims brought against the issuer.”

Companies should provide a detailed estimate of costs of environmental liabilities, as well as a sensitivity analysis and disclosure of the upper and lower ends of the range of estimates from which the recorded estimate was chosen, the OSC staff report says.

The OSC is not alone in pushing for more detailed disclosure, Jantzi says. Large institutional investors such as the Canada Pension Plan Investment Board and B.C. Investment Management Corp. have also been pressing companies for more information on such issues as carbon emissions and the effects of climate change on their operations.

“If these types of investors, who are reasonable investors, are asking for this kind of information, how can you argue that it’s not material?” Jantzi says. “Materiality can be defined as what investors are actually asking for. Large mainstream investors are looking for disclosure on social, environmental and governance issues. It’s no longer just a bunch of socially responsible investors on the fringe. It’s what shareholders want to know.” IE