The Ontario Securities Commission’s innocuously named Staff Notice 51-716 has drawn quite a bit of attention for its no-nonsense stance on environmental financial disclosure.
According to various industry professionals, including Paul Cassidy, from Blake, Cassels and Graydon LLP’s Vancouver office, and Gray Taylor, from Toronto-based Bennett Jones LLP, the notice signals a shift in the mindset of the OSC. Rather than just examine disclosure matters, the regulator is also turning its attention to anticipated enforcement of environmental infractions.
Yet Jo-Anne Matear, assistant manager of corporate finance at the OSC, and co-author Neeti Varma, accountant with the OSC, explain that their rationale for undertaking the examination of environmental disclosure by a sample of TSX and Venture Exchange-listed companies is because “investors are asking for this information.”
Matear and Varma say the report was based on an assessment of 35 issuers from a mix of industries — each of the companies was deemed to be in an industry “where environmental matters were particularly relevant,” — and included companies from mining, oil & gas, transportation services, utilities, steel, environmental services and industrial products.
“What we did find was that that generally when issuers were discussing their environmental costs in their MBNA, if they had an environmental liability in their financial statements, they weren’t taking it the next step and discussing the effect that it could have,”Varma says. “They were complying in terms of their CICA handbook requirement in terms of disclosure of contingencies or as retirement obligations but those are specific handbook requirements. But they weren’t taking it that one step further and including a meaningful discussion in their MBNA in terms of environmental obligations.”
A lack of disclosure on the meaningful impact of environmental factors can have serious consequences, particularly on the investor’s bottom line, explains Matear.
“We recognize that materiality is the basis for disclosure. If information is material it should be disclosed. If it is immaterial, we don’t expect disclosure,” says Matear. She adds that the term “material” is defined as “information relating to environmental matters if a reasonable investor’s decision whether or not to buy, sell or hold securities of that issuer would likely be influenced or changed if the information was omitted or misstated.”
This disclosure is important, notes Matear. “Investors do look at these types of costs in longer terms. While there are requirements in the MBNA, the impact of these [environmental factors] in the short term and long term need to be reflected [in a businesses disclosure].”
Cassidy, who has 25 years of experience in environmental law, has a problem with the authors’ definition of disclosure. He says despite the highly critical analysis of what the report’s authors deemed the ineffective “boilerplate” method of environmental disclosure, they failed to provide “helpful guidance on what would be beneficial disclosure… perhaps out of recognition of the complexity of environmental liability in securities.”
This complexity may also lead to legal ambiguity and the potential for lawsuits.
“One should never underestimate the creativity of a plaintiff’s counsel, particularly when it comes to disgruntled investors, who want to blame everyone but their own inept financial or investment decisions,” says Cassidy, noting the litigious nature of the U.S. attorneys who make a living launching “spurious lawsuits” of this nature.
Despite Cassidy’s criticism of the notice, however, he is well aware of the impact the disclosure could have on firms, investors and the justice system.
“All a plaintiff counsel has to do is develop a cause of action, such as breach of tort, or sue for negligence or statutory right of recovery. Then, while in court with a judge that is not an expert on securities, refer to this Staff Notice as a clear indication of what is expected, which is to indicate [that the notice is] evidence of the level of care that was owed to the normal investors which they fell below,” explains Cassidy. “That prompts [corporations, et al.] to contemplate not only the letter of the law, but also the spirit of the law.”
However, Cassidy’s main concern is the notice fails to take into consideration that environmental liability extends past the purchase and installation of scrubbers to meet air regulations. For example, environmental cost and liability also extend into training, prevention, education and other areas of business operations, Cassidy says.
As such, the veteran environmental legal expert believes that “ghettoizing” environmental costs will only hurt the initiatives of the OSC and other organizations that appear to be taking steps toward environmental regulation.
“These costs should not be looked at as non-revenue-generating, which puts them at risk of being cut out, but as an integral part of doing business.”
Senior economists at CIBC World Markets also seem to agree with the notion that environmental factors must be integrated into a business’s balance sheet and considered an integral part of business. In different reports released over the last month,by analysts Jeffrey Rubin and Benjamin Tal both systematically linked environmental factors, business success and investment decisions. By focusing on one of the largest environmental factors, greenhouse gas emissions, Rubin and Tal were able to quantify how domestic and international businesses will be impacted by the carbon, and the cost of that impact should this environmental factor not be taken into consideration.
“From an investment perspective, not taking carbon risk into account can be a significant error,” explained Tal after the release of his second report, Carbon Trading.
Rubin agrees with Tal’s assessment. In the February issue of CIBC’s World Markets report, Rubin stated that close to 40% of the market capitalization of the TSX would be impacted by carbon abatement measures — measures that are currently underway in the states of California, Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont. (There is also a federal bipartisan bill before Congress, sponsored by Senators McCain, Obama and Lieberman, that will establish a nationwide cap-and-trade system for greenhouse gas emissions at the federal U.S. level.)
“Investors will soon have to recognize carbon liabilities as part of a firm’s balance sheet … carbon exposure is broader than many investors yet suspect.” writes Rubin.