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Climate Change Disclosure for Canadian Public Companies

Barbara Hendrickson

Corporate Reporting: Climate Change & Related Environmental DisclosuresDesign ExchangeJanuary 28, 2009

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Overview

– Importance of climate change disclosure– Disclosure requirements under Canadian

securities laws – Shareholder resolutions for better climate

change disclosure

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Importance of Climate Change Disclosure

– Climate change disclosure for public companies is becoming more and more crucial

– Canadian public companies must consider whether they should disclose risks and opportunities associated with climate change

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Current Disclosure Requirements Under Canadian Securities Laws

– Material Changes / Material Information– Prospectus disclosure– Continuous disclosure (AIF, MD&A, F/S)– CEO and CFO certifications– Audit committee review

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Material Change Disclosure

– Companies must promptly disclose material changes to the public (s.75(1) OSA)

– Only changes in business, operations or capital which would be expected to have a significant effect on the market price or value of securities will be material changes (s.1 OSA)

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Disclosure of “Material Information”

– Under TSX Rules “material information” must be disclosed in a timely manner

– Includes both material facts and material changes

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Disclosure of “Material Information” (cont’d)

– Material Information is defined to include any information relating to the business and affairs of a company that results or would reasonably be expected to result in a significant change in the market price of the company’s securities (s.407 TSX Rules)

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Definition of “Material Facts”

– “Material fact” means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities (s.1 OSA)

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Prospectus Disclosure

– Under securities laws prospectuses must provide full, true and plain disclosure of all “material facts” relating to the securities issued or proposed to be distributed (s.56 OSA)

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Prospectus Disclosure (cont’d)

– Prospectus Form Requirements require the disclosure of:– Environmental policies fundamental to the

company’s operations, including the steps the company has taken to implement them (Item 5.1(4) NI 41-101F1)

– Risk factors relating to the company and its business, such as environmental risks that would likely influence an investor’s decision to purchase securities of the company (Item 21.1(1) NI 41-101F1)

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Prospectus Disclosure (cont’d)

– Trends, commitments, events or uncertainties that is both presently known to management and reasonably expected to have a material effect on the company's business, financial condition or results of operation

– Legal proceedings of the company (Item 23 NI 41-101F2)

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Prospectus Disclosure (cont’d)

– Where a prospectus contains a “misrepresentation”, a purchaser under the prospectus has a right of action for damages against– Companies or selling security holders – Underwriters– Directors of the company at the time the

prospectus was filed– Experts who consented to disclosure of

information in the prospectus, and– Every person signing the prospectus (s.130 OSA)

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Definition of “Misrepresentation”

– A misrepresentation is,– an untrue statement of “material fact”, or – an omission to state a “material fact” that is

required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made (s.1 OSA)

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Continuous Disclosure

1. Annual Information Form (“AIF”)

2. Management Discussion & Analysis (“MD&A”)

3. Financial Statements (“F/S”)

4. CEO and CFO Certification

5. Audit Committee Review

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Continuous DisclosureAnnual Information Form

– The form requires disclosure of environmental issues including:– Financial and operational effects of

environmental protection requirements on the capital expenditures, earnings and competitive position of the company in the current financial year and the expected effect in future years (Item 5.1(1)(k) NI 51-101F2)

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Continuous DisclosureAnnual Information Form (cont’d)

– Environmental risks in the order of their seriousness (Item 5.2 NI 51-101F2)

– Environmental policies (Item 5.1(4) NI 51-101F2)

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Continuous Disclosure – Management Discussion and Analysis

– MD&A is a narrative explanation, through the eyes of management, of how a company performed during the financial year, and of a company’s financial condition and future prospects

– MD&A complements and supplements the F/S

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Continuous Disclosure – Management Discussion and Analysis (cont’d)

– Rules require that MD&A should discuss important trends and risks that have affected F/S, and trends and risks that are reasonably likely to affect them in the future

– MD&A focuses on material information

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Continuous Disclosure – Management Discussion and Analysis (cont’d)

– MD&A rules require the following disclosure:– For companies that have significant projects

that have not yet generated operating revenue, describe each project … any factors that have affected the value of the project such as environmental issues (s. 1.4 Instruction (ii) NI 51-102F1)

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Continuous Disclosure – Management Discussion and Analysis (cont’d)

– The company’s analysis of the operations for the most recently completed financial year, including commitments, events, risks or uncertainties that will materially affect the company’s future performance and any unusual events or transactions (Part 1(a), Part 2 1.2 Instruction (ii) NI 51-102F1)

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Continuous Disclosure – Management Discussion and Analysis (cont’d)

– CICA Release: Building a Better MD&A Climate Change Disclosures

– Latest guidance from the CICA in the climate change area

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Financial Statement Reporting

– Climate change and other environmental issues can materially affect a company’s financial performance and prospects

– Under certain circumstances climate change and the impacts of other environmental issues are accounted for and reflected within financial statements and the notes thereto

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Chief Financial Officer and Chief Executive Officer Certificates

– CEOs and CFOS must certify that:– They have reviewed the AIF, F/S and MD&A– There are no misrepresentations– The F/S are a fair presentation of the financial

conditions of the issuer

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Chief Financial Officer and Chief Executive Officer Certificates (cont’d)

– They are responsible for establishing disclosure controls and procedures (DC&P) and internal controls over financial reporting (ICFR)

– They have designed DC&P to provide reasonable assurance that material information is available to them in a timely way and disclosure to the securities regulations is made in a timely way

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Chief Financial Officer and Chief Executive Officer Certificates (cont’d)

– They have designed ICFR to provide reasonable assurance regarding the reliability of financial reporting in accordance with the issuer’s GAAP

– The name of the control framework – They have disclosed, based on evaluation of ICFR,

any fraud involving management or employees to the auditors and board

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Chief Financial Officer and Chief Executive Officer Certificates (cont’d)

– The issuer has disclosed material weaknesses with respect to design of the ICFR

– The issuer had disclosed the limitations on the scope of design of DC&P and ICFR

– They have disclosed in the MD&A any changes in ICFR

– That they have evaluated the effectiveness of the DC&P and disclosed the conclusions of the review

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Chief Financial Officer and Chief Executive Officer Certificates (cont’d)

– Significant penalties attach to misstatements by CEOs and CFOs (NI 52-109)

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Audit Committee Review

– Audit committees are required to review a company’s F/S and MD&A before the company publicly discloses the information

– The audit committee must be satisfied that adequate procedures are in place for the review of the company’s public disclosure of financial information extracted from the company’s F/S and must periodically assess the adequacy of these procedures (NI 52-110)

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Liability For Continuous Disclosure

– Companies, directors, officers, promoters and other insiders and controlling persons are liable for misrepresentations in publicly filed or distributed documents and oral statements and for failure to make material change disclosure

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OSC Staff Notice 51-716 – Environmental Reporting

– Notice reports on the results of targeted review of compliance with Ontario securities law that require public companies to disclose information about environmental matters

– Publication on February 28, 2008

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OSC Staff Notice 51-716 – Environmental Reporting (cont’d)

– Material potential environmental liabilities should be included in a company’s MD&A and AIF whether or not the liability has accrued in the F/S or disclosed in notes to F/S

– AIF should include where available a quantification associated with environmental protection requirements and the impact or potential impact of these costs on financial and operative results

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OSC Staff Notice 51-716 – Environmental Reporting (cont’d)

– When discussing environmental policies companies should evaluate and describe the impact or potential impact on their operations

– Risks relating to environmental laws that are material to an company’s operations whether national or international should be included in the AIF and MD&A

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OSC Staff Notice 51-716 – Environmental Reporting (cont’d)

– Meaningful discussion of material environmental factors in MD&A and AIF is important to achieve a fair presentation of the company’s financial condition in all material respects

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Shareholder Resolutions

– Investors are also taking action on climate change by petitioning the companies in which they hold shares

– Such resolutions historically received support in the single digits but this is changing

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Shareholder Resolutions (cont’d)

– Support for climate change-related proposals has doubled since 2005

– Many such resolutions are specific to the issue of climate disclosure

– Many such resolutions are withdrawn following dialogue between the filers and the company

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Conclusion

– Why disclose?– Investors demand it– Securities regulatory authorities require it

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Thank You

Barbara Hendrickson

Telephone: 1-416-865-7903

Email: Barbara.Hendrickson@mcmillan.ca

McMillan LLP

Brookfield Place, Bay Wellington Tower

Suite 4400, 181 Bay Street

Toronto, Ontario, M5J 2T3

Canada