Environmental disclosure is an area of financial reporting that is particularly critical in certain sectors of the economy - businesses that operate in extractive industries, such as mining, oil & gas and steel, and related industries such as environmental services, transportation services, industrial products and utilities.
Earlier this year, the Ontario Securities Commission published OSC Staff Notice 51-716, a targeted review of environmental disclosure. Jo-Anne Matear, Assistant Manager in the Corporate Finance Branch of the OSC, was on hand at the recent Green Business / PwC Executive Roundtable, which took place at the Fairmont Royal York Hotel to offer attendees some background on the review and its findings.
Growing interest
Matear was quick to point out that the Staff Notice does not introduce any new disclosure requirements.
"It really is intended to be an educational tool for issuers, and we’re hoping that issuers will use it to raise the bar, so to speak, on their environmental reporting," Matear explains.
The decision to conduct this review was due to the growing interest in environmental disclosure.
"Investors are asking for more and better disclosure on environmental matters, and they appear to be increasingly taking these matters into account when they make their investment decisions," says Matear.
Those environmental matters are outlined in National Instrument 51-102 Continuous Disclosure Obligations.
The scope of the review included the selection of 35 Ontario-based reporting issuers from the TSX (63 per cent) and the TSX Venture (37 per cent) exchanges. These companies [issuers] included representatives from the industries listed earlier in this article.
The review examined disclosure in issuers’ annual financial statements, annual management’s discussion & analysis (MD&A), annual information form (AIF), if applicable, and the issuers’ websites.
"In terms of what we looked at in those documents, we focused on their compliance with reporting obligations relating to environmental matters set out in our MD&A and AIF forms," says Matear.
Matear noted that only "material" information is required to be disclosed. The test for materiality, generally speaking, is whether or not a reasonable investor’s decision to buy, sell or hold securities would likely be influenced or changed if the information in question was omitted or misstated.
The OSC looked at two types of requirements:
General requirements. These are not limited to environmental matters but do include environmental matters - such as financial liabilities, asset retirement obligations and risk factors.
Specific environmental obligations. These are found in the AIF form requirements and include disclosure of financial and operational effects of environmental protection requirements and environmental policies fundamental to operations .
Inadequate, generic compliance
Overall, the Commission found that there was inadequate compliance with its current reporting obligations for environmental matters.
"In particular, we found that some issuers were not providing required disclosure, and if it was provided, there were some concerns with it," explains Matear. "There was often no quantitative information provided. For example, there was no discussion of costs when discussing environmental policies fundamental to operations."
Matear went on to note that the OSC does not expect quantification in all cases, but quantification of, for example, environmental liabilities should be provided where quantitative information is reasonably available and would provide material information to investors. "That needs to be taken into account," she stresses.
The OSC also found that some of the disclosure was often generic boilerplate information that really didn’t provide investors with meaningful information.
When Mike Harris, Partner, Sustainable Business Solutions and Corporate Governance Leader
at PwC suggested it would be interesting to know if those that didn’t meet the requirements still had substantial reports, Matear noted that "there was a range of disclosure being provided."
Although the study was focused on particular sectors, Matear was keen to point out that the requirements examined do apply to any issuer for whom environmental matters are relevant. In addition, she noted that while the OSC does not expect issuers to become "greener" corporate citizens, it does expect disclosure of material environmental matters so that investors are provided with all relevant material information that could affect their investment decisions.
Materiality — how do you decide?
Blair Feltmate, director of sustainable development at Ontario Power Generation (OPG), suggested that it’s these other issuers that should be the focus of future study.
"If you do this (research) on a regular basis, I would like to see a focus on environmental risks associated with sectors that are generally considered to have minimal environmental impacts, such as hospitality services, telecommunications, the computer sector, financial services, etc.," he suggested. "Basically, sustainable development started in the mining, forestry, petroleum, and utilities sectors. These sectors, at least at the large capitalization end of the equation, pretty much have their sustainable development act together, they know the game inside and out. But it’s the so-called ’environment light’ sectors that have footprints substantially greater than anyone fully appreciates."
The discussion of the OSC Staff Notice eventually led to a discussion of how to determine materiality. The OSC does provide guidance on the subject, but of course it is still, inevitably, a subjective decision.
"I’m sure we all have key performance indicators that we measure but we don’t necessarily disclose, not because they paint a poor picture of the company necessarily, but because we don’t think it’s necessary disclosure," notes Nelson Switzer, director of corporate sustainability at Direct Energy observes.
Feltmate approaches this challenge in two ways. The first thing he did was to get external feedback on OPG’s sustainable development (SD) report. He brought six external SD experts and six internal people together in a room and took them through 11 questions that they were given ahead of time about the report. The questions covered strengths, weaknesses, what needs to be changed, what’s good about it, what’s bad about it.
"They came up with about 12 recommendations, 10 of which were addressed in our recent report," says Feltmate. "And that’s important - it wasn’t just lip service, all recommendations were considered. I was amazed by the things they came up with that were blatantly obvious when they mentioned them, but I had never thought of. It was a very useful exercise."
The second thing OPG did was they took their report and created an SD matrix. On the left hand side of the matrix, they wrote down everything they and 12 other companies were reporting on from environmental, economic and social perspectives, and then across the top of the matrix was OPG and the other companies - five or six in the resources sector, a couple of utilities and then a few that were non-utilities. Through the use of the matrix, they could compare their reporting, at least in quantitative terms, to what others are doing.
"The SD matrix analysis is an indispensable tool because just by looking at the columns you can get a sense of how how extensive your coverage of environmental, social and economic reporting is relative to other companies, and by looking across a row you can compare your coverage of a single issue, such as climate change, charitable giving, energy efficiency, etc., relative to the coverage of that issue by other companies," says Feltmate. "The matrix can thus help you to determine what issues you should, perhaps, be thinking more about and, conversely, there may be something you are reporting on that other companies are not, thus giving you pause to think, ’is this issue material?’"
External audits
Switzer notes that he has done a similar exercise using risk as the main focus.
"But then I did a materiality analysis and asked, ’is this really material for our business or to our stakeholders?’" he explains. "Because we can’t be everything to everybody, if we look at our key impact areas, do we have priority impact areas and secondary impact areas? On the priorities we really go into great detail, but on the rest of the impact areas we just make sure we’re covering the bases."
Switzer and Feltmate also pointed out that more companies are having their SD reports externally audited for the quality of disclosure.
"We have an external audit done about every five years," says Feltmate. "It’s data driven - making sure all the numbers match up, that they are the same in the AIF/MD&A, and that there is accountability for them. It’s not a simple exercise - lasting three or four weeks - but I find that every few years stakeholders like that little bit of assurance, and to see an auditor’s sign-off on the back of the document."
"It’s not as mature a market as financial auditing, where the CICA has standards and a handbook, etc.," notes Mike Harris. "However we do see a trend where clients are asking for greater detail, understanding that some stakeholders are going to want more information. But it’s still evolving.
External assurance demonstrates to report readers that your organization is making efforts to ensure the information reported is accurate, complete and credible."
The Green Business / PricewaterhouseCoopers Executive Roundtable explored a variety of key issues around sustainable management practices. For full bios on all the participants, click here.
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