Ontario Enhances Corporate Sustainability Reporting

David Surat and Dyana McLellan for The Lawyers Weekly

March 12, 2010

The Ontario Securities Commission (OSC) recently undertook a review of the province's existing corporate disclosure reporting requirements. It conducted broad consultations to establish best practices for corporate social responsibility and environmental, social and governance reporting standards. Investors increasingly take these matters into consideration when making an investment decision; the purpose of the resolution was to ensure that Ontario investors have access to all financial and non-financial information material needed to make investment decisions.

In its report to the Minister of Finance last December, the OSC presented four recommendations to enhance disclosure of corporate governance and environmental matters. According to the OSC, the proposed recommendations are designed to result in greater transparency for investors and the Canadian marketplace on the nature and adequacy of issuers' corporate governance practices and the nature and extent of environmental risks and other environmental matters affecting issuers.

The OSC believes these recommendations will assist investors when making decisions on investments and proxy voting. A majority of the stakeholders consulted throughout the process felt that the OSC should assume a greater role in advancing and promoting corporate governance and environmental disclosure by providing more guidance to issuers and conducting more continuous disclosure reviews, rather than by expanding existing disclosure requirements.

To enhance compliance with the existing corporate governance disclosure requirements set out in National Instrument 58-101 - Disclosure of Corporate Governance Practices, the OSC proposed the following two recommendations:
  • Conduct a follow-up compliance review on corporate governance disclosure, building on the results of the Canadian Securities Administrators 2007 compliance review outlined in CSA Staff Notice 58-303 - Corporate Governance Disclosure Compliance Review. This review would involve assessing the corporate governance disclosure in information circulars, annual information forms or management's annual discussion and analysis, as applicable, filed in spring 2010 by reporting issuers based in Ontario. The OSC has targeted the end of 2010 for the completion of this review.
  • corporate governance disclosure offered by the TSX.

The OSC and other Canadian securities regulators had proposed in December 2008 to replace the current corporate governance disclosure requirements with a more flexible principle-based model. In view of the challenging economic climate and the significant compliance issues faced by Canadian reporting issuers resulting from the pending change from Canadian generally accepted accounting principles to international financial reporting standards, this initiative was abandoned.

The OSC surveyed the corporate governance disclosure requirements of several other jurisdictions in connection with its report and concluded that the current disclosure requirements under National Instrument 58-101 and National Policy 58-201 - Corporate Governance Guidelines - which use a "comply or explain" model of disclosure - are consistent with international rules. Although new corporate governance rules remain possible, the focus will be on improving compliance with the current requirements.

To enhance compliance with existing environmental disclosure requirements set out in National Instrument 51-102 - Continuous Disclosure Obligations, the OSC proposed the following two recommendations:
  • Provide additional guidance for issuers on existing environmental disclosure requirements, both in general terms and possibly on an industry-specific basis, by issuing a staff notice that would build on the guidance set out in OSC Staff Notice 51-716 - Environmental Reporting and respond to the evolving nature of environmental matters. The OSC has targeted late 2010 for the publication of this notice.
  • Improve knowledge of OSC staff on environmental disclosure by holding training sessions for corporate finance staff on disclosure of environmental matters. The objective would be to identify areas of concern and provide guidance on the types of comments that may be raised during continuous disclosure reviews. The OSC recommends that these training sessions be held after the staff notice described above is issued.

The OSC report suggests that the current materiality-based disclosure rules, if properly enforced, should be adequate to provide investors with meaningful environmental disclosure. Therefore, it appears that new disclosure requirements related specifically to environmental matters are unlikely in the short term.

The trend of investors considering environmental and sustainability issues in their investment decisions continues to grow despite some loss of momentum due to the focus on credit issues since 2008. Accordingly, securities regulators will continue to scrutinize issuers' disclosure for meaningful discussion of potential material risks and contingencies related to environmental matters.

Additional guidance for issuers on existing environmental disclosure requirements as proposed by the OSC will likely continue to focus on avoiding generic or boiler plate disclosure, increased quantification of material costs related to environmental issues and the impact of any new environmental or sustainability developments on the business of reporting issuers.

The U.S. Securities and Exchange Commission (SEC) recently adopted a similar approach in an interpretative release on climate change disclosure issued on Feb. 2. Similar to the OSC's approach in OSC Staff Notice 51-716 - Environmental Reporting issued in February 2008, the SEC reminded issuers that existing disclosure rules may require disclosure of climate change-related matters if they may have a material impact on an issuer's business.

The common theme in the OSC and SEC guidance is that issuers are expected to assess any factors that may be material to the issuer and its business when complying with the public company disclosure requirements, including non-traditional sources of potential risk such as evolving environmental or sustainability standards. Although rooted in the existing disclosure standards, this interpretation will likely continue to generate controversy and debate.

David Surat is counsel at the Toronto office of Borden Ladner Gervais, where he is a member of the Securities and Capital Markets Group. Dyana McLellan is a partner at the same office, where she is a member of the Securities and Capital Markets, Mergers and Acquisitions, Corporate Finance and Corporate Governance Practice Groups.
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