Canadian Energy Law : Lawyers & Attorneys for Environmental Energy Law

In Staff Notice 51-333, the CSA emphasize that the standard (as outlined in NI 51-102) to be met by reporting issuers in determining if environmental matters must be disclosed is whether or not the matter is “material”. The CSA offer several principles to guide the determination of materiality, namely that: (i) there is no bright line test, (ii) materiality is context- and timing-dependent; and (iii) trends, demands, commitments, events and uncertainties depend on the probability that such trend, etc., will occur and the expected magnitude of its effect.1

In the context of a wide range of environmental issues, the CSA focused Staff Notice 51-333 on the following types of disclosure:

1. Environmental Risks and Related Matters. The five key disclosure requirements in NI 51-102 that relate to environmental matters are: environmental risk, trends and uncertainties, actual and potential environmental liabilities, asset retirement obligations and the financial and operational effects of environmental protection requirements, including the costs associated with these requirements.

2. Environmental Risk Oversight and Management. Two key sets of disclosure requirements provide insight into a reporting issuer’s oversight and management of environmental risks: environmental policies implemented by the issuer and the issuer’s board governance. A reporting issuer should explain the purpose of its environmental policies and the risks they are designed to address and evaluate and describe the impact that the policies may have on its operations. The reporting issuer should disclose the board of directors’ (or any delegate committee’s) responsibility for the oversight and management of environmental risks.

3. Impact of adoption of International Financial Reporting Standards (IFRS). As reporting issuers make the mandatory transition to IFRS for financial years beginning on or after January 1, 2011, issuers may be required to accrue more environmental liabilities at higher amounts and provide more disclosure regarding these liabilities.

4. Forward-Looking Information Requirements. Issuers are advised that disclosing goals or targets with respect to greenhouse gas emissions or other environmental matters may be considered forward looking information or future oriented financial information and would be subject to the disclosure regime for such information in NI 51-102.

5. Governance Structures Around Environmental Disclosure. Staff Notice 51-333 provides reporting issuers with recommendations regarding governance structures with respect to environmental matters, including reliable internal controls and disclosure procedures. The reliability of these systems is a necessary underpinning for securities regulatory filings, including CEO and CFO certifications under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings. Directors and certifying officers need to know that management has implemented systems, procedures and controls to gather reliable and timely environmental information to be able to certify that the reporting issuer’s filings do not contain any misrepresentations.

The CSA’s Staff Notice 51-333 demonstrates that, regardless of whether or not they are subject to greenhouse gas emissions or other environmental reporting requirements, issuers must seriously consider the effect of environmental matters and climate change on their business and ensure that such matters are adequately disclosed to investors.

We will continue to follow the progress of the Canadian securities regulators in their development of a robust disclosure regime for climate change related matters.  Look for further analysis and observation in future bulletins.

Key Elements of the Regulation

The new regulation requires a broad range of organizations in the province to report their GHG emissions, starting with emissions for the 2010 calendar year. The regulation addresses a number of key issues, including:

• Affected Facilities: All facilities that emit 25,000 tonnes of carbon dioxide equivalent (CO2e) or more per year are required to report GHG emissions data. The government anticipates that between 200 and 300 facilities in the province will fall into this category.¹
   
• Timing: GHG emissions from 2010 are to be reported in 2011, with annual reporting thereafter. The first emission reports are due on June 1, 2011.
   
• Phasing in: Facilities are permitted to apply best-alternative quantification methods in reporting GHG emissions for 2010. As of 2011, facilities will be required to use identified standard quantification methods. This phase-in approach allows facilities time to build quantification capacity.
   
• Third-Party Verification: Annual third-party verification, in accordance with ISO standards, will be required, with the first verification to be submitted in 2012 in respect of 2011 emissions. Facilities are encouraged to undertake voluntary third-party verification in reporting GHG emissions for 2010.
   
• Smaller Emitters: Facilities emitting between 10,000 and 25,000 tonnes of CO2e are not required to report GHG emissions. The government plans to develop an outreach program to encourage voluntary reporting by smaller emitters so that they are prepared to adapt to emerging continent-wide cap-and-trade requirements.²

The regulation is accompanied by a technical guideline, entitled "Guideline for Greenhouse Gas Emission Reporting," which outlines the best alternative quantification methods in emissions reporting for 2010 and mandatory standard quantification methods, to be used as of 2011, to quantify emissions. The government received submissions on the draft GHG emission-reporting regulation and guideline from stakeholders, including industry, associations, municipalities and consulting groups, during a thirty-day public-comment period. In response, several amendments were made in the final regulation. Third-party verification will be phased in to allow facilities to adapt to the new requirements. Additionally, some confidential business information has been removed from the reporting obligation. Technical modifications were also adjusted to be more consistent with federal and U.S. requirements, to give more time for preparation of certain reports and to allow emission factors to be used in the reporting of certain types of emissions.

We will continue to examine this regulation as part of our ongoing review of Ontario's climate change strategy. Look for further analysis and observation in future bulletins.

¹  Government of Ontario, news release, "Ontario Takes Next Step Toward a Cap-and-Trade System" (December 1, 2009)
²  Government of Ontario, Environmental Registry, "Regulation Decision Notice: Greenhouse Gas Emissions Reporting Regulation and Guideline" (December 1, 2009), EBR Registry Number: 010-7889.
 

The regulation also requires that verification statements be filed in respect of any facility that has emissions in excess of 25,000 tonnes of C02e in any year. Verification statements are to be completed by an independent third-party verification body that has been accredited by either the Standards Council of Canada or the American National Standards Institute pursuant to ISO 14065. For verifications completed before December 31, 2012, the verification body may also be one accredited by the California Air Resources Board. For 2010 and 2011, verification statements must be submitted to the Ministry of Environment by September 1 of the following year. For any year after 2011, the verification statement must be submitted by April 1 of the following year. The regulation requires that a verification body must ensure that it is free of any conflict of interest in relation to any verification statement prepared by it. A verification statement must include an opinion from the verification body that an emissions report submitted by a facility operator is materially correct. For that purpose, the regulation prescribes a five-percent materiality threshold.

The reporting requirements are detailed in the Reporting Regulation and are a key step in the development of a market-based cap-and-trade system to reduce GHGs in the province.

Canadian industrial emitters face deadline for emissions reporting

The Department of the Environment has given notice that Canadian industrial emitters of GHGs have until June 1, 2010 to report their 2009 GHG emissions. The reporting deadline, which was established by Environment Canada, applies to facilities that emit over 50,000 tons of carbon dioxide equivalent (CO_2e) per year. Environment Minister Jim Prentice has indicated that more detailed regulations will be released prior to the Copenhagen talks.

The Western Climate Initiative releases essential requirements of mandatory reporting

The partners of the Western Climate Initiative (WCI) are comprised of seven U.S. states and four Canadian provinces, namely British Columbia (B.C.), Manitoba, Ontario and Quebec. Other U.S. states and Canadian provinces (Saskatchewan and Nova Scotia) are currently WCI observers.

The WCI has recently released its final version of the first group of Essential Requirements for Mandatory Reporting (ERMR). The ERMR requires owners and operators that are subject to the mandatory reporting requirements to submit annual GHG emission reports by April 1 of each year for emissions in the previous calendar year. The initial reporting requirements will apply to the owner or operator of a facility that emits 10,000 metric tons of CO_2e or more per year in combined emissions, from one or more of the listed source categories, in any calendar year starting in 2010. Accordingly, companies subject to the ERMR that commenced operations prior to 2010 will be required to report their 2010 GHG emissions by April 1, 2011.

Subsequent to the year 2010, the ERMR contemplates that the reporting requirements will also apply to: (1) all importers of electricity (both retail providers and marketers) that import electricity into the WCI region, (2) any supplier that within the WCI region distributes transportation fuels in quantities that when combusted would emit 10,000 metric tons of CO_2e per year or more, in any calendar year starting in 2010, and (3) any supplier that distributes within the WCI region residential, commercial and industrial fuels in quantities that when combusted would emit 10,000 metric tons of CO_2e per year or more, in any calendar year starting in 2010.

The impact of the ERMR regime

In order to comply with the WCI-imposed obligations, the B.C., Manitoba, Ontario and Quebec provincial governments are each moving forward with legislation designed to implement the ERMR regime. For example, the B.C. government has announced its intention to introduce a mandatory GHG-emissions reporting regulation during the fall of 2009. The Ontario government has recently stated that its intention is to harmonize Ontario reporting requirements with those of the WCI (as well as with any U.S. federal trading system). Quebec has passed Bill 42 (An Act to amend the Environment Quality Act and other legislative provisions in relation to climate change), which establishes the reporting of GHG emissions by certain categories of emitters to be determined by regulation.

It should be noted that other Canadian provinces have also moved towards the adoption of legislation that will require companies to report GHG emissions. For example, in 2004, Alberta passed the Specified Gas Reporting Regulation, which continues to require industrial facilities that emit more than 100,000 tons of CO_2e in a calendar year to submit annual emission reports. Additionally, on August 14, 2009, the government of Nova Scotia released the Greenhouse Gas Emission and Air Pollutant Regulation. This regulation requires facilities located in Nova Scotia that emit more than 10,000 metric tons of CO_2e in a calendar year to submit annual emission reports.

Measuring and reporting GHG emissions is a labour-intensive process

In order to comply with the various provincial and/or federal legislation that may apply to them, companies will need to determine whether or not they emit the quantity of GHGs that triggers the various legislative reporting requirements. In order to do so, companies will need to measure their GHG emissions in accordance with the prescribed methods set out in the various legislation applicable to them. Measuring GHG emissions will be labour-intensive and will require that a detailed and mapped-out process be followed. Additionally, while governments have generally recognized the importance of standardized measuring methods (so as to help ensure the fair operation of multi-jurisdictional carbon cap-and-trade programs), there is no certainty that all legislation will contain common measuring techniques.

In the event a company is subject to GHG reporting requirements, the applicable legislation will also set out other obligations that the company will need to spend time considering. Typically, these obligations will include monitoring, record-keeping and retention requirements, as well as data-verification requirements. It can also be expected that GHG legislation will increasingly require emitters to reduce their GHG emissions towards established targets and/or to cover their GHG emissions with prescribed emission allowances, units or credits. 

Canadian reporting issuers and the impact of climate change

As was stated by the Canadian Institute of Chartered Accountants (CICA) in a Management's Discussion and Analysis (MD&A) disclosure guide published in November 2008 (the Guide), investors are increasingly seeking more detailed and nuanced information about how reporting issuers view the impact of climate change, in order to assess its effect on a company's current and future financial conditions, results of operations and cash flows. The CICA noted that the business impact of climate change will require reporting issuers - even those that do not directly produce GHG - to implement strategies, both to adapt to the effects of climate change on the reporting issuer's business and, in other cases, to take action to mitigate the extent of their GHG emissions. The CICA Guide outlines five types of information in MD&A that should address climate-change issues:

Business strategy. MD&A should present investors with an overview of the climate-change factors that the reporting issuer has factored into its business strategy.

Risks. MD&A should describe the risks presented by climate change on the reporting issuer, including physical risks (e.g. changes to weather patterns), regulatory risks (e.g. heightened regulatory oversight and scrutiny), reputational risks (e.g. negative customer perceptions of reporting issuers failing to address climate-change issues), litigation risks (e.g. lawsuits against heavy GHG emitters) and any other material risks.

GHG emissions. To the extent that it is material to evaluating the performance and future prospects of a reporting issuer, a reporting issuer's direct and indirect GHG emissions and related intensity data should be discussed in MD&A.

Financial impacts. The impact of climate change on financial operations, cash flows and the financial condition of the reporting issuer should be discussed in MD&A, along with the future financial implications.

Governance processes. MD&A should describe the governance and organizational processes used by the reporting issuer in identifying and managing climate-change issues.

While Canadian securities regulators have not yet specifically mandated the disclosure of climate-change strategies in a reporting issuer's public disclosure record, the requirements of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), including the requirements applicable to a reporting issuer's MD&A, are sufficiently broad so as to capture such issues.

A reporting issuer's MD&A, for example, is required to discuss the effect of "known trends, demands, commitments, events or uncertainties" on the reporting issuer's "financial condition, results of operations and cash flows." Moreover, a reporting issuer's annual information form (AIF) is required to disclose such things as the "financial and operational effects of environmental protection requirements" on its financial position, including capital expenditures. An AIF is also required to detail risk factors, such as environmental risks, and "regulatory constraints.and any other matter that would be most likely to influence an investor's decision to purchase" the securities of the reporting issuer. As climate-change concerns continue to escalate and, as a result, increasingly stringent legislation is enacted , regulatory authorities may in the future require Canadian reporting issuers to provide more prominent and expansive disclosure with respect to the impact that climate change will have on their business.

In February 2008, the Ontario Securities Commission (OSC) issued Staff Notice 51-716 - Environmental Reporting, outlining the results of a targeted review by OSC staff of the degree to which Canadian reporting issuers were adequately disclosing information about so-called "environmental matters" in their annual financial statements, MD&A and AIFs. The OSC's written findings suggest that, at the time, the disclosure of certain Canadian reporting issuers with respect to potentially material environmental matters was inadequate and, in certain instances, consisted of insufficient, boilerplate disclosure.

Staff Notice 51-716 should continue to serve as a signal to Canadian reporting issuers that, regardless of whether or not they are subject to specific GHG-emission or other environmental reporting requirements, it is necessary for them to seriously consider the effect of environmental matters and climate change on their business and to ensure that such matters are adequately disclosed to investors.