A new environmental reporting guidance was released by the Canadian Securities Administrators for companies listed on Canadian stock exchanges, including the Toronto Stock Exchange which ranks third in North America and eighth in the world. How will this affect public and private companies? Let’s take a look.
As anticipated in my earlier post Capital Favours Sustainable Businesses, the new disclosure guidance document was released on October 27 by the Canadian Securities Administrators. It provides guidance on disclosure requirements relating to environmental matters under securities legislation. This applies to all Canadian and foreign reporting issuers, including all companies listed on Canadian stock exchanges such as Toronto Stock Exchange, TSX Venture Exchange, and Canadian National Stock Exchange.
Businesses who are not currently reporting issuers should also take note if they might be acquired by a public company or are going public within the next two years. Voluntary disclosure in these cases could help attract potential buyers or facilitate their IPO processes.
Disclosure rules in the following areas are detailed in the new document, officially Staff Notice 51-333 (PDF):
–Environmental risks and related matters
–Environmental risk oversight and management
–Forward-looking information requirements as they relate to environmental goals and targets
–Impact of adoption of International Financial Reporting Standards (IFRS) on disclosure of environmental liabilities
As environmental reporting is part of the Continuous Disclosure Obligations, the oversight responsibility on proper disclosure lies with a company’s CEO, CFO, audit committee members, and board of directors. More details on these requirements and consequence of non-compliance can be found in National Instrument 51-102, 52-109, 52-110, and 51-322.
What brought about the new guidance document is that investors are increasingly concerned with how environmental matters affect businesses and have been requesting information about these matters through a number of avenues, such as shareholder resolutions. The Ontario Securities Commissions have found environmental disclosures to be inadequate by public companies. This trend was noted in my recent post Investors Increasingly Concerned With Climate Change Risks, in which I examined a range of shareholder proposals to Canadian companies, including Suncor Energy, Encana, Great-West Life, Potash, Viterra, and Agrium.
“Greater transparency is needed regarding the nature and extent of environmental risks and other environmental matters,” said Jean St-Gelais, Chair of the CSA and President and Chief Executive Officer of the Autorité des marchés financiers. “This guidance should greatly assist issuers in complying with their disclosure obligations, which would ultimately provide investors with much more complete information on environmental matters.”
How should businesses respond? Whether you are obligated to comply with the guidance or not, one thing is clear. The new disclosure guidance was brought about by the CSA because investors wanted the disclosure. This is not an isolated action. The SEC also introduced a similar disclosure guidance for U.S. public companies earlier this year (PDF). Investors wanted the disclosure, not to put extra burden on management, but because they see that climate change and sustainability issues are affecting business performance and ultimately impact their return on investment.
Regardless of whether business executives agree with these views or not, the fact is investment capital increasingly favours companies who share these concerns. Whether it is through public stock markets or private capital, investors and banks increasingly prefer businesses who understand their greenhouse gas emissions, energy usage, regulatory risks, reputational risks, and litigation risks. Deutsche Bank takes climate change factors into consideration when choosing companies to invest in. They have more confidence investing in companies that disclose their greenhouse gas emissions. See Capital Favours Sustainable Businesses on how Deutsche Bank’s team of environmental, social, and governance (ESG) specialists evaluate a company’s climate change factors.
Harvard Business Review also thinks business leaders need to take sustainability seriously. Their May 2010 feature article predicts the next ‘musical chair’ for businesses will be played to the tune of sustainability. Comparing it to previous game changers like mass production, IT revolution, and globalization, HBR predicts sustainability will once again shuffle business winners and losers. Businesses who get the vision and execution right will gain leadership positions. Those who fail to react will decline. I have summarized the article’s key points in Sustainability Is The Next Business Megatrend.
While we are still at a relatively early stage of sustainability, the time for businesses to think and act is now. One sensible first step for a business to take is to measure its greenhouse gas emissions. The procedure is not complicated, but should be conducted by credible professionals. The results will guide strategies on mitigating energy risks, regulatory risks, reputational risks, and litigation risks. It may also reveal opportunities on operational improvements. I have provided an overview on how to find certified professionals in the post How To Find Certified Greenhouse Gas Emissions Quantification Professionals.
How your business deals with sustainability issues affect more than the future of the environment. It also affects how the stock market regulators look at you, how your bank looks at you, how your institutional investors look at you, and how your shareholders look at you. Increasingly they want to invest in sustainability leaders because those will likely be the profitability leaders.
Derek Wong is a Toronto based sustainability consultant. See contact info and more posts like this at Carbon49.com.