On April 9, 2009, a private member’s resolution was passed unanimously by the Ontario Legislature calling on the Ontario Securities Commission (“OSC”) to conduct a consultation on corporate social responsibility and environmental, social and governance reporting standards, and adopt an enhanced standardized reporting framework for environmental, social and governance matters.
In response to this request, roundtable consultation meetings were held on September 18, 2009 and December 7, 2009 to inform the recommendations that would be provided to the Ministry of Finance. Following the consultations, on December 18, 2009, the OSC issued Notice 51-717 Corporate Governance and Environmental Disclosure. The Notice communicates the OSC’s intention to conduct a review of corporate governance disclosure in information circulars, annual information forms, or annual management’s discussion and analysis forms filed by issuers in the of spring of 2010.
The OSC will also, in consultation with its advisory committees and other experts in the area, issue a staff notice by December 2010, providing guidance on compliance with existing environmental disclosure requirements.
In February of 2010, a second report to the Minister of Finance is expected to be issued on the topic of corporate “social” performance reporting. While not yet finalized, it is expected that this report will similarly recommend enhanced material disclosure of corporate social performance information be encouraged by the Ministry and the OSC. Such recommendations would be consistent with the approach to material environmental disclosure taken by the OSC already (as indicated in Staff Notice 51-716, Environmental Reporting). Corporate social performance information would include such things as employment and labour relations, human rights practices, health and safety, consumer relations, and aboriginal and community relations.
While these developments suggest a renewed emphasis on sustainability reporting by the Ontario government, they do not indicate that regulatory or legislative reform is on the horizon. Instead, the recommendations flowing from the April 9, 2009 resolution emphasize the need for complete disclosure of “material” social, environmental and governance practices in order to comply with existing Ontario securities law.
The question becomes what is “material” and what must be disclosed by Ontario issuers. Canadian Securities Administrators (CSA) National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) requires public companies to prepare, file with regulators and make available to the public continuous disclosure documents such as annual information forms, annual and interim financial statements and accompanying management’s discussion and analysis, and material change reports. The objective of continuous disclosure requirements is to provide investors with all the relevant information they need to make informed decisions on whether to buy or sell securities and at what price.
Several environmental, social and governance reporting obligations already arise under NI 51-102. Public companies are required to disclose in their MD&A any known trends, demands, commitments, events or uncertainties that are reasonably likely to affect the company’s business or that management reasonably believes will materially affect the company’s future performance. Annual information forms are required to discuss: material information regarding the financial and operational effects of social and 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. Social and environmental policies that are fundamental to the company’s operations must be disclosed, along with the steps taken to implement them, associated risk factors and regulatory constraints that would be likely to influence investor decision making.
Social and environmental compliance, and associated risks, can significantly affect the business strategy, financial performance and potential value of a company. Investors want and are entitled to know the long-term impacts of social and environmental responsibilities on the business. If that disclosure is misleading or insufficient, investors in securities of the company can sue.
“Materiality” is, and will remain, the determining factor for including information in continuous disclosure documents mandated by securities laws. Information relating to social and environmental matters is likely material if a reasonable investor’s decision of whether or not to buy, sell or hold securities of the issuer would likely be influenced or changed if the information was omitted or misstated. The OSC has stated that issuers should consider both quantitative and qualitative factors in determining materiality generally, and particularly for disclosure relating to environmental matters. The same will likely be true of corporate “social” performance issues.
The likely outcome of these sustainability reporting initiatives in Ontario will be an increased emphasis on compliance within existing requirements. Much work remains to be done however, and issuers should expect an ongoing process of engagement with issuers, investors and other stakeholders, to define the proper scope of materiality. There may also be increased efforts at standardization of environmental and corporate social performance indicators and reporting standards. Issuers will, moreover, be increasingly encouraged to identify social and environmental issues and areas of social impact that are most likely to be material and relevant to their investors. In anticipation of such expectations, issuers can begin to examine existing voluntary sustainability reporting frameworks including the Global Reporting Initiative.
The bottom line of these developments for securities issuers is that public companies in Ontario and the rest of Canada are, and will continue to be, expected to fully disclose and discuss their social, environmental and governance risks, contingencies and compliance costs, to the extent they are material for the “reasonable investor”. While the scope of “materiality” has not changed there may be a greater emphasis on full disclosure in these areas. This may result in greater disclosure and new challenges for issuers.