Environmental Disclosure by Public Companies: a Québec Perspective

1. Introduction

   Over the past few decades, public companies have had to provide information to investors on all material aspects of their business activities, their financial performance and their future projects. This continuous reporting is done through periodic disclosure in the form of public documents and releases describing material changes.

   In 2005, the Autorité des marchés financiers du Québec adopted National Instruments (NI) 51-102,1 52-1092 and 58-1013 to specify the nature and scope of information to disclose, to make certain officers accountable for information-gathering and for the accuracy of communications, and to require the disclosure of governance practices. The Québec Securities Act and NI 51-102 provide that a reporting issuer must provide periodic reports of continuous disclosure, including an annual information form (AIF) and a management discussion and analysis form (MD&A), which must be filed annually.

   As we will see below, NI 51-102 Forms and Policy Statement 51-102 have specified the environmental content of periodic disclosures.

   However, many stakeholders are still unsatisfied with the scope and the generic character of environmental disclosures.4 Some authors even talk about a "disclosure gap" to describe this lack of consistency between regulatory requirements and disclosures filed.5 These discrepancies are also observed in climate change risk disclosures.6

   In response to the pressures made by various segments of society,7 financial market authorities have looked at environmental disclosures by companies whose activities affect the environment and have severely criticized them.8

   On October 27, 2010, the Canadian Securities Administrators published CSA Staff Notice 51-333, Environmental Reporting Guidance to assist reporting issuers in meeting their existing obligations to disclose environmental information. Notice 51-333 provides guidelines to assess the materiality of environmental information and examples of adequate disclosure. It also points out that, as of January 1, 2011, reporting issuers may have to disclose more information about environmental liabilities, as the International Financial Reporting Standards may require greater accruals for environmental liabilities, compared to the Canadian GAAP.

   It is in this evolving context, which appears to be moving towards increased environmental disclosure, that we shall address two issues that consistently arise when directors, officers and advisors of corporations consider the information gathered and identify the information to be reported, namely (a) evaluating the threshold of materiality of information beyond which disclosure is required, and (b) the breadth of forward-looking information to be disclosed.

2. Material Information

   Securities laws and regulations define what is material information, the disclosure of which is required. Canadian and American courts have shed some light on the materiality threshold and on the analysis required to determine the materiality threshold in a given context.

   1. Statutory Definition

      The materiality threshold above which information must be disclosed is defined in Québec in the Securities Act (QSA),9 as well as in Forms 1 and 2 of Regulation 51-102.10

      The QSA provides that a reporting issuer must periodically disclose information about its business and internal affairs in compliance with regulatory requirements.11

      Regulation 51-102 provides that material information must be disclosed in the annual information form (AIF) and the MD&A.12

      In the AIF, the reporting issuer must (i) describe the environmental requirements applicable to the corporation as well as their effects on capital expenditures, earnings and competitive position of the corporation;13 (ii) mention environmental and social policies fundamental to operations, as well as steps taken to implement these policies;14 (iii) list material environmental and public health risk factors relating to the company's operations;15 and (iv) describe all civil and regulatory proceedings, current and contemplated.16

      The MD&A must give material information on the current and future activities of the corporation, including the information that complements and supplements the financial statements and that may not be fully reflected therein. It must discuss important trends and risks that could affect the financial statements or that are reasonably likely to affect them in the future.

      Each AIF and MD&A must be certified by the chief executive officer and the chief financial officer as to the adequacy of the management and data collection systems and, to their knowledge, as to the accuracy of the disclosures.17 This certification includes the collection and disclosure of information on the environmental performance and responsibilities of the company.

      Public companies that fail to report material information in an AIF or in a MD&A could be subject to penal proceedings18 by the AMF, a statutory civil action taken by investors19 and civil liability proceedings under Article 1457 of the Civil Code of Québec (CCQ). The AIF and the MD&A are core documents within the meaning of Section 225.3 of the QSA.

      The forms to Regulation 51-102 set out the following test to determine if information is material: "Would a reasonable investor's decision whether or not to buy, sell or hold securities in your company likely be influenced or changed if the information in question was omitted or misstated?"20

      This regulatory test of what constitutes material information to be reported in periodic continuous disclosure documents, based on the decision of a reasonable investor, is different from the test for what constitutes a material fact under the QSA, which is used in public offerings of securities.21 Assessing a material fact is based on its impact on the market, meaning that information must be disclosed if it has the potential of changing the value or the price of the securities of the corporation. The rights to undertake statutory civil proceedings under the QSA are based on the existence of a misrepresentation, itself defined as any misleading information on a material fact22 and therefore capable of affecting the value or the price of securities.

      The Canadian definition of material information is similar to that adopted in the United States.23 Canadian courts often refer to the more abundant American case law to establish the parameters of materiality.24 We shall do the same in this article.

      Even though the reasonable investor standard is an objective one, its appreciation is based on the facts and circumstances of each case. The decision to disclose information, or not to disclose it, must result from a rigorous analysis of all relevant facts and the potential impact of such information. This decision must also take into consideration the expectations and concerns of a reasonable investor.

      In a recent ruling,25 the Ontario Securities Commission (OSC) describes the assessment of the materiality of a statement as follows:

      Accordingly, the assessment of the materiality of a statement is a question of mixed fact and law that requires a contextual determination that...