Securities Commissions: What are the Environmental Requirements?

As of today, no regulations specifically setting out the environmental requirements of securities commissions in Canada exist.

However, reporting issuers must disclose all material information about themselves to the public through their continuous disclosure documents. Of course, this also applies to material information that may relate to environmental aspects or issues.

Defining “Material Information”

Generally, the duty to disclose applies to any information that, if withheld or disclosed incorrectly or incompletely, would influence the decision of a reasonable investor to buy, sell or hold securities of an issuer. It is one of the principles essential to maintaining the integrity and proper functioning of the capital markets.

In this regard, the Canadian Securities Administrators (CSA) have provided, in CSA Staff Notice 51-358 Reporting of Climate Change-related Risks, a non-exhaustive list of application criteria that may be used to determine what qualifies as "material information" and therefore should be disclosed in a reporting issuer's continuous disclosure documents.

1. No Clear Demarcation Criteria

In today's regulatory and legal context, no single quantitative threshold exists as to when information becomes "material information." It may vary from issuers to issuers and industry to industry, depending on the circumstances of each.

The CSA believes that issuers should consider both quantitative and qualitative factors in determining materiality.

2. Context

When assessing materiality, the context in which the information is presented must be taken into account. Some facts, when viewed individually, may not seem material to an issuer, but may become so when viewed in a broader context and in light of all known facts.

The CSA suggests that issuers should not "miss the forest for the trees" by assessing the materiality of individual facts on a case-by-case basis.

3. Timing

Determining the materiality of a fact or information by an issuer should be based on the existing conditions at the time the information is disclosed.

In an environmental perspective, the CSA suggests that issuers should consider if it is reasonable to expect that the impact of the matter may increase over time. This is especially relevant where an issuer's industry is characterized by long operating or investment cycles, or where it will need to acquire new technologies to continue its business.

4. Trends, Needs, Commitments, Events and Uncertainties

In its analysis, the issuer must consider the time horizon of a known trend, need, commitment, uncertainty or events.

For matters relating to environmental issues, the assessment of their materiality is mainly based on the analysis of:

• the likelihood that the event will occur or become a reality; and
• the anticipated magnitude of its impact.

Investors, especially institutional ones, have been increasingly looking for information about environmental risks that may be specific to the entity.

The CSA believes that better disclosure of these risks by issuers will enhance the ability of investors to make informed decisions.

Proposed - Regulation 51-107 Respecting Disclosure of Climate-Related Matters

Significantly, this lack of clearly defined environmental regulation or legislation may change in the near future.

In the Province of Québec, the Autorité des marchés financiers (AMF) has developed a draft regulation, namely draft Regulation 51-107 respecting Disclosure of Climate-Related Matters (the “Draft Regulation”), to set out a number of climate-related disclosure requirements for reporting issuers, other than reporting issuers that are: Investment Funds, Asset-Backed Securities Issuers, Covered Foreign Issuers, Foreign Issuers Registered with the Securities and Exchange Commission, some Exchangeable Securities Issuers and some Credit Supported Issuers.

The AMF believes that climate change-related information has become increasingly important to investors in Canada and abroad and that the information required by the Draft Regulation is a significant factor in their investment and voting decisions.

According to the AMF, the Draft Regulation is consistent with the recommendations made by the Task Force on Climate-Related Financial Disclosures (the “TCFD”) and published in its June 2017 report entitled, “Recommendations of the Task Force on Climate-related Financial Disclosures.” It must be noted that nothing in the Proposed Regulations would require issuers to prepare and disclose a scenario-based analysis, especially given the various potential scenarios related to climate change.

Furthermore, the Draft Regulation, as currently drafted, allows issuers to avoid having to disclose the information recommended by the TCFD with respect to greenhouse gas emissions and their associated risks. The only requirement is that these issuers provide their reasons for not making this disclosure.

If enacted, the regulation would require reporting issuers to disclose a number of items related to climate and environmental issues in several continuous disclosure documents.

As an example, reporting issuers would have to disclose in their proxy circulars a description of the board's oversight of climate change risks and opportunities, as well as a description of management's role in assessing and managing climate change risks and opportunities.

The Annual Information Form (or, if the issuer does not file one, the Annual Management Report) should include more environmental disclosure, such as descriptions of:

• the short-, medium- and long-term climate change risks and opportunities identified by the issuer;
• the implications of climate change risks and opportunities for the issuer's business, strategy and financial planning; or
• the targets used by the issuer to manage climate change risks and opportunities and its performance against those targets.

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