Ontario Securities Commission Staff Notice 51-716 is still drawing considerable attention, given the public notice is part of a standard evaluation the provincial regulator undertakes of regular business disclosures.
Since its release at the end of February, 51-716 has caught the attention of media outlets, lawyers and industry pundits.
Most recently, the Social Investment Organization (SIO), a national association for socially responsible investment (SRI) that includes 36 financial institutions, asset management firms, fund companies, investment consulting firms and credit unions, wrote a public letter applauding the OSC’s shift in mindset.
The letter “commend[ed] the OSC on this Staff Notice.” Eugene Ellmen, executive director of SIO, states, “We agree with your assessment that, in many cases, issuers fail to adequately report their environmental issues.” On behalf of the organization’s members, Ellmen also applauded the regulator for their guidance, in the comments section, which he defined as “very helpful.”
Paul Cassidy, environmental law expert with Blake, Cassels and Graydon, disagrees. While he emphasizes that his comments do not reflect the opinions of his firm or clients, Cassidy believes the OSC Notice was too vague in its guidance to be of benefit.
With 25 years of experience in this area of law, Cassidy observed that despite the highly critical analysis by the report authors of the “boilerplate” methods of environmental disclosure, there was little in the way of guidance. The notice failed to provide “helpful guidance on what would be beneficial disclosure,” says Cassidy, “perhaps out of recognition of the complexity of environmental liability in securities.”
From this perspective, Cassidy believes the notice leaves firms open to litigation — as the complexity of environmental reporting, the demand for disclosure by the OSC and the “lack of guidance” could lead to legal ambiguity.
Ellmen agrees with Cassidy on only one point: “It does get quite complicated.” At this point he differs with Cassidy’s assessment. “As we said in our brief to the OSC, this [requirement] will not lead to more litigation, but to less litigation.”
He explains that by demanding companies identify their environmental risks, and then document these findings, the OSC is enabling companies to gain insight into their own vulnerabilities, while providing accurate analysis to investors.
“In the long term, these reports could cause investors to sell their positions, or reduce their positions in companies that are ill-prepared to deal with environmental issues,” says Ellmen. “However, these reports could also show opportunities for investors to increase their positions. The process of reporting can also serve as an early warning on environmental matters. Either way, more transparent information will mean less litigation.”
Cassidy’s point, however, is that the ambiguity regarding environmental reporting is that it is hard to appreciate and quantify the cost of preventions and solutions.
Ellmen admits that certain problems, such as greenhouse gases and carbon emissions, may require quantification, but adamantly states: “We never said that all these factors need to be quantified. They just need to be explained.”
However, Cassidy’s main concern is that the notice fails to take into consideration that environmental liability extends past, for example, the purchase and installation of emissions scrubbers to meet air regulations; according to Cassidy, environmental cost and liability also extends into training, prevention, education and into all other areas of business operations.
“These costs should not be looked at not as non-revenue generating, which puts them at risk being cut out, but as an integral part of doing business.”
As such, the veteran environmental legal expert believes that “ghettoizing” environmental costs will only hurt the initiatives of the OSC and other organizations that appear to be taking steps towards environmental regulation.
“That’s a fair point,” says Ellmen. However, he quickly adds, “we don’t consider [this type of analysis and reporting] to be ghettoization. In fact, we consider these costs to be a necessary company expense. If companies don’t invest now they will have to invest in the future. By accounting for them now, these costs become better integrated into the operations of a company, rather than ignoring them and viewing them as an off-balance sheet item. The [OSC Notice] brings them into the balance sheet, and brings them into disclosure.”
Originally published on Advisor.ca on May 12, 2008