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Disclosing environmental risks a growing concern in Canada

New Ontario rules boost publicly traded companies? liabilities

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TORONTO—Publicly traded Canadian companies must improve disclosure of environmental risks and liabilities in their financial statements or face shareholder lawsuits, legal and environmental experts say.

Companies trading securities in Ontario will have to comply with new regulatory guidelines designed to ensure that environmental issue disclosure complies with securities legislation and provides meaningful information to make investment decisions. Failure to comply with the guidelines would increase litigation exposure for Canadian companies from shareholders alleging misrepresentation, inadequate or incomplete disclosure.

"This is a far more comprehensive requirement for disclosure around the environmental footprint of Canadian companies," said Alister Campbell, president and chief executive officer of Zurich Canada in Toronto. "It's going to ensure that companies more vigorously evaluate their environmental exposures."

In a recent review of 35 companies for which the Ontario Securities Commission is the principal regulator, the OSC found that many companies relied on generic environmental disclosures in their financial statements and only a few had appropriately detailed environmental risk disclosures.

Many companies listed on the Toronto Stock Exchange, for example, included a standard discussion of environmental estimates in their financial statements with little or no analysis or did not discuss the environmental estimates at all, the commission found. One company simply stated that it is responsible for its share of environmental costs and maintains insurance for environmental risks, but there is no guarantee that insurance will cover all environmental claims, according to the OSC review.

"We are of the view that boilerplate disclosure is insufficient because it does not specifically identify how the estimate relates to that issuer, and therefore does not provide meaningful information to investors," the OSC said.

One of the reviewed companies did provide a detailed analysis of its environmental liabilities, including a breakdown of estimated reclamation costs for both its closed and open mines and provided the basis and methodology to make the estimates, according to the OSC review.

The OSC declined to identify the companies reviewed but said they operate in environmental services, industrial products, mining, oil and gas, steel, transportation services or utilities sectors.

"They key is (the OSC) is trying to make people step up and illustrate to their financial investors that there is environmental risk and the degree of environmental liabilities," said Greg Dunn, vp and environmental manager for Canada for XL Insurance in Toronto. "There's a focus on making sure every organization's financial statements are correct, so I think from that respect it's important."

The commission, though, did not state the extent to which companies must examine and estimate potential environmental liabilities.

"I think that's one of the sleeper issues—to what extent a company has to uncover those liabilities and disclose them," said Robert Fishlock, senior environmental partner at Blake, Cassels & Graydon L.L.P. in Toronto. "I don't know what the answer is to what that disclosure should be, but it's very much a moving target."

Adequate and complete financial statement disclosure has added importance since passage of Bill 198, a 2005 amendment to Ontario's securities law that created civil liability for inaccurate or incomplete disclosures in the secondary market. Alberta, Manitoba, Quebec and Saskatchewan have followed with similar laws (BI, Nov. 14, 2005).

"Obviously, a failure to make proper disclosure of material environmental issues could give rise to liability to issuers, directors and officers, and others caught within the scope of these rules," said Christopher Jones, a partner in the Blake securities group in Toronto.

Bill 198 eliminated the reliance barrier that had barred many class action lawsuits, so investors will not have to prove they relied on the environmental disclosures to file a claim, he said. "If someone can demonstrate that there was a misrepresentation in the adequacy of prior disclosure, then there is a liability issue," Mr. Jones said.

Certain companies may have a harder time providing adequate environmental disclosure than others, but corporations generally have access to this information and will be able to respond to the new disclosure requirements, said Shawn Denstedt, a Calgary-based partner and co-chair of the environmental group of Osler, Hoskin & Harcourt L.L.P. "It's just going to be a much bigger task than it has been in the past," he said.

Energy companies, for example, already assess environmental exposures due to other regulatory obligations, so it would be relatively straightforward for them to provide adequate disclosure. However, financial institutions will have to enhance their disclosure of environmental risks.

Risk managers, brokers and insurers are already evaluating environmental risks as part of the underwriting process and can use this information to provide the required public disclosure, Zurich's Mr. Campbell said.

"My instinct in this case is that the risk managers for publicly traded companies will have thought through all of these already," Mr. Campbell said.