There is a growing trend toward financial reporting that reflects the impact of environmental issues on business performance, the Canadian Institute of Chartered Accountants says.

“Whatever happens with climate change will affect capital markets,” says Alan Willis, advisor on sustainability to the CICA. “The case is being made for improved disclosure.”

Willis says the CICA supports recommendations made recently by the National Round Table on the Environment and the Economy task force on capital markets and sustainability.

In a report released Feb. 12, the task force concluded that climate change is linked to Canada’s long-term ability to compete. The report followed consultations with more than 200 representatives of the private and public sectors.

The NRTEE was created by an act of Parliament in 1988 as an independent body dedicated to integration of environmental conservation and economic opportunity. Among its 16-member task force are executives and directors from such companies as Royal Bank of Canada, Falconbridge Ltd. and Brookfield Power Corp. (formerly Brascan Power Corp.).

Climate change may have reached the top of the public and political agenda, the task force observed in its report. It found, however, there are three significant barriers to integrating sustainability into investment decisions:

> Trustees of pension funds — which are among the largest institutional investors — traditionally consider non-financial factors to be in general conflict with their fiduciary duty to build wealth.

> When it comes to including environmental factors in financial reports, it is not clear what is “material” and should, therefore, be disclosed consistently.

> Environmental factors may have an impact over the long term, but corporate quarterly reporting focuses on short-term performance, which means long-term, potential negative impacts are downplayed.

The task force’s recommendations to overcome these barriers include:

> Federal and provincial governments should adopt regulations requiring pension plans to disclose the extent to which environmental issues are taken into account in their investment decisions.

> The CICA and securities regulators should establish educational programs for capital issuers so they know what environmental issues are material and should be disclosed.

> Securities regulators should encourage disclosure of financially material environmental issues through publication of a guidance or interpretation statement.

> Securities regulators should support and enforce any existing management discussion and analysis requirements related to environmental considerations.

The day after the NRTEE report was released, Jeff Rubin, chief economist at CIBC World Markets Inc. , released a report entitled Beyond Kyoto, confirming the impact of climate change on investors’ bottom line.

Rubin’s report concluded that greenhouse gas emissions will directly affect companies that make up 40% of the Toronto Stock Exchange’s market value. He says investors should be aware that carbon emissions are going to carry a big price within the Canadian economy.

“Relative to the mandated 6% reduction,” wrote Rubin, “Canada will likely finish the decade more than 40 percentage points shy of its Kyoto target. Honest miss or spurious commitment?”

This kind of sentiment will pressure issuers into greater disclosure, says Willis. “Increasingly, investors want to look at information outside the balance sheet.”

For example, he says, the MD&A portion of a company’s annual report can communicate information about long-term prospects, value and reputation “that doesn’t show up in the financial statistics.”

Willis says a CICA discussion brief illustrates how MD&A can communicate to inves-tors the impact of climate change and other environmental issues on a company’s past and future performance. The brief also sets out the types of activities, products and services that could be disclosed, as well as the actions that could be taken. (For more details, see www.cica.ca/index.cfm/ci_id/35203/la_id/1/document/1/re_id/0.)

Jo-Anne Matear, assistant manager of corporate finance for the Ontario Securities Commission, says the OSC recognizes the importance of environmental disclosure.

Matear says companies are required to complete an annual information form reporting any risk factors, including environmental and health risks. What constitutes such risks is not defined, but companies must report whether they have implemented environmental policies that are fundamental to operations.

Companies must also report the financial and operational effects of environmental protection requirements on capital expenditures, earnings and competitiveness in the current and future years.

The OSC also defines materiality, for purposes of MD&A: “Would a reasonable investor’s decisions 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? If so, the information is likely material.”

@page_break@“The ante has been raised,” says Willis, now that securities legislation across the country requires CEOs and CFOs to certify the information contained in financial statements and MD&A. “Environmental factors need to be taken into account more fully.” IE