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The Investor’s Perspective on Environmental Finance Julie Desjardins, CA Desjardins & Associates on behalf of The Canadian Institute of Chartered Accountants October 28, 2004 Canadian Institute of Chartered Accountants 1 Outline • • New reporting environment External reporting environment: – – – • • Financial statement disclosures MD&A disclosures Adequacy of current disclosures Increasing accountability Conclusion October 28, 2004 Canadian Institute of Chartered Accountants 2 New Reporting Environment • 2002 The year of scandals • 2003 The year of rules • 2004+ The years of enforcement? October 28, 2004 Canadian Institute of Chartered Accountants 3 A new reporting package Financial statements + the Management’s Discussion and Analysis report (MD&A) October 28, 2004 Canadian Institute of Chartered Accountants 4 A Changed Landscape The MD&A report should communicate information that helps users understand past performance and future prospects Continuous Disclosure Press Releases AIF Financial MD&A Statements Financial MD&A Statements Annual Reports Insider Trading Prospectuses Reports Material Change Reports Together the MD&A and F/S form the foundation for “business reporting” October 28, 2004 Canadian Institute of Chartered Accountants 5 Financial Statement Disclosures • Environmental issues (e.g. site contamination clean-up) affect financial statements • But materiality affects transparency October 28, 2004 Canadian Institute of Chartered Accountants 6 New Financial Statement Disclosures • New assets and liabilities to be recorded in financial statements for GHG emissions • Related activities • CICA/IETA workshop 2002 • IFRIC 2003 • CICA Research Report 2004 October 28, 2004 Canadian Institute of Chartered Accountants 7 Key IFRIC Financial Statement Disclosures • Allowances - record as assets at market value on balance sheet • If allowances allocated free of charge – record government grant on balance sheet and take to income over time • As emissions occur – record expense and liability (at market value) October 28, 2004 Canadian Institute of Chartered Accountants 8 CICA Research Report – GHG Emissions • Approved by the Canadian Accounting Standards Board Consider Canadian requirements for GHG emissions. Discuss the accounting treatment for any related credits and allowances and the disclosures that should be included in published financial reports. • Progress report expected 2005 • Completion will be linked to regulatory process October 28, 2004 Canadian Institute of Chartered Accountants 9 A Changed Landscape The MD&A report should communicate information that helps users understand past performance and future prospects Continuous Disclosure Press Releases AIF Financial MD&A Statements Financial MD&A Statements Annual Reports Insider Trading Prospectuses Reports Material Change Reports Together the MD&A and F/S form the foundation for “business reporting” October 28, 2004 Canadian Institute of Chartered Accountants 10 MD&A – What is it? A regulatory filing that is: “a narrative explanation, through the eyes of management, of how your company performed during the period covered by the financial statements, and of your company’s financial condition and future prospects.” Form 51-102F1 October 28, 2004 Canadian Institute of Chartered Accountants 11 MD&A Disclosures Required disclosures: – Current Regulatory Requirement: NI 51102 – MI 52-109: CEO/CFO Certifications Best practice disclosures: – CICA’s MD&A Guidance (2002, revised 2004) October 28, 2004 Canadian Institute of Chartered Accountants 12 Required MD&A Disclosures Your MD&A must discuss important trends, events, uncertainties and risks that are reasonably likely to have an effect on your company’s business. Required by NI 51-102 October 28, 2004 Canadian Institute of Chartered Accountants 13 Required MD&A Disclosures “Your MD&A must discuss material information that may not be fully reflected in the financial statements. Some examples are environmental, social or cultural matters…” Required by NI 51-102 October 28, 2004 Canadian Institute of Chartered Accountants 14 Board of Director Responsibilities • Approve annual and interim financial statements • Approve annual and interim MD&As Required by NI 51-102 October 28, 2004 Canadian Institute of Chartered Accountants 15 Required Management Certifications Annually and quarterly, CEOs and CFOs must certify that their filings: “fairly present in all material respects the financial condition, results of operations and cash flows of the issuer” Required by MI 52-109 October 28, 2004 Canadian Institute of Chartered Accountants 16 Required Management Certifications Annually and quarterly, CEOs and CFOs must certify that their filings: “do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading” Required by MI 52-109 October 28, 2004 Canadian Institute of Chartered Accountants 17 Required Management Certifications CEOs and CFOs must certify that they: • are responsible for establishing, maintaining, designing and evaluating disclosure controls and procedures • responsible for establishing, maintaining and designing internal control over financial reporting and for disclosing in the MD&A material changes thereto Required by MI 52-109 October 28, 2004 Canadian Institute of Chartered Accountants 18 CICA’s MD&A Guidance • November 2002, revised 2004 • principles on completeness, materiality • disclose key performance drivers, including environmental issues • disclose any need to develop new systems, processes • calls for quantitative, as well as qualitative, risk disclosures October 28, 2004 Canadian Institute of Chartered Accountants 19 Vision, Core Businesses & Strategy MD&A Disclosure Framework Executed thro ugh Key Performance Drivers R I S K Ena bled by Capability (Resources & Systems) Le adin g to Results (historical/ prospective) A Continuum of Rele vant Inform ation a bout the Pa st and Future October 28, 2004 Canadian Institute of Chartered Accountants 20 CICA Report - 2001 Environmental Performance: Measuring and Managing What Matters • How does environmental performance matter to our company and our strategy for shareholder value creation? • Are we measuring and managing this effectively? • Are we communicating this effectively to our internal and external stakeholders? October 28, 2004 Canadian Institute of Chartered Accountants 21 World Resources Institute Changing Oil - 2002 • Studied 16 oil companies • “Few companies have disclosed the degree to which they are financially exposed to these issues, and no company has attempted to quantify the financial implications for its shareholders.” October 28, 2004 Canadian Institute of Chartered Accountants 22 CERES Report – June 2003 • All of 20 examined companies taking some governance actions to respond to climate change. • Few have developed comprehensive programs to treat issue as imminent threat • Risk disclosures inadequate October 28, 2004 Canadian Institute of Chartered Accountants 23 Contrasting MD&A Disclosures Suncor: • specific estimate of impact of Kyoto on Oil Sands cash operating costs • notes major assumptions • concludes impact not expected to be material (but ultimate impact dependent on government implementation plans.) October 28, 2004 Canadian Institute of Chartered Accountants 24 Contrasting MD&A Disclosures Nova Scotia Power Inc. (100% owned by Emera (EMA- TSX) • “recognizes the importance of climate change and is committed to support prudent Canadian abatement efforts. However, Nova Scotia Power is concerned that the lack of a clearly articulated implementation plan for Kyoto does not allow an accurate determination of the impact of ratification on the company and its customers” October 28, 2004 Canadian Institute of Chartered Accountants 25 Food for Thought • • • • management’s financial decision making – pressures to deliver on short term targets board of director consent to the strategy? how important is the environment to - the public in general - to shareholders good news: analyst report highlighted issue October 28, 2004 Canadian Institute of Chartered Accountants 26 New CICA MD&A Interpretive Release • Additional MD&A guidance • MD&A disclosures about the impact of climate change and other environmental issues on financial performance and prospects • Early 2005 October 28, 2004 Canadian Institute of Chartered Accountants 27 Increasing accountability • Aggressive regulatory environment – best practices important • CEO/CFO certifications • Audit committee and board involvement October 28, 2004 Canadian Institute of Chartered Accountants 28 Increasing accountability More agents of change: • institutional investors (Carbon Disclosure Project, Institutional Investors Group on Climate Change) • shareholder activism • insurance companies • bondholders • lenders October 28, 2004 Canadian Institute of Chartered Accountants 29 Conclusion • Existing MD&A regulations require better disclosures • Current disclosures are lacking • The time for change is now; the agents of change are numerous. October 28, 2004 Canadian Institute of Chartered Accountants 30