Environmental Liability: The Cost of Green

Last February the Ontario Securities Commission (OSC) touched off a national debate on the value of environmental liability reporting by public companies in Canada. The commission’s Staff Notice 51-716 recited a litany of complaints by commission staff about the poor state of environmental liability analysis by public companies. It called for more detailed assessments in the various filings required of all companies trading on the Toronto Stock Exchange. Many objected that environmental liabilities can’t be easily assessed or categorized. Others countered that it’s better to be “approximately right” than “precisely wrong” and noted that arguments about difficulties in assessing liability might have held water 30 years ago but are no longer valid today. Those arguing that modern environmental liabilities can be easily quantified ignore recent U.S. history. There has been a significant debate south of the border about the utility of such reporting precisely because of its woeful tendency for inaccuracy. Americans continue to wrestle with the very problem of trying to accurately account for such an amorphous concept as “the environment.” Certain areas might be capable of straightforward quantification; for example, if a cap-and-trade system is ever developed in Canada, greenhouse gas emissions might be easily quantified. However, the “environment,” as it is defined today, includes a variety of inherently unquantifiable characteristics, such as spiritual values. So “the environment” is simply not as easily quantified as it was years ago when it was related to simply cleaning up a contaminated site or repairing a waterway after a spill. Accountants can easily focus on putting numbers to such low hanging fruit, but the OSC’s staff notice does not end with such straightforward items as a reporting requirement. On the contrary, commission staff, for laudable securities regulation reasons, appear to want a much more comprehensive level of reporting for environmental liabilities. For example, if a mine site is contaminated, one can estimate the costs of remediating the site from a strictly biological perspective. The removal of the contamination can be costed, or if it cannot be removed, the cost of managing it on-site can be evaluated. But that’s not the end of the story for the environmental liability associated with that contamination. There are legacy costs associated with the impact to the natural environment caused by the mine-site contamination, and these are now evolving into the concept of “natural resources damages” – a type of liability that has long been the subject of litigation in the U.S. Natural resource damages are an attempt by the courts to assign a quantified value to a damaged environmental feature without regard to its market value (for example, destroyed timber). To suggest this new type of liability, which did not exist 30 years ago and is only now becoming a potential liability in Canada, is capable of easy quantification is simply missing the new mark of what we mean by “the environment” in 2008. Further, how does one assign a numerical value to a spiritual consideration? Thirty years ago, no one considered a spiritual value as an “environmental value” that, if degraded, would result in a liability. Yet today, the definition of “environment” in many pieces of Canadian legislation often requires the consideration of “socio-economic” features and other non-biological factors when assessing liability. Socio-economic features include spiritual values. It will be interesting to see accountants try to quantify a negative impact on a spiritual value. Those who believe that accurate environmental liability reporting is both straightforward and simple ignore that today’s “environment” is much more complex than it was 30 years ago. They are also ignoring the realities of the Canadian experience and, amazingly, the experience in the U.S., which is replete with confusion and uncertainty in environmental reporting. This confusion and uncertainty will only lead to the same experience in Canada and to environmental liability reporting that is of dubious value to investors. Investors deserve more than a report that is only “approximately right.” It is a safe bet that litigation will ensue when a disgruntled investor is unhappy with such half-baked reporting. Yet that is the can of worms that has just been opened. Paul Cassidy practices environmental and energy law at Blake, Cassels & Graydon LLP in Vancouver.