Latest regulatory review highlights, or: Global leader!

The Canadian Securities Administrators have issued CSA Staff Notice 51-364 Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2022 and March 31, 2021.

The notice summarizes the key findings and outcomes of the review program, describes common deficiencies and includes some illustrative examples “to help issuers address these deficiencies and understand our expectations.” It contains the following broad comment:

  • Supply chain issues, the COVID-19 pandemic, labour shortages, high energy costs, inflationary pressures, rising interest rates, the global financial climate and the conflict in Ukraine and surrounding regions are some factors that are affecting current economic conditions and increasing economic uncertainty, which may impact issuers’ operating performance, financial position, and future prospects.
  • We recognize that issuers are preparing disclosure in evolving and uncertain times, resulting in increased estimation uncertainty as the assumptions used to prepare the financial statements may materially change in the near term. Issuers should carefully evaluate and explain how economic uncertainty and changes in assumptions affect their operations and the amounts reported in the financial statements. Further, audit committees and external auditors must be diligent in fulfilling their responsibilities to ensure that investors receive accurate, transparent, and timely information that supports investment decisions. Issuers must also consider how economic uncertainty impacts the application of MD&A and other disclosure requirements.

Of course, when you reflect on the horror of the list provided in that first sentence, you couldn’t much blame the issuers for just giving up. Anyway, some of the areas covered in the report (MD&A, business combinations, financial instruments, non-GAAP measures) recur in one way or another in just about every bulletin of this kind. It’s not much of a surprise for instance, in the area of revenue, that “some issuers do not disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.” But one somewhat new area is that of “greenwashing,” indicating again the increasing regulatory focus on ESG. The report provides the following example of deficient disclosure:

ESG Highlights:

  • Environment:
    • The Company plans to be carbon neutral by 2023.
    • Strategic relationship with high-quality partners attentive to environmental stewardship and performance enhance our long-term value. Our key partner exemplifies this by setting aggressive emissions reduction targets and investing in multiple environmental/economic-enhancing technologies.
    • The Company is a global leader in environmental solutions.
  • Social:
    • Established relationships with several organizations focused on (i) promoting healthier and more sustainable communities, (ii) supporting educational opportunities and (iii) fostering employee engagement in the community.
  • Governance:
    • High rating on national corporate governance survey.

It’s worth reproducing the CSA’s critique of this transparent piece of self-congratulation:

  • First, in the above example, the issuer made an unsubstantiated claim stating that it would be carbon neutral in the very near term. Unless this statement can be supported by facts and corporate activities it is misleading and promotional to include. Further, this type of statement will typically constitute FLI (forward looking information). The issuer must have a reasonable basis for the FLI, identify the material risks factors that could cause actual results to differ materially, state the material factors or assumptions used to develop the FLI and describe its policies for updating the information.
  • Second, the issuer included promotional language with respect to its partnerships, as there were no accompanying disclosures to support the issuer’s claims about a key partner being “high-quality” or its “aggressive emissions reduction targets”. Third, the issuer described itself as being a global leader despite having generated only nominal revenue from its operating activities.
  • Next, the issuer discusses its social impact by making a broad statement about its relationships with other organizations without support. This statement should be supported with information about with whom these relationships are and what specifically these organizations are doing. Further, without additional detail regarding the particular aspects of sustainability being pursued or how these will be measured and evaluated, the reference to promoting “more sustainable” communities is vague, potentially misleading and promotional.
  • Lastly, the issuer discusses its corporate governance and discloses that it scored high on a national survey. While the use of ratings and other metrics can be useful tools, ratings can vary significantly among different raters, due to differences in the factors considered and the weight assigned to the factors. In order to not be misleading the actual rating should be disclosed and it should be clear what specific set of criteria the rating is based on and what, if any, third party certified the rating.

While those are all fair and well-made points, there’s a part of me that thinks it’s hardly worth spending time dissecting such puffery, that any investors who could possibly be swayed by the original disclosure (global leader in environmental solutions!) deserve what they get. Happily for them and for all of us, the CSA thinks differently.

The opinions expressed are solely those of the author (a global leader in blogging!)

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