The Investor’s Perspective on Environmental Finance

1. The Investor’s Perspective on Environmental Finance Julie Desjardins, CA Desjardins & Associates on behalf of The Canadian Institute of Chartered Accountants Canadian Institute of Chartered Accountants

2. Outline • New reporting environment • External reporting environment: • Financial statement disclosures • MD&A disclosures • Adequacy of current disclosures • Increasing accountability • Conclusion Canadian Institute of Chartered Accountants

3. New Reporting Environment • 2002 The year of scandals • 2003 The year of rules • 2004+ The years of enforcement? Canadian Institute of Chartered Accountants

4. A new reporting package Financial statements + the Management’s Discussion and Analysis report (MD&A) Canadian Institute of Chartered Accountants

5. A Changed Landscape The MD&A report should communicate information that helps users understand past performance and future prospects Continuous Disclosure Press Releases Annual Financial AIF MD&A Financial Statements MD&A Reports Statements Insider Trading Prospectuses Reports Material Change Reports Together the MD&A and F/S form the foundation for “business reporting” Canadian Institute of Chartered Accountants

6. Financial Statement Disclosures • Environmental issues (e.g. site contamination clean-up) affect financial statements • But materiality affects transparency Canadian Institute of Chartered Accountants

7. 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 Canadian Institute of Chartered Accountants

8. 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) Canadian Institute of Chartered Accountants

9. 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 Canadian Institute of Chartered Accountants

10. A Changed Landscape The MD&A report should communicate information that helps users understand past performance and future prospects Continuous Disclosure Press Releases Annual Financial AIF MD&A Financial Statements MD&A Reports Statements Insider Trading Prospectuses Reports Material Change Reports Together the MD&A and F/S form the foundation for “business reporting” Canadian Institute of Chartered Accountants

11. 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 Canadian Institute of Chartered Accountants

12. MD&A Disclosures Required disclosures: • Current Regulatory Requirement: NI 51-102 • MI 52-109: CEO/CFO Certifications Best practice disclosures: • CICA’s MD&A Guidance (2002, revised 2004) Canadian Institute of Chartered Accountants

13. 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 Canadian Institute of Chartered Accountants

14. 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 Canadian Institute of Chartered Accountants

15. Board of Director Responsibilities • Approve annual and interim financial statements • Approve annual and interim MD&As Required by NI 51-102 Canadian Institute of Chartered Accountants

16. 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 Canadian Institute of Chartered Accountants

17. 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 Canadian Institute of Chartered Accountants

18. 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 Canadian Institute of Chartered Accountants

19. 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 Canadian Institute of Chartered Accountants

20. Canadian Institute of Chartered Accountants

21. 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? Canadian Institute of Chartered Accountants

22. 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.” Canadian Institute of Chartered Accountants

23. 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 Canadian Institute of Chartered Accountants

24. 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.) Canadian Institute of Chartered Accountants

25. 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” Canadian Institute of Chartered Accountants

26. 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 Canadian Institute of Chartered Accountants

27. 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 Canadian Institute of Chartered Accountants

28. Increasing accountability • Aggressive regulatory environment –best practices important • CEO/CFO certifications • Audit committee and board involvement Canadian Institute of Chartered Accountants

29. Increasing accountability More agents of change: • institutional investors (Carbon Disclosure Project, Institutional Investors Group on Climate Change) • shareholder activism • insurance companies • bondholders • lenders Canadian Institute of Chartered Accountants

30. Conclusion • Existing MD&A regulations require better disclosures • Current disclosures are lacking • The time for change is now; the agents of change are numerous. Canadian Institute of Chartered Accountants