August 3, 2002

J. L. Goodfellow FCA
Chair, Canadian Performance Reporting Initiative Board
CICA MD&A Project
277 Wellington Street West
Toronto ON M5V 3H2

 Dear Mr. Goodfellow:

Let me take this opportunity to comment on behalf of the members of the Social Investment Organization on the draft document "Management's Discussion and Analysis: Guidance on Preparation and Disclosure." I apologize for not getting our comments to you in time for the deadline. I trust that we are not too late to provide input.

Our interest in this topic comes from our background as Canadian-based investors with a commitment to social responsibility and environmental sustainability. The SIO has more than 400 members across Canada, including staff and managers of leading socially responsible investment funds, asset managers, financial institutions and investment advisors. Our members manage funds on behalf of more than 200,000 investors. Among our members and others, there is approximately $50 billion in assets in Canada managed with regard to social and environmental guidelines.  

Our members are very interested to see strengthened governance requirements through accounting standards, such as the MD&A Guidance, as well as improved securities regulations, such as the Canadian Securities Administrators (CSA) continuous disclosure rules now under discussion; and more stringent requirements to be put in place at the New York Stock Exchange and other stock exchanges. We intend to send comments related to our views on MD&A to the CSA to encourage CSA regulators to enshrine our views on MD&A in national securities regulations.

Our view of corporate governance is that social and environmental risk is a significant, yet largely unrecognized factor in determining share value.  Environmental problems, human rights controversies, product liability issues, employee concerns and other reputational issues all hold the potential to crate share price discounts over the short-term and into the future.  Likewise, the companies that implement sustainability policies, codes of conduct, employee benefits programs, and adopt corporate citizenship practices are more likely to identify market and production opportunities in the future.  In short, corporate reporting on social and environmental issues holds the potential to reduce risk and enhance long-term shareholder return.  Social and environmental disclosure is increasingly viewed as an element of good corporate governance.

This view is not restricted to socially responsible investors. In a national survey of investors conducted by the American Institute of Certified Public Accountants in 2000, 79 per cent of those polled believed that "corporate responsibility" information (such as privacy policies, overseas labour and environmental standards) is necessary. Analysts, institutional investors and retail investors want this information, which is now considered off-balance sheet data. Investors want these types of disclosures to establish a true and accurate picture of the corporation. The Global Reporting Initiative (GRI)  an international, multi-stakeholder effort to create globally applicable guidelines for reporting on the economic, environmental, and social performance is currently working to make sustainability reporting as routine and credible as financial reporting in terms of comparability, rigour, and verifiability. These social and environmental variables capture dimensions of corporate performance and culture not included in conventional financial analysis or even the most advanced concepts of corporate governance now under consideration by accounting bodies, securities regulators and stock exchanges. 

We are very pleased to see that your MD&A document shares these views. In Section 2, principle 4 states: "In determining what to disclose in MD&A reports, the focus should be on aspects of performance relevant to long-term value creation." We heartily agree. We believe that social and environmental risks can result in long-term erosion of share value, while exemplary social and sustainability practices can help to create value over time. As a guiding rule, we also agree with your discussion of principle 4, namely; "if so-called non-financial aspects of a business (perhaps those related to personnel, operational, environmental, technical, research and development, social, cultural or other matters) are expected to have a material impact on the economic condition and development of the business, such information should be disclosed."

However, we believe that in order to apply these principles, corporations will need additional guidance from the document. Specifically, we believe that principle 6 on materiality should explicitly state that corporations should include issues of social and environmental importance as material to the decision-making needs of users. Including the phrase "social and environmental issues" in the guidance on materiality would prompt management and Boards to re-consider their reporting on non-financial issues.

In terms of the recommended disclosure framework (Section 301), SIO agrees with the outlined framework with some conditions. Specifically, we believe that critical success factors should include issues of exemplary performance on key stakeholder matters. These stakeholders can include employees (programs to create employee loyalty, innovation and productivity), customers (production of high-quality products and services leading to customer satisfaction), communities (programs to create long term trust, enhancing the corporation's "social license to operate") and the environment (operational or product issues enhancing long-term sustainability). All of these issues bear on the corporation's ability to produce long-term share value.

Likewise, social and environmental issues should be explicitly identified as risk factors. This is the flipside of the positive stakeholder factors that would be identified in critical success factors. This would include stakeholder issues such as employees (union disputes, OSHA-type data (fatalities, lost time incidence), discrimination and harassment complaints), customers (product quality or safety issues), community involvement (human rights complaints or operational problems in developing countries) and environment (emissions problems or other sustainability risks).

The members of the Social Investment Organization believe that the current crisis of confidence in world capital markets is more than a problem of financial accounting. It is a problem of short-term thinking that externalizes corporate risks to stakeholders. Recent corporate abuses have reduced US and international investors’ holdings in the amount of billions of dollars. But other stakeholders have also been ill-treated by other kinds of non-financial corporate harm. These have resulted in numerous examples of damage to our communities social welfare and environmental sustainability. These issues have also created untold erosion of long-term share value.

By providing additional guidance to Canadian corporations on their MD&A responsibilities, CICA can help to create a more responsible and sustainable world and to enhance share value over time.

Sincerely,

Eugene Ellmen
Executive Director

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