Report: Companies Should Examine Whether Their Financial Disclosures Adequately Acknowledge Systemic Risks

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Dec 22, 2020, 15:15 ET

NEW YORK and LONDON, Dec. 22, 2020 /PRNewswire/ -- The events of 2020 brought risks related to public health, climate change, and diversity, equity, and inclusion to the forefront of public consciousness. A new report by The Conference Board and Datamaran finds that, while corporate disclosures related to these risks have generally increased over the last decade, a significant number of large companies have not included these issues in their financial disclosures.

Released today, the report examines how large public companies reacted to the year's events in their corporate reporting, and how senior executives can apply this knowledge in addressing external risks. As the report points out, for instance, public health risks were absent from most companies' risk disclosures in financial reports until the risk materialized with the emergence of COVID-19, signaling a reactive risk management approach.

"Most companies continue to report on ESG topics outside their financial reports. But as ESG issues become increasingly important to investors, some of these issues are expected to make their way into more financial statements," said Thomas Singer, Principal Researcher at The Conference Board. "Disclosure in financial reports is also a signal of the attention those issues receive in corporate risk management and overall governance processes."

The analysis focuses on some of the largest public companies from Europe and the United States, examining the S&P 500 and the S&P Europe 350 using Datamaran's patented technology. Additional findings from the report include:

Companies should examine whether their financial disclosures adequately acknowledge systemic risks.

Risk disclosure needs to be specific to each company, but in light of intense interest from investors, company boards and board committees should take a fresh look at their risk disclosures. Boards may also want to reconsider how committees—beyond the audit committee—are involved in the risk management and disclosure process.

Companies may be increasingly expected to provide more specifics in financial disclosures.

While more companies are including ESG risks in their financial disclosures, risks are frequently described in broad terms. For example, climate risk disclosure has become more prominent, but only a small percentage of company disclosures mention specific impacts and opportunities related to climate change.

"External risks – and the pace at which they emerge – have transformed the business landscape in 2020. And yet, while there is a growing corporate awareness of external and emerging risks generally, companies often struggle to incorporate them into their long-term strategies and business model innovations," said Ian van der Vlugt, Director of Product at Datamaran. "Companies need an ability to monitor the external landscape in a reliable and systematic way, with technology as an enabler to provide credible and real-time data about emerging risks to inform decision-making. This is what investors and regulators not only expect, but demand."

Companies should consider what other relatively "dormant" risks might be around the corner.

The impact of the pandemic on business has highlighted the need for companies to prepare for other emerging risks. Companies may need to ensure their business continuity planning is more dynamic, as seemingly nonmaterial issues can quickly become material.

About The Conference Board

The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org

About Datamaran

Datamaran is the only software analytics platform in the world that identifies and monitors external risks, including ESG. Trusted by blue-chip companies and top-tier partners, its patented technology brings a data-driven business process for external risk and materiality analysis. In house—at any time. www.datamaran.com

SOURCE The Conference Board