Reporting risk, uncertainty & opportunities

Our collective experience over the last two years of the COVID-19 pandemic has led us to think about how we can better reflect on risk, uncertainty & opportunity.

In the move to our new WFH world, companies have shown they have sophisticated ways to measure, respond to, & anticipate change. But this does not always translate into adequate statutory disclosure for investors & stakeholders.

What do investors and stakeholders want to see?

They want to be able to understand the processes a company has to manage change and conclude if they have effectively functioned over the year.

The information should set the risks & opportunities in the context of the company’s strategy and environment to allow for better understanding.

Increasingly, we see that companies are widening their sensitivity analyses. Investors want the results of the stress testing on different scenarios explained and linked to plans that the company has for the future. They seek to understand how quickly a business can react to new conditions.

How can we do better?

A recent report by the Financial Reporting Lab identified the actions preparers of annual reports can take to meet the needs of their investors.

Information should be reported consistently, with company-specific information which presents a story, linking risk & opportunities with the company’s business model & long-term viability.

Improving messaging on responsibilities and accountability of management enables us to build a more coherent picture which increases confidence in management.

This messaging should show specific actions management has taken to respond to change.

Disclosing more information about stress-testing will provide comfort that a range of scenarios are considered by management. Adding timescales to change will allow for better long-term planning by investors and stakeholders.

Final thoughts

By changing the way companies report on risk, uncertainty and opportunity, management can promote confidence in them from investors by improving the quality of their disclosed analysis of changes to their entity and environment.