February 28, 2023
“Risk Factor” Sections Keep Getting Lengthier, But Don’t Blame the Lawyers!
“Risk factor” season is coming to a close – but I can’t resist flagging this recent Cooley blog about whether the SEC’s 2020 “modernization” rules have made any dent in the length & specificity of this section of the annual report. The blog looks at Deloitte research on S&P 500 risk factors that was published at the end of last year – and hopefully, will be updated in the coming months to reflect this year’s reporting. Here were the key findings:
– The number of pages has not decreased over the two-year period, but continues to increase.
– The number of risk factors continues to increase.
– Most companies did not need to include a risk factor summary.
– Headings are being used, but they are often very generic.
– One-third of companies used a “general risk factors” heading during the past two years, contrary to the SEC’s advice.
– The number of standalone “climate” risk factors has soared – with about one-third of S&P 500 companies adding at least one.
These may not have been the results the SEC had in mind back when it adopt rules to encourage more succinct disclosures. But don’t blame the lawyers! It’s not that we aren’t trying. Put the blame where it’s due: the polycrisis. Nevertheless, Deloitte offers these suggestions for improvement:
– Integrate risk factor disclosure processes, including climate-related risk disclosures, with enterprise risk management (ERM) reporting processes.
– Use risk taxonomies from ERM program for headings.
– Avoid generic risks.
– Liz Dunshee