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Ilanet.LongTermRisksr1.17 - 19 Nov 2019 - 00:00 - GregorioIvanoff

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Analysis of long-term risks

"Most regulatory frameworks (e.g. capital requirements calculation rules, financial reporting requirements for companies) narrowly define ‘financial risks’ excluding implicitly point-in-time risks. As far as reporting requirements for listed companies are concerned long-term risks are not formally excluded but the lack of precise guidelines in this area by market authorities, and loose law enforcement on this topic create disincentive to report:

  • given the lack of clear framework, external auditors have no mandate to challenge companies reporting on this topic;
  • given the lack of reporting, risk departments and sustainability department are in most cases advised by legal departments not to explore the financial materiality of long-term risks, because
    • it is not considered as relevant,
    • it might expose the company to shareholder litigation if a non-reported risk eventually materialize.

As a consequence most listed company do not discuss nor assess point-in-time risks in the ‘risk factors’ section of their annual accounts, even when they are easy to identify and quantify (e.g. stress test on changes in public policies in industries highly exposed to controversial or ‘high external cost’ practices such as tobacco, nuclear power, etc.).

We follow the recommendations from 2° Investing Initiative to the Commission to explore this issue and strengthen reporting requirements on risk factors, including:

  • developing a comprehensive mapping of point-in-time risks industry-by-industry in collaboration with companies, investors and stakeholders;
  • requiring the publication of stress-tests for key point-in-time risks in sensitive industries (notably on climate risks [...]).
  • Mandatory disclosure regarding point-in-time risks can also pave the way for the evolution of accounting standards, especially regarding rules for calculating impairments. (WWF European Policy Office, 2013)

Keywords: risk in emerging markets, high external cost, long term investing, non-reported risk, risks in governance, credibility in governance, risks in practice, money uncommitted, accounting practices, credibility services, stakeholders identification, identification policy, sustainable risks, equity risks, stress test, encryption, report, risks, UN Global Compact, ILO Declaration on Fundamental Principles and Rights at Work, OECD Guidelines for Multinational Enterprises, CAUX Round Table Principles for Business

Institute of Social Innovation. User guidelines for the PROGRESS ESG Risks Assessment Tool. Version 1.0, prepared in the context of the project “Strategies and Tools to Promote Responsible Investment”. Available from < >. access on 28 November 2013.

Sustainability in action: Assessing sustainable risks. Available from < >. access on 7 August 2015.

The NSA and cryptography: Cracked credibility. To be safe, the internet needs reliable encryption. But the standards, software and hardware it uses are vulnerable, Sep 14th 2013. Available from < >. access on 13 December 2013.

WWF European Policy Office | Position Paper on long-term Financing | 25 June 2013. Available from < >. access on 27 November 2013.

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-- GregorioIvanoff - 10 Aug 2015
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