Developing your risk reporting
Risk reporting continues to evolve. The risk section within your Annual Report needs to reflect the macroeconomic and geopolitical environment, and with the recent disruptions caused by COVID-19 and the increased focus on sustainability, this has led to substantial shifts in risk reporting.
The COVID-19 pandemic has resulted in many challenges for companies, such as disruptions to supply chains, accelerated the usage of technology in many industries, and the greater emergence of remote working. This has led many companies to include a particular focus within their risk reporting on this matter. Generally, this has meant a detailed discussion of the impacts from COVID-19 in the introductory content of the risk section and then, within the principal risks table, highlighting of specific risks that are especially impacted by COVID-19, the details of that impact and the necessary mitigations that have been put in place.
There has also been increased interest in sustainability within Annual Reporting, particularly now that compliance with the TCFD recommendations is mandatory. This has led to an increased focus on sustainability-related risks being disclosed, and also the processes through which sustainability-related risks are identified and prioritised. The current focus is largely around environmental sustainability and climate change, however, risks relating to social sustainability, such as retention of key talent and culture, have also become more common.
There has also been a greater focus on interconnectivity of risk reporting with other sections of the report. Investors are keen to understand how the risks and uncertainties that a business faces impacts on its business model, strategy and future viability. Many Annual Reports now include linkage to risks in the strategy and KPIs sections to demonstrate this link. Less commonly, some Annual Reports will also link to risks from marketplace sections, demonstrating how the external environment has affected the composition of principal risks. Additionally, the risk section itself will link individual risks to elements of the business model and strategy sections.
The viability statement has continued to develop to show how the principal risks of the business have been considered as part of the process in determining whether the business will continue to operate over a long time period (normally around three to five years). The most common way of showing the linkage from the principal risks to the viability statement is through the scenario and stress testing. Viability statements that give substantial detail on the process that a company went through to determine viability will generally outline the various potential future scenarios that a company can face, and test whether a company will survive should those scenarios come to pass. Companies can show which principal risks have been considered in each of those scenarios, which in turn can give confidence to an investor that the judgement of viability has been established on solid considerations.
If you would like to understand how to further develop your risk reporting, please get in touch with us, we would love to help!
