Limited Visibility: The Current State of Corporate Disclosure on Long-term Risks

This discussion paper extends the analysis of time horizons in financial markets, conducted as part of the Tragedy of the Horizons project, to ‘long term risk disclosures’ by companies.

On the basis of corporate disclosures (including annual reports, regulatory filings, guidance to analysts, etc.) the paper analyzes how far in the future listed companies disclose their plans and financial forecasts, and how they discuss ‘long term risks’ that are only weak signals today but might disrupt their business model in 5, 10 or 20 years.

The paper then assesses how disclosures might be improved using observations on current best disclosure practice, a comparison of corporate disclosures with internal practices, economic intelligence data and estimates by financial analysts.

The report represents the most comprehensive analysis of corporate long-term financial disclosures to date. The analysis included the review of 125 annual reports, 37 sustainability reports, 33 CDP survey responses, analyst estimates and corporate guidance collected on Bloomberg for over 1,000 companies, as well as qualitative interview questions with investors, CFOs, auditors and corporate lawyers. It analyzes three types of corporate reporting: raw activity data related to investments (with an emphasis on capital expenditure), financial forecasts (e.g. sales, EBIT), and discussion of risks. The sample of annual reports covers 10 countries.

The main conclusion of the paper is that the development of forward-looking financial disclosures over the past two decades has nearly exclusively focused on short-term time frames (next quarter to year).