ESG-Related Risk Factors

2 minute read

Companies should make sure they are considering emerging practices for disclosing environmental-, social-, and governance- (“ESG”) related risk factors, as these disclosures are now a common practice.

  • Based on our review of companies in the S&P 500, the number of companies with an ESG-related risk factor has increased year-over-year, in the period from 2019 to 2022. Risk factors spanned a range of ESG-related topics, primarily related to climate change, but also including diversity-, other environmental-, or general ESG-related risks. We expect this trend to be followed by small- and mid-cap companies. To see the graph that shows the percentage of the S&P 500 with an ESG-Related Risk Factor in the annual report (by fiscal year), please see this guest post for
    ESG-Related Risk Factors: Nearly All S&P 500 Co’s Now Have Them .
  • Climate-related risks accounted for most ESG-related risk factors in the S&P 500, with a significant increase in the number of companies reporting climate related risks since 2019.
  • Most climate-related risk factors were specific to the reporting company’s business. The most common type of climate-related risks reported for fiscal year 2021 were physical risks related to business operations, including potential disruptions in the supply chain due to climate related events and the direct exposure of company assets and operations to more severe hurricanes and wildfires.
  • In the upcoming years, we expect more disclosures with respect to climate-related legal and regulatory risks, given the SEC’s proposed climate-related disclosure rules, which are expected to be finalized this year, and the European Union’s Corporate Sustainability Reporting Directive, which went into effect this year.
  • To see the percentage breakdown of the S&P 500 (by industry) with a specific Climate-Related Risk Factor in the annual report (by fiscal year), please see this guest post for 
    Categories of Climate-Related Risk Factors: Data By Industry .
  • In addition to the growing number of ESG-related risk factors, we’ve seen an increase in the number of ESG-related risks specific to the reporting company’s business, rather than “general” or “other” risks. To see examples of specific vs general ESG risk factor and the percent of S&P 500 companies that has specific ESG-related risk factors, please see this guest post for 
    ESG-Related Risk Factors: Getting More Specific .
  • Not every company will have ESG- or climate-related risk factors. But regardless of your industry, if you do not have a process in place to identify material company-specific ESG-related risks, especially climate-related risks, there is a potential that your risk management processes and disclosures will fall behind market practices.