Regulators are recommending disclosure on COVID-19:
How companies are responding
Since the coronavirus has been upgraded by the World Health Organization to a global pandemic, there have been massive disruptions to financial markets, working patterns, and the flow of goods and services around the globe. Millions of lives have been upended, and this does not even consider the individual health risk the disease poses.
Institutions and market participants are facing growing operational and compliance challenges in formulating a proper response to the coronavirus crisis. Authorities and regulatory bodies in both the EU and US are acknowledging these difficulties and are working to stabilize markets. They have also impressed upon firms the importance of disclosing the material effects of COVID-19 (whether actual or potential) in their financial reporting and related financial statements.The U.S. Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA), specifically, have issued guidance laying out how firms are expected to work towards including COVID-19 related disclosure in their 2020 financial filings.
What you can expect from us
As the situation unfolds, it's important to closely monitor how companies and other influential entities are responding to the crisis. It's with this goal in mind that Datamaran is launching a client-exclusive monitoring service around Covid-19 developments. This is the first in a series of snapshots that will help to keep you informed of regulatory developments, media coverage and formal business disclosure.
The SEC and the ESMA: Regulatory Alignment
The SEC, for its part, has issued a series of orders and statements to this effect, asking firms to consider COVID-19 and report on it, when material to the company. Additional SEC orders have provided for virtual stakeholder meetings, such as those for annual reports, and virtual board meetings. Business continuity planning such as this has featured heavily in SEC guidance and has included measures to delay regulatory obligations, allowing the most-affected companies to focus on taking the necessary steps for continuity of business, fully comprehend the material impacts of the coronavirus, and file complete reports on it.
The ESMA has taken a similar - but stronger - stance on COVID-19. In line with SEC provisions, its guidance indicates that firms “should provide transparency on the actual and potential impacts of COVID-19, to the extent possible”. Where the ESMA goes further is in defining a basis for such reporting, asking companies to provide “both a qualitative and quantitative assessment on their business activities, financial situation, and economic performance” in their next financial report. Furthermore, ESMA has identified a regulatory basis (the Market Abuse Regulation) for actually requiring such disclosure and acknowledges that while business must activate contingency planning, regulatory obligations will not be suspended.
Companies heed the call for transparency
All in all, while the SEC and ESMA are forging two very similar paths through the COVID-19 crisis, it is worth exploring adoption of their guidance through corporate disclosures in Europe and the US.
The chart above demonstrates the historical trends for disclosure around previous coronavirus strains (for example, Middle East Respiratory Syndrome - MERS), showing little attention by corporates compared to COVID-19. As the outbreak of the current pandemic coincided with the usual deadlines for filing annual reports in March 2020, many companies responded quickly and transparently by including COVID-19 mentions in their corporate reports. Based on data available so far in 2020, 41% of American companies and 31% of European ones have already acknowledged the novel coronavirus in their financial reporting.
Datamaran is currently evaluating these disclosures in order to provide more detailed insights to our clients and to help them assess their risk management practices and priorities in light of the crisis. The findings will be shared in our next COVID-19 update.
US vs EU: Differences in Disclosure
More differences are visible if we look at industry reporting. The chart below demonstrates the divergent focus displayed by European and US industries regarding the crisis so far. In industries such as Oil & Gas (where the numbers are a significant 55% to 32%) and Financial Services (40% in the EU to a mere 24% in the US), European companies lead American ones in recognizing COVID-19 related risks in their reporting. However in other industries, like Technology Equipment and Services (a 30% difference lead by the US) and Pharmaceuticals (with 50% of US companies disclosing on the issue compared with 39% in the EU), US companies are showing a quicker acknowledgment of the crisis. Notably, none of the 12 European Utilities analyzed reference the virus while only 14% of the included US Utilities do so.
What is coming next
As COVID-19 continues to spread in a growing number of countries, the information overload due to the excessive quantity of (often unstructured) information becomes a further challenge for companies. Datamaran will continue to track the evolving situation by collecting timely and consistent data and information to inform your company strategy and support decision making.
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