Better than boilerplate: More detailed disclosures benefit investors

Less is often more. This adage is plainly evident in the avalanche of sustainability reporting that investors and analysts must sort through to get a complete picture of corporate performance in today’s world. As we often say at SASB, investors don’t need more information, they need better information.


When it comes to quality, however, it turns out that more is more.


A recent study at the University of Toronto found that more detailed disclosures enhance analysts’ understanding and impact investors’ decision-making. The study, The Benefits of More Detailed Risk-Factor Disclosures by Ole-Kristian Hope, Danqi Hu and Hai Lu, focused on Risk Factor disclosures—those required by Item 503(c) of Regulation S-K—in SEC filings such as Form 10-K. The researchers found that analysts are better able to assess fundamental risk when firms’ risk-factor disclosures are more detailed and avoid vague, abstract, or “boilerplate” language. They also found that the market more readily incorporates detailed information into stock prices, suggesting that such non-financial disclosures help investors better assess firms’ financial statements.


In particular, the study found a strong, significant (p<0.01) positive correlation between level of detail in disclosures and the absolute value of three-day cumulative abnormal returns around the 10-K filing date, suggesting that a higher level of detail leads to a stronger market reaction. They also considered analysts’ ex-ante expected range of future price movements compared to the realized price after 12 months, and found that analysts only reliably assessed fundamental risk for the subsample of firms whose risk-factor disclosures exhibited higher level of detail.


This is the first study to demonstrate the impact that a company’s risk-disclosure practices can have on analysts’ risk assessments and investors’ reactions, and it provides empirical evidence to support the SEC’s call for improved disclosure effectiveness.


SASB standards are intended to make it easier for companies to provide investors with high-quality information in their statutory filings. The standards are designed to elicit meaningful disclosures on the sustainability-related risks and opportunities that are most likely to have material impacts on a firm’s financial condition or operating performance.


SASB’s research shows that more than two-thirds of SASB disclosure topics are already being addressed in SEC filings, but rarely in a decision-useful way. More than a third of these disclosures consist of boilerplate language: broad, nonspecific wording that does not describe the realities of the registrant’s particular operating context. Meanwhile, only about 10 percent of issuers disclose sustainability information using performance metrics that indicate how well a company is managing that risk. Because of a lack of widely adopted standards, the metrics that are in use are not comparable from one company to another.


Meaningful—not boilerplate—disclosures on sustainability topics enable investors to more effectively allocate capital, allow companies to access more capital at a lower cost, and enhance overall market efficiency and stability.


By standardizing sustainability disclosures, SASB raises the signal-to-noise ratio, minimizing excessive or boilerplate disclosures and enabling apples-to-apples comparisons among firms within an industry—the number-one need identified by institutional investors.