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Wildfire risks not commonly disclosed by U.S. companies

In the United States, wildfires pose a major risk to entire communities (particularly in Western states), frequently destroying homes, businesses, and lives. When wildfires sweep through a region, they usually affect the economy as a whole, decreasing U.S. firms’ values to stakeholders, especially when businesses incur physical damage and supply chain issues, or lose employees. However, according to a new study led by the University of California, Davis, these firms rarely report their wildfire risks in required federal filings, and choose instead to hide such risks in nonspecific risk disclosures.

By examining over 80,000 10-K reports – annual reports filled by all publicly traded companies, including disclosures and exhibits – between 1996 and 2018, the researchers found that, on average, only 6.1 percent of firms with wildfires in their headquarters counties mention wildfire information in their required federal filings.

“Despite a growing awareness of the strategic importance of climate change, firm-level disclosures of extreme weather and climate-related risks and events remain the exception rather than the norm,” said study lead author Paul Griffin, a professor at the UC Davis Graduate School of Management. 

“Disclosure is a sign that the firm is taking these events seriously and will take action itself to mitigate the risk. Disclosure leads to real action,” he added.

The analysis revealed that the number of wildfire days in a company’s headquarters county is a key factor in determining whether the company will disclose wildfire risks. Largely, only firms previously affected by wildfires directly, such as utility and banking industries with tangible assets, report these risks. Thus, the most disclosure-sensitive companies appear to be those that experienced wildfires which disrupted their past operations, while the most disclosure-insensitive ones are those whose 10-K disclosures related to forward-looking risk factors only. The latter are also more likely to use limited, imprecise language to describe their wildfire risk.

Although wildfire disclosure sensitivity started to increase after 2010 – in line with the Security and Exchange Commission (SEC) guidance pressing companies to consider extreme weather as a material risk factor – there is still an unacceptably large number of firms hiding wildfire risk in their areas of operations.

The study is published in the Journal of Business Finance & Accounting. 

By Andrei Ionescu, Staff Writer

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