Ep. 102: Liv Watson & David Wray: Non-Financial Standards Digitizing Transformation and Sustainability Reporting

Contact Liv: https://www.linkedin.com/in/livwatson/
Contact David: https://www.linkedin.com/in/david-w-29627882/
IMA's Paper - https://www.imanet.org/insights-and-trends/external-reporting-and-disclosure-management/a-digital-transformation-brief-business-reporting-in-the-fourth-industrial-revolution

FULL EPISODE TRANSCRIPT
Mitch: (00:00)
Hey everybody, welcome back. This is episode 102 of Count Me In, IMA's podcast about all things affecting the accounting and finance world. I'm your host Mitch Roshong and I'm here to open up today's conversation by reintroducing you to Liv Watson & David Wray. If you'll recall, Liv and David joined us a while back to talk about business reporting in the fourth industrial revolution. Today we'll hear them talk with Adam about their paper on nonfinancial standards, digitizing transformation. Liv and David are leaders in the process of assessing the infrastructure required for the digitization of nonfinancial information, and they are here to share their perspectives with us again now. Let's head over to the conversation.

Adam: (00:51)
What does digital transformation of nonfinancial disclosures mean?

Liv: (00:55)
Thank you for the question here. What does digital transformation for non-financial disclosure mean is it's fragmented how people look at it, but let me try and put some perspective into it.  At the bottom or at the end goal, if we put it that way. We want auditable, traceable data. One truth to the data, and as long as we create data sitting locked up in proprietary documents or PDFs, there is a copy and paste process that is very human intensive and error prone. So what we really need is a digital transformation to create non-financial data and bring that into the same kind of environment where financial data is today, where regulator mandates companies to disclose XBRL as an open standard for financial information. And if you look today at a data captured from analysis, which used to be a cumbersome process from the U S Security Exchange Commission. Today, 89% of that data is captured in bots and becomes machine-readable data to automate analysis. So we need to take this whole non-financial data into a digital transformation, into a taxonomies ecosystem, where there are trusted available taxonomies for non-financial data. And it allows then also for companies to use this taxonomies is to improve their internal system so that you truly can create one truth to the data and link to multiple reports. And I know we will speak a little bit more about that later, but the regulators now are stepping out and understanding that non-financial data, sustainability data or ESG, however you want to put it, it's actually just as important to making economic decisions, but also policy makers wanting this to try and drive economies, to align with the global goals. So we need a data revolution. Thank you.

Adam: (03:38)
So that we've discussed what it means. Why is the digital transformation of nonfinancial disclosures, a burning platform need?

David: (03:47)
That's a great question, Adam. I'll answer it from two different perspectives. So firstly, as a working group member and then as a preparer. so let me look at the working group member perspective first. So despite the increasing attention in the role of sustainability disclosure, there clearly is a lack of trust taxonomies for non-financial standards and frameworks. And what this basically means is that the prepare of information is really limited in the way that they can access and disclose information against these nonfinancial standards as Liv alluded to earlier. So one possible outcome is that the data that's being passed from the preparer to the user, really risks being misinterpreted without contextual information being provided. So that results in restricted access potentially limited visibility and compareability of the information for the user. And ultimately it really hampers the uptake and growth of sustainability disclosure standards, which is not great. So a taxonomy therefore would go a long way to help address these issues by enabling a steady flow of machine readable, really comprehensive and accurate information for users to be able to make much more informed decisions. So now, if I look at this from the perspective of a preparer, the burning platform at its most basic level is the cost of compliance, and we talked about this in our paper, digital transformation, brief business reporting in the fourth industrial revolution, where we said that the international Federation of accountants or IFAC as it's commonly known estimates, that fragmented regulation really costs the financial industry sector alone 780 billion every year. Now multiply that out across all sectors and the numbers become absolutely astronomical. Imagine what we might achieve if we could spend that same money in sustainability areas. So think about education, equality, clean water so much would be possible if we weren't spending well over a trillion dollars on compliance costs around the world.

Adam: (05:52)
Then how do we practically propose to tackle these issues?

Liv: (05:58)
Thanks, Adam. At the heart of this, is that just like the rail road, right? If we only had rail cars without the railroads, those cars would not be mobilized. So we need an infrastructure when it comes to, digitizing non-financial data and what we truly need, and I speak a little bit about that from my, involvement and appointment to the European Lab steering group that was appointed by the European Commission to, look at what kind of digital infrastructure as well as what kind of standards should be mandated as they update their next release of the non-financial directive that impacts any company with over 500 employees that they have to disclose their ESG, to the market place. So Europe being a driver of this is trying to understand that this time around let's do it right. Let's not ask for more glossy, colorful PDF files that are totally unsustainable and not reusable, as David alluded to earlier. This task force is giving recommendation. We are currently in the recommendation stage and one of the things that we as a group have assessed, is the fact that we need a digital infrastructure with that. David also alluded to being involved with, I&P who he has created a task force which IMA is a part of as well, to be able to make that assessment. What kind of an infrastructure would that look like? So what do I mean by that? We believe that unless there is a central repository with taxonomies, for disclosure, for non-financial information that this taxonomy registry can help the standard setters to disseminate their standards to the marketplace in a digital way where software vendors and users can then take that to easily embed them to solutions and search engines so that we can start retrieving information and pinpoint this data looking into the needle in the haystack, as we said. So what is that mean? It means that there's digital taxonomy registrywill be a place for the taxonomy I mean, for the standard sharing to disseminate their standards digitally and also to collaborate, to start harmonizing the definitions around the metrics, because often your standards shared in the non-financial space as for the same metrics, they've kind of defined them differently. So trying to build that kind of harmonize station infrastructure allows for, digital transformation versus just an alphabet soup of taxonomies out there that wil...