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People and Planet in the Accounts: digitisation of ESG - where we are today is not fit for purpose

20 November 2020: If non-financial ESG information is to be discoverable and meaningful, so any stakeholder can find and depend on it, digitisation based on taxonomies, defined and agreed by standard-setters, is the way forward.

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Should companies report on everything they do? How should that mass of data be read? And how do you digitise all that information such that you surface the right information at the right time to the right stakeholder?

These are the questions that have been taxing Liv Watson, Senior Director of Strategic Customer Initiatives at Workiva. She helped found XBRL International and is one of the original developers for XBRL (eXtensible Business Reporting Language) – the mark-up language that provides a global framework for exchanging business information. 

“I see this as a journey. We are seeing governments and regulators take interest in digitisation in a way they haven't before,” says Watson.

Watson started on her digitisation journey when she entered the profession, and saw that accountants were literally copying and pasting data from one location to another to collate and compare them. “I realised there had to be a digital transformation,” she says.

“The vision now is that we should not lock up non-financial ESG information in colourful, printed, unsustainable reports. We need to digitise it so that it can become consumed in the same way as financial data is consumed by the SEC, for example.”

Today 89% of financial data is consumed by bots. It has become machine-readable – not just human-readable – because there is the regulatory mandate in place to tag and digitise it. That is not the case for non-financial information.

“Workiva has developed an intelligent, intuitive platform where our customers collaborate in the cloud,” says Watson. “The largest companies in the world connect data, documents and teams to improve efficiency, increase transparency and reduce risk.”

So, what must happen if non-financial information is to be truly operational? Watson sits on a European Financial Reporting Advisory Group (EFRAG) project task force mandated by the European Commission that is assessing the possibility of developing EU non-financial reporting standards. Within this assessment, Liv is co-leading a workstream on the role of digitisation. “The European Commission realises that, even though companies are mandated to disclose non-financial data, if only their financial data is tagged, decisions will be made first on the financial data and the non-financial data second.

Watson is also leading a Non-Financial Digitisation Working Group (NDWG), which is assessing the role that a public good registry of digital taxonomies could play in digitising non-financial standards and frameworks. The project is facilitated by the Impact Management Project (IMP) which provides a facilitated forum for organisations to build consensus on how to measure, assess and report impacts on sustainability. Much of the IMP’s current facilitation is of standard-setting organisations: it is coordinating a group of 16 standard-setters that, through their specific and complementary expertise, are coordinating efforts to provide complete standards for measurement, assessment, and reporting of companies impacts on sustainability. The IMP is based at the ICAEW’s London office alongside the Capitals Coalition.

“The NDWG will assess different options for what a digital taxonomy registry could look like and articulate the potential benefits for preparers and users of non-financial information,” says Watson. “If you don’t have trusted taxonomies, tagging information doesn’t make a lot of sense because it still wouldn’t be machine-readable. A trusted registry of digital taxonomies could help regulators define what those tags should be.” 

She continues: “The challenge that we have today is that many companies are global and have to conform with global compliance regulation – we need a truly global approach to digitising non-financial frameworks and standards.”

Watson is adamant that if we want to measure and disclose company performance on sustainability, we need the digital infrastructure to communicate this at scale. 

“The problem with non-financial (also referred to as ESG or sustainability) data and the way companies report their data is that there can be so many versions of the truth in the annual report, in the sustainability report and on their website that it’s hard to determine reliability,” says Watson. “If you talk to a rating agency, they don’t necessarily get all their data from the annual report. They might get it from the sustainability report. There are so many different sources of information.”

“We need the technology now. A public good registry of digital taxonomies, with appropriate governance, could be an important part of the solution. Instead of making their own digital versions of non-financial standards, software vendors could plug approved taxonomies into their digital tools and help companies create machine-readable information that is discoverable, reusable and traceable back to an agreed data-definition so that there is no ambiguity.” This is crucial for the reliability of non-financial information, which matters both to companies and the standard-setters that guide them.

What does all this mean for the profession? “The accounting profession is in a perfect position to help make this data useful and explainable so we can help drive change and understand impacts,” concludes Watson.

Article series: People and Planet in the Accounts

Convergence of non-financial frameworks and standards is gaining momentum and we are beginning to see how nature and society might be included in the financial statements. But can these frameworks tolerate such change? In these articles we explore this from the perspectives of different actors in the debate.

See the series