Demand for non-financial information is increasing and, more and more, users of company reporting are turning to advanced technology to help assess companies’ non-financial credentials. While there are clear benefits to this for users, it raises a crucial challenge for companies.
“The challenge that they face is two-fold: both a lack of structure in the data reported by companies and a lack of maturity in their systems to pull information together in a consistent and comparable way present barriers to meaningful disclosure,” explains Philip Fitz-Gerald, Director of the Financial Reporting Council’s FRC Lab.
“To an extent, this is likely to be addressed through ongoing regulatory developments aimed at standardising non-financial reporting, particularly in response to climate change. This should help to drive the development of those systems but companies will also need to innovate in this area to ensure the information they provide is decision-useful.”
Fitz-Gerald goes on to explain how users are also innovating. For example, artificial intelligence (AI) is used to assess companies’ assets – where they’re located, and how they might be affected by climate change. Some are also using other information sources such as satellite imagery or website traffic data to get an indication of company performance.
“The problem is that they're often having to gather this information from a variety of different sources, not necessarily from the company itself,” Fitz-Gerald continues. “That's because not all companies are providing the information that users are looking for or would be expected to provide in their corporate reporting. As a result, many use data aggregators, or AI or other systems, to try to collect that data.”
This raises a need for companies to present their data – financial and non-financial – in a more user-friendly, structured way.
Financial data for public companies will be reported digitally for the first time at the end of 2021 and non-financial data may follow suit. Fitz-Gerald explains: “XBRL is the standard commonly used for organising the financial information that can be structured, and that can certainly be extended to non-financial reporting information. That includes numbers and contextual information because you can tag narrative reporting as well.” AI also works more effectively when the data is structured in this way.
“The biggest risk of a lack of structure and standardisation is that we would end up with data that is not consistent and not comparable, and ultimately won't be decision-useful. Users will continue to try to access the data from third party sources using available advanced technologies rather than relying on the information that's coming from the company, which increases the risk of errors or misinterpretations creeping in.”
Annual reports can often be lengthy documents and few people read them from cover to cover. Nevertheless the information within them is extremely valued, says Fitz-Gerald, because the annual report is scrutinised by the Audit Committee, Board and external auditors.
“It is a process with a certain level of trust within it, which is why it holds so much value. Technology therefore can play a key role in how that trusted information is accessed. Users want to be able to quickly pull out the information they need from that report, rather than go elsewhere.”
More and more companies are taking their annual reports beyond the PDF, says Fitz-Gerald, for example by including links to videos that explain strategy or show an asset. “Video, I think, is a very important technology that companies are increasingly using to tell that story.”
Others are going further, using virtual reality and augmented reality (VR and AR) to communicate certain elements of the annual report, which might be particularly suited to non-financial disclosures.
“It gives you the ability to not only read on a page what the strategy of the company is or what the assets of the company look like, but to actually show it, and in many cases experience it, through VR and AR.”
So it is likely to be a combination of technologies that provides the most effective system of communication. “Providing structured data allows AI to quickly analyse information for the users of accounts,” says Fitz-Gerald, “while video, AR and VR can be useful ways for the company to demonstrate its vision for the future.”
“There will always be a need for a company to articulate its story. It's really about taking that annual report and bringing it to life, making it more accessible and delivering high-quality information in a usable format. Technology can really help to do that.”
Non-financial reporting: where are we headed?
What are the challenges that companies face when it comes to non-financial reports, where can improvements be made, and what does the future hold?
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