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As developments in sustainability reporting continue at pace, David Wray discusses the link with financial reporting and the importance of adopting a digital mindset.
Digitally connecting

Several sustainability and financial reporting standards initiatives are under way globally. However, these initiatives will only deliver value when policymakers address the connectivity between financial and sustainability reporting and adopt a digital-first strategy. By this, I mean sustainability and financial reporting standards (including the related disclosures) being designed with the end-users in mind.

Thinking digitally means that outcomes are contemplated in terms of auditability, comparability, discoverability, machine-readability, reliability and, of course, a single reporting mindset. A connected and digital approach will ultimately help investors and other stakeholders analyse and compare large amounts of data across a large number of jurisdictions.

Addressing the challenges

The essential challenges currently being faced are fragmentation and a lack of interoperability (the ability for computer systems to exchange and make use of information), both of which are fundamental to digitising disclosures and reporting. For instance, the same term can hold different meanings for different regulatory bodies. In a particular country, the same vehicle tax might be referred to as a ‘car tax’ by one body and an ‘automobile tax’ by another – something a machine cannot intuitively understand. Imagine extending this simple example across hundreds of jurisdictions with different languages, units of measure, templates or descriptions.

A common framework

The siloed development of taxonomies with different meanings and definitions prevents interoperability. Adopting a disciplined, human-agreed approach to taxonomies that leverage common terms, dictionaries, source references and validation rules will reduce the cost of compliance significantly. For example, investment banks need their customers’ data – data that itself depends on a structured taxonomy – in order to understand their holistic sustainability risks and opportunities within a portfolio. When that is readily accessible, structured and machine-readable then the cost of obtaining and processing that information is lower than is the case today.

A common framework of taxonomies does not preclude localisation either: quite the opposite. It ensures a consistent, extended structure for local requirements and builds those back into the wider taxonomy framework. This allows localisations to be leveraged as a best practice, or new practice, by other jurisdictions.

Consistent digital tagging of data ensures comprehension by stakeholders within the sustainability ecosystem, from standard-setters to end-users and all stakeholders in between. Global effort and commitment will be required to create a common technical framework from which a structured taxonomy can emerge for global use. Aligning best practices on the taxonomy for sustainability reporting standards will be far easier than aligning on the sustainability standards themselves (due to geopolitical differences) and therefore is the area where policymakers should invest collaborative efforts. The result will be a materially lower cost of compliance across the entire ecosystem and global interoperability.

Connecting with financial reporting

The new International Sustainability Standards Board (ISSB) and European Financial Reporting Advisory Group (EFRAG) are working on their respective sustainability guidance and disclosure development projects. While the ISSB’s focus is on enterprise value for investors, EFRAG’s focus extends beyond investors to include societal stakeholders. In efforts to connect sustainability and financial reporting, the IASB has published helpful educational material on the particular topic of climate-related risks.

The Capitals Coalition has also identified interesting ways to consider sustainability and financial impacts. It has outlined several methods, ranging from reflecting investments to enhance natural and human capital as intangible assets, through to transforming the income statement by creating new asset and liability types to reflect debts owed to nature and social capital.

What does this mean for our profession?

We need to upskill! Specifically, we need to sharpen our storytelling, data modelling, digital and ‘out-of-the box’ thinking skills. If we fail to evolve towards adding value to all societal stakeholders, we will become extinct ourselves.

About the author
David Wray, Digital Transformation expert, President of the French CFO Network’s International Group (DFCG) and Global Accounting & Reporting Senior Director, Huawei

To hear more, listen to David’s session Connecting financial and sustainability reporting at the Financial Reporting, Audit and Assurance Conference at icaew.com/FRAConf

By All Accounts January 2022

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