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...