Companies can streamline their environmental, social, and governance reporting using technology, according to a recent report.
The policy briefing explains how technologies like blockchain and artificial intelligence, along with a common, global system of taxonomies that goes beyond national and regulatory boundaries, can make the reporting process more efficient and auditable for investors and regulators, while reducing many of the manual tasks.
“Basically the work that’s being done is looking at what we’re calling the ecosystem of corporate information or financial information, the active data that becomes accounting information, and looking at it as part of a larger ecosystem,” said Shari Littan, director of corporate reporting research and policy at the Institute of Management Accountants, who wrote the briefing. “Every piece of data from an accounting standpoint has some transaction that gave rise to the data and is created within a company. At some point, it has to get to a user in some summarized form. That’s where the concept around digital reporting comes in. Think of it less as the production of a single document, and more as the transmission of a data set that has parameters and definitions. The power of that could be around allowing the data itself to be reformatted.”
Littan compared it to Extensible Business Reporting Language, or XBRL, which the Securities and Exchange Commission now mandates for financial filings from public companies and other types of issuers. XBRL uses a common data-tagging format to make it easier for investors and analysts to compare different companies and industries. It’s also part of the U.S. GAAP Financial Reporting Technology issued by the Financial Accounting Standards Board and the IFRS Taxonomy from the International Financial Reporting Standards Foundation and the International Accounting Standards Board.
“It’s kind of like XBRL, for example, where there’s tagging and metadata recognition around it so that piece of data can be incorporated and summarized in different ways,” said Littan. “The power of that is communicating to some user at some point, so that the same information can be reformatted using the power of the technology into different reports for different users in different jurisdictions.”
With the growing popularity of ESG funds among investors, the SEC and financial regulators in other parts of the world have been calling for more common standards for ESG reporting. The Sustainability Accounting Standards Board finalized its merger last week with the International Integrated Reporting Council, and has been working with the Global Reporting Initiative, the Climate Disclosure Standards Board and the Carbon Disclosure Project on harmonizing their different standards more closely (
“A lot of these standard-setting organizations, in efforts to find more alignment, are looking to their technology teams right now to learn to harmonize from a digital perspective,” said Littan. “I’m told that the data aggregators will be part of the solution as well because they are the digital users of this information.”
The SEC requested comments in March on requiring companies to make more detailed climate change disclosures. The American Institute of CPAs and the Center for Audit Quality recently submitted their comments supporting such disclosures (
Disclosure mandates must be clear as to the intended user, suggested IMA president and CEO Jeff Thomson in his letter to SEC chairman Gary Gensler. “The SEC has the specific mission of helping investors,” he wrote. “With respect to climate and other ESG disclosures, we urge the SEC to adhere to this mission. We note, however, that not all users of corporate reporting, or even of financial reporting in the narrower sense, are the same. The markets function not only for short-term investors with an investment horizon of only a few days or months but also for long-term investors such as pension funds, life insurance companies, and fund managers that must maintain portfolios for asset owners with decades-long horizons. We understand the challenge of developing disclosures that consider the needs of these different investors.”
Thomson pointed out that some of the global initiatives around ESG are unclear about the intended users of certain reporting. “This lack of clarity can make operationalizing new regulation problematic,” he noted. “Moreover, impact accounting is still a nascent area in terms of identifying the key indicators and measurement. All regulation regarding ESG disclosure, whether from the SEC or its counterparts worldwide, must make the intended user for specific information absolutely clear.”
IFAC CEO Kevin Dancey
“As policymakers consider the best way forward for crafting an emerging global system for climate and other sustainability-related disclosures, support from the U.S. is more important than ever,” Dancey wrote. “We believe that companies who adopt an ‘integrated mindset’ — insight gained by management and those charged with governance from both financial and sustainability information, including climate-related issues — will make better decisions and can deliver superior financial returns to investors, as well as take account of value to customers, employees, suppliers, and societal interests.”
Littan believes that technology can help with ESG reporting if it’s built into the future standards. “Traditional financial reporting grew up on paper using human language definition, and now we have the opportunity to build into the system from its inception a digital standard setting,” she said.
Thomson discussed the use of data analytics technology during the IMA’s online annual conference on Tuesday. “The new science of winning is data analytics, data mining, knowing and anticipating your customers’ needs and wants, and in fact future needs and wants,” he said. “Analytics should not be equated with analytical information technology. It is the human and organizational aspect of analytical competition that truly differentiate it. The technology is incredibly exciting — blockchain, RPA, etc. — but it is the people and the processes around it that make the technology hum.”
All of the latest technology buzzwords are trying to get to one common goal, according to Hirav Shah, director of data analytics at the IMA. “They are able to understand the customer and what are the customer preferences,” he said. “That’s where data analytics is really creating value. Previously it was very difficult, but now with all the processing of terabytes and terabytes of data within a few seconds, it’s become possible to understand each and every customer and their preferences.”
