Shari Littan CPA, JD, IMA® (Institute of Management Accountants) Director, Corporate Reporting Research & Policy

May 26, 2021

Regulatory authorities are considering mandatory disclosure of sustainable business information around issues such as climate risk and diversity, equity and inclusion (DE&I) in a way that interconnects with traditional financial information.

In February, the European Commission’s European Financial Reporting Advisory Group (EFRAG), published a highly expected report, “Proposals for a Relevant and Dynamic EU Sustainability Reporting Standard-Setting.” This report is the work of EFRAG’s special Preparatory Task Force (PTF) that evaluated the need for additional regulatory action to mandate sustainability reporting. Subsequently, in April, the European Commission issued its Proposal for a Corporate Sustainability Reporting Directive (CSRD). While stakeholders are assessing the effects of this proposal, it is clear that the EC, based on the PTF’s recommendations, see technology as a critical tool in improving the corporate reporting ecosystem. These recommendations resulted from the hard work and passionate dedication of Liv A. Watson, IMA® (Institute of Management Accountants) Global Board member, who also serves on PTF’s Stream A6 and contributed significantly to the assessment (Appendix 4.6 to the main report).

An IMA white paper published last year, “Business Reporting in the Fourth Industrial Revolution,” authored by Watson along with a team of thought-leaders on the use of technology in corporate reporting, addressed the extensive costs associated with a fragmented corporate reporting systems and disclosure requirements. As cited in this report, the International Federation of Accountants (IFAC) estimates that the fragmentation brought about by current reporting regulations and standards costs the financial services sector (that’s one sector), $780 billion annually. International Data Corporation (IDC), a global provider of technology market intelligence and advisory services has predicted that worldwide data will grow by 61 percent per year. The fragmented and divergent regulatory ecosystem is a core issue associated with existing compliance and statutory reporting schemes. This can be improved by focusing analysis on the two critical points of business information – the moment the data is created and needs to be included in a report – which speaks to “RegTech.” The second is the moment that the information is accessed by a user, which is sometimes referred to as “FinTech.”

Crucially, the recommendations of the IMA report call for the creation of a common, global system of taxonomies that transcends regulatory boundaries while also allowing each jurisdiction to access the information it needs. The use of common reporting language, in conjunction with technologies like blockchain and AI, can revolutionize financial and ESG disclosure. By finding commonality (or points of differentiation) of definitions, automated systems can replace the repetitive reformatting and delivery of the same data to multiple regulatory authorities and private users in different jurisdictions in different formats.

The EFRAG report, drawing on IMA’s paper, looks to using technology to make the reporting, analysis, and decision-usefulness of sustainable business information more efficient, labor-saving and globally communicable. In considering the corporate reporting landscape to enhance sustainability reporting, the EC, through the task force report, reflects the report’s conclusions: finding commonality in digital definitions can ease the repetitive reporting burdens that new forms of sustainability information present to corporate reporters and a range of users. It aims to use technology to overcome regional variations in reporting requirements, such as between the nations of the European Union and the United States. In addition, ecosystem participants – corporates, data aggregators, regulators, investors, and policymakers - have yet to settle on the various ESG frameworks such as the guidelines issued by the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-Related Financial Disclosure, the Global Reporting Initiative (GRI), and the survey approaches by CDP, MSCI and Sustainalytics. What all this means for finance and accounting professionals, is that reporting is becoming a potentially longer and more painstaking process as corporate reporting teams strive to satisfy ever more complicated disclosure requirements and expectations at the behest of investors, data aggregators, and regulators.

Whatever the future direction that the EC and other global regulatory organizations, as well as the standards frameworks, take on ESG reporting, IMA agrees that AI, robotic process automation (RPA), and other digital technologies will play a key role in driving efficiency. This will help regulators, stakeholders and investors gain a clearer insight into comparable ESG information from companies across the world, while minimizing the need for companies to duplicate efforts in delivering data to different regulatory jurisdictions. And most importantly, a digital reporting revolution will save finance professionals time and labor while adding value to their organizations as strategic business partners. As Jeff Thomson, CMA, CSCA, CAE, IMA President and CEO, noted in the IMA-supported work, the call to action is urgent. The use of open data standards, taxonomies, digital delivery technologies, and guidance can enable more connected and less fragmented reporting than what we are seeing today. These technologies can modernize corporate reporting by eliminating inefficient and inconsistent formatting and streamline the most informative data from source to user. More actionable, relevant, and trustworthy data is at stake to enrich ethically sound individuals, organizations, capital markets, and society at large.