Ep. 102: Liv Watson & David Wray: Non-Financial Standards Digitizing Transformation and Sustainability Reporting

December 14, 2020 | 24 Minutes

Liv Watson, Sr. Director of Strategic Customer Initiatives at Workiva, and David Wray, Sr. Director of Accounting and Reporting at Huawei, come back to Count Me In and talk about non-financial standards for digitizing transformation and sustainability reporting. The Impact Management Project has a Non-Financial Digitization Working Group, which Liv chairs, and David chairs the economic workstream within the working group. They have two purposes: (1) determine the best way forward to develop a fit for purposefully digitized, transparent and integrated public good ecosystem for non-financial reporting globally; and, (2) ensure that non-financial information is structured, reliable and accessible to all-benefiting stakeholders, society at large, and our planet. In this episode, they talk about non-financial disclosures and the need, practically tackling these issues, and what the accounting profession can do to support this transformation. Download and listen now!

Contact Liv: https://www.linkedin.com/in/livwatson/
Contact David:
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

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 will create, disconnection of the information. So we have had long discussion with this, and I think that there is a consensus now we're around the world that, a broader understanding of what that infrastructure would look like. It's now, brought to the forefront. So both David and I are involved with, writing this and, and bringing  consensus to the market. So we hope to come back obviously and shared with you what those outcome of this assessment is, but from a European's perspective, they are going to have a recommendation out early next year, what should the new non-financial mandate look like? And what is that digital infrastructure? And when you think about, the regulatory drivers in Europe right now is that they have something called the green, not the green, but a taxonomy regulation in Europe, that will go into effect in 2021 as well, which will drive asset managers to have to classify each investment and assess each investment over ESG, criteria as in the taxonomy to afford its impact on thee environment, and to start identifying what we call stranded assets, when are you going to face these assets that are actually negative impact? So when we start looking at these impact on both our profession, as well as impact on companies, this is no longer just about public companies or the big companies. A policy maker wants to bring the smaller company into the gym as well. So, it will be an interesting, evolution that we have coming because they never in my life seen all of the stakeholders coming together now and addressing the issue that non-financial data is just as important as financial, if we ever going to think about dreaming meeting the global goals. So yes, thank you for that question, Adam, because helping us getting the message out and getting feedback from the public on what a public good infrastructure for taxonomy would, would be, is very key to the success for this. And then as a board member of IMA globally, I am so honored to also represent IMA to this initiative. So I will turn it back to David. He might have some comments because we recently together went on the journey for two years to do research and then publish a paper on why this digital infrastructure needs to be there. So, David, would you have a comment that you liked that.

David: (12:53)
You know, Liv, I think you summarized it brilliantly. I think that you're exactly right. This journey is one that's long overdue, and it's not just from a regulatory perspective or a standard set or perspective it's from a preparer perspective and every other stakeholder involved in the ecosystem. So I think everybody is now coalescing exactly as you said around this consensus view, that's emerging. So it's really, really exciting to see this coming together. And I think the two of us have a real passion around transformative processes, but also moving to digitization and using technology to end up driving such positive change. So I couldn't agree with you more.

Adam: (13:37)
It's so great to hear that so many people are coming to the table and being a part of the conversation because it's in the past, you've had, you know, certain one group doing things and other group doing things, but having everybody at the table is just, it's really kind of exciting. but since this is a podcast for accounting professionals, how can the accounting profession support this important transformation?

David: (13:58)
It's a really good question as well, Adam. I think it's really important to acknowledge that as Liv and I are talking these transformative changes, not only affect entities and the wider ecosystem stakeholders as we just talked about, but really they affect people. So if we look at this from an accounting profession point of view, of course we need to adapt. There's no question about it. We refer to this in our paper as the paradigm shift in the development of future ready skills, but what does that mean? Well, in practice, it means that the accounting professionals really need to sharpen two fundamental types of skills as we move forward. The first one is greater emphasis on soft skills and here, what, what I mean by soft skills is really this idea of how we communicate better. It's leadership. It's about active listening, not just listening, but active listening, or effective listening. It's about collaboration. When we talked about this ecosystem, there are many different stakeholders with many different points of view and, and different objectives. You know, so it's about collaborating with, with those different perspectives. So people in the process that are not necessarily like-minded. That requires a skill to be able to do, and then other similar interpersonal skills are also essential. All of these things of course fit into and lead into business partnering and how we lead teams and how we manage change. So I think this focus on soft skill is absolutely critical, and one that, that needs renewed emphasis in. The second type of critical skill, I think is technology and data analytics. So of course, we're talking about digitization, we're talking about technology. So it goes without saying that this would be an area of significant focus, but it means really understanding more about emerging technologies. Like for example, what are the use cases for blockchain? What about machine learning or natural language processing or robotics, for example? So how do we take those as a profession and embed them into the organization in a way that makes sense? And these skills are clearly critical. If our profession is going to continue to advise, for example, our employers, our clients, or other stakeholders on what digitized solutions we should be looking at that ultimately will be fit for purpose. So how we digitize non-financial information is a great example of leveraging these skills, as we think about the most effective ways of communicating about the transformative change that we're talking about with interested parties, or as we think about the intersection, for example of technology process and people and digitizing non-financial taxonomies or reporting itself.

Adam: (16:39)
So if we look into the crystal ball a little bit, here's a quote from your paper, “Change is inevitable. The forward-thinking accounting and compliance professionals must prepare for changes and play and even more active role in data governance, the fast changing transactional and business landscape demands, fundamental altercations and the way we work”. So what does this statement mean for the each, for each of you. Liv let's start with you.

Liv: (17:05)
Thank you. Well, first of all, looking into the crystal ball, think about it, it isn't long since our profession is used to spreadsheets and now online and now cloud and those kinds of things, and I think that what is becoming clear is that the accounting profession, as David stated earlier, the cost of compliance or even cost of managing data has skyrocketed. As our profession, we need to become good data governance, not just domain expert and think about how data is used, repurposed and disseminated throughout this life cycle, so that we can, advisable have one truth of the data linked to multiple version. So my thinking of the skillset, but I also want to remember that I feel that it's more important to our profession in the future, and that is the paradigm shift over. It's not about disclosure, its the impact that we have as we move toward a more greener economies, right? So what is the impact and risk associated with companies because now, you know, just dealing with data that sits in your own system, if you're going to do scenario analysis, looking at external risk of carbon or, or, weather related, impact that can have, then you are now dealing with a lot of external data as well. So be part of the solution and, and adopt open data standard and, and become a good data stewardess and reduce the cost of data management, do not work in silos and sit there. In the future into the crystal ball, I see us very best suited as professionals. We understand that data. We need to understand the broader impact that this data has, and I think that we, as a professional, we can help management and communicate to stakeholders the value long-term value that the companies or the, that the companies do so more about what impact that this data and what positive impact can we help our organization have, and how do we meet those global goals, which are set for 2030, but when you start looking into the future, wow, the digital transformation and the power, I just see, us becoming, not data scientists where we can do programming, but what we need to do is be able to understand a much broader data set than the impact on the financial that we do today. And I think our profession is to involve to do that. It also needs to support that we can not just have this old way of looking at assurance like, yeah, look at it like shooting the wounded, going in after the war, we need to get more forward thinking and give good real time data assurance and monitoring embedded into these processes. So to me, the crystal ball is two key things that I want his audience to take away. Number one, our profession, we are the best suited to manage this and, and take control and help guide the companies, and second embrace the digital transformation, or you're going to be left off that train that just left the station. Thank you, Adam.

Adam: (21:33)
Thanks Liv. David, how about you? How would you answer this quote?

David: (21:37)
Thanks Adam. I always enjoy ending on a crystal ball note. It's always fun to do this. In addition to the two types of capabilities I just talked about as well as those so eloquently covered by Liv. There's another category. I think that plays a key role here and that's professional ethics and values. So governance is really premised in my mind on being able to identify risks and be able to apply really critical thinking to address them. So it means being able to, for example, be objective, be skeptical in some cases, and really challenge to make sure that what we're seeing is in fact, a single version of the truth that Liv mentioned earlier. So in reality, it means recognizing and prevents, preventing for example, lapses and ethical behavior. Particularly as we think about automation and the black box issues, right where the black box issue being one that we don't understand how it works. We only see the output, but that's not good enough. We have to understand how it works, because how do we provide any kind of guidance or assurance on whether or not it's functioning correctly? And of course it means that we also have to be able to identify and manage any kind of legal and regulatory requirements. As accountants, we have to have a sense for that particular area. It's not just allocated to the lawyers. It's very much to the accountants to interpret as well, not so much the legal issues, but the accounting implication of those illegal requirements. So of course the future is full of challenges and full of possibilities. And it's up to each and every one of us as professionals to seize upon it and make sure that we continuously develop the capabilities within our own toolboxes to do so.

Closing: (23:29)
This has been Count Me In IMA's podcast, providing you with the latest perspectives of thought leaders from the accounting and finance profession. If you like, what you heard, and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.