Digital reporting is vital infrastructure for CSRD
This article was originally published on LinkedIn here.
AI is an extraordinarily important new technology, but it is not a magic wand. As the CSRD negotiations enter their last stages, some MEPs are wondering whether AI can replace digital reporting. The answer is ‘no’, but it is its natural complement. As the EU seeks to encourage wider retail investment in the region’s growth, AI and digital tagging can provide the low-cost, assured, informed access that can help to stimulate the capital markets. AI cannot do that alone.
AI can help management with tagging. It is good at the simple stuff, but extensive testing by many groups repeatedly proves that we are a long way from Investment Grade data:
1. AI can’t reliably help with more complex or company-specific disclosures;
2. AI is not consistent. As research shows, AI will provide slightly different results the next time it is used; and
3. Different AIs will confidently provide different answers based on the same data.
Multiple experiments demonstrate that when you provide AI with reliably structured (‘tagged’) data (especially when combined with structured metadata – such as the taxonomies produced by EFRAG), the analytical capabilities on offer are exceptional.
Users need a single version of digital truth for which management is ultimately accountable.
The tighter these tagging decisions are tied into sourcing systems and controls, the easier it will be for companies to produce accurate and consistent digital disclosures going forward. We welcome the fact that companies (and auditors) will be working with software that leverages AI to reduce the time and increases the accuracy associated with certain tagging decisions, but this is a “copilot” process where management doesn’t relinquish control.
With universal structured disclosures EU companies will get more of the attention and capital that they need at lower cost. The cost of digital tagging represents no more than 1%-3% of the total cost of the preparation, sourcing, systems, controls and oversight associated with reporting.
The EU is currently far behind in making data available to capital providers. The US now has more than an exabyte of structured securities disclosures. Japan’s holdings are similar. For the Savings and Investment Union to support the investment needed to drive innovation and growth across the EU this piece of fundamental plumbing needed for disclosure must be in place.
Reducing the efficiency of traditional and AI-assisted analysis on EU companies would raise the relative cost of capital and inhibit the growth of retail investing, while making a fractional saving on disclosure costs. Failing to pair AI with mandatory digital reporting would represent a false economy and put retail investors at risk, making it harder for the EU to lead in the development of sustainable financial markets.
