The Embedded Benefits in ESEF Digital Financial Reporting

In a battle for significance, no other public facing business document can match the annual financial report. It is the document that a public corporation must, by law, publish to describe its operations and financial condition, and to chronicle its activities over the past twelve months. Shareholders, investors and the wider financial ecosystem make innumerable strategic and operational decisions based on its contents.

In today’s digital age, then, it is little surprise that the European Securities and Markets Authority (ESMA) has mandated that annual financial reports published from the start of 2020 follow a consistent digital configuration, known as the European Single Electronic Format (ESEF) and, in them, embed their Legal Entity Identifier (LEI).

On first glance, the ESEF format appears to be designed to drive financial report production into a convenient paperless form factor. While this is both true and highly commendable, an ocean of additional potential is revealed by ESMA’s insistence that corporations embed their LEI. This mandate will heighten transparency, enhance trust, and provide instant and non-repudiable verification that the organization filing the report is, indeed, who they claim to be. These far-reaching benefits are all enabled by the report linking to the filing entity’s verified LEI reference data held within the Global LEI Index.

The simple process of embedding an organization’s LEI – or, indeed, that of its affiliates, subsidiaries and parent companies – within an ESEF financial report means that regulators, investors, traders and other financial stakeholders, can consolidate and verify information on the filing entity faster and more conveniently than ever before.

LEI reference data includes business card information on an entity, including name and registered address, together with relationship data which confirms if the entity owns, or is owned by, other entities. This increased transparency relative to an entity’s ownership structure means that relationship networks between LEIs can be quickly and automatically established, since the LEIs of the filing entity, its affiliates, subsidiaries and parent companies are all provided in the new machine-readable ESEF format. Usefully, because the reference data is reverified annually by GLEIF accredited LEI issuers, it is always accurate and up to date. The net result is a substantially more useful document for end users, which is also verifiably trustworthy, authentic and integral.

ESMA has published the Global LEI Foundation’s 2019 annual report on its website to provide a best practice example of a report published in the ESEF format, which other preparers can reference. The report is published in human and machine-readable Inline XBRL and HTML formats, with LEIs embedded within both the annual report and the digital certificates of the report’s signing executive officers. The combination of these two features provides something completely unprecedented: instantly available, digitally verifiable credentials that confirm both the authenticity of document and the key individuals responsible for its content.

Beyond the single report, the LEI embedding process creates broader opportunities for the financial ecosystem. Aggregating information on companies from multiple sources is dramatically simplified, making the job of comparing standardized financial information both faster and easier. This can be accomplished either manually, by ‘clicking through’ to view the LEI reference data, or via an automated process, saving yet more time and eliminating the risk of human error. In time, this level of facility will lead to the automated creation of online databases that use the linked LEIs to collate key data assets, to the benefit of, frankly, any person or organization that has interest, globally.

The mandatory embedding of LEIs in financial reports is just one demonstration of this technology’s transformative potential. In broader terms, not only is the LEI shoring up the digital financial ecosystem, it is helping to stabilize the evolution of the world’s digital economy. It is no exaggeration to say that the LEI, together with the Global LEI System, solves the problem of trust for legal entities worldwide. It is the only open, commercially neutral, standardized and regulatory endorsed system capable of establishing digitized trust between all legal entitles, everywhere. It was conceived and designed as a public good and can be deployed without charge in a wide - and growing - variety of digital use-cases. Put simply, the more it is utilized, the better it will do.