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The European Green New Deal, how will this impact accounting & finance?

First, I was very happy when reading the document made public yesterday, that the SDGs were put front and center of this new Deal: "The Green Deal is an integral part of this Commission’s strategy to implement the United Nation’s 2030 Agenda and the sustainable development goals, and the other priorities announced in President von der Leyen’s political guidelines. As part of the Green Deal, the Commission will refocus the European Semester process of macroeconomic coordination to integrate the United Nations’ sustainable development goals, to put sustainability and the well-being of citizens at the centre of economic policy, and the sustainable development goals at the heart of the EU’s policymaking and action." This will definitively impact the way that accounting, reporting and financing will be conducted in the future. For example, see the SDG reporting by Danone here.

Second, connectivity, as a principle, is put as a key principle of the future agenda of the Commission: "While all of these areas for action are strongly interlinked and mutually reinforcing, careful attention will have to be paid when there are potential trade-offs between economic, environmental and social objectives". This also means that there are now clearly 3 objectives (a triple bottom line) in the EU. Connectivity also refers to systems thinking, a clear framework for thinking about sustainable development.

Climate Neutrality for 2050 will impact not only the public sector but also the private sector. More than ever, Science-Based Targets for 1.5°C are warranted and need to be implemented globally. Planetary Boundaries, already taken into account by the French Government in its latest Sustainable Development report, and by many front runners such as Kering, Alpro. A working group at the R3.0 think tank is working hard on Global​ ​Thresholds​ ​& Allocations​. Future Fit has also built a framework that can be readily implemented by companies to drive into a context-based world. Finally, the "doughnut" is key: social foundations are as important as the environmental planetary boundaries.

Pricing is being encouraged "These policy reforms will help to ensure effective carbon pricing throughout the economy. This will encourage changes in consumer and business behaviour, and facilitate an increase in sustainable public and private investment. The different pricing instruments must complement each other and jointly provide a coherent policy framework". Will the number of companies (in 2017, 600) pricing carbon internally raise? More importantly, will that encourage "Full Cost Accounting" models such as the E P&L or even "Sustainability Assessment Models" such as KPMG's True Value or PWC's TIMM? (SAM models are now being standardized by the Value Balancing Alliance). (see also later in the EU text: "The price of transport must reflect the impact it has on the environment and on health")

The EU enlarges the scope of its ambition to a circular economy "Achieving a climate neutral and circular economy requires the full mobilisation of industry", which will impact tremendously the way we currently do accounting for sustainability. See for example the project by WBCSD.

Data, measurement and valuation will become key: "Companies making ‘green claims’ should substantiate these against a standard methodology to assess their impact on the environment. The Commission will step up its regulatory and non-regulatory efforts to tackle false green claims. Digitalisation can also help improve the availability of information on the characteristics of products sold in the EU. For instance, an electronic product passport could provide information on a product’s origin, composition, repair and dismantling possibilities, and end of life handling." To avoid "greenwashing", companies will need to step up in terms of data gathering, IT systems and expertise. There will be a need for Chief Value Officers and Sustainability CFOs.

Biodiversity is coming, endly, to the forefront: "To ensure that the EU plays a key role, the Commission will present a Biodiversity Strategy by March 2020, to be followed up by specific action in 2021. The strategy will outline the EU’s position for the Conference of the Parties, with global targets to protect biodiversity, as well as commitments to address the main causes of biodiversity loss in the EU, underpinned by measurable objectives that address the main causes of biodiversity loss." Measurable objectives can now also be set by organizations using several emerging tools such as the Global Biodiversity Score, the work on indicators done by the UNEP WCMC, and the Biological Diversity Protocol (and many more, see also this website: the Natural Capital Toolkit.

More measurement, valuation will be need to achieve this "To achieve the ambition set by the European Green Deal, there are significant investment needs. The Commission has estimated that achieving the current 2030 climate and energy targets will require €260 billion of additional annual investment, about 1.5% of 2018 GDP". The plan is "The Commission will present a renewed sustainable finance strategy in the third quarter of 2020 that will focus on a number of actions". This will lead to significant need in tools and expertise, harmonization and standards, to account for sustainable development.

Additionnally, measurement will accompany the development of "clear labels for retail investment products and by developing an EU green bond standard that facilitates sustainable investment in the most convenient way".

And then comes the most important development to accompany all of this "Sustainability should be further embedded into the corporate governance framework, as many companies still focus too much on short-term financial performance compared to their long-term development and sustainability aspects. At the same time, companies and financial institutions will need to increase their disclosure on climate and environmental data so that investors are fully informed about the sustainability of their investments. To this end, the Commission will review the Non-Financial Reporting Directive. To ensure appropriate management of environmental risks and mitigation opportunities, and reduce related transaction costs". This will impact organizations... tomorrow. If you have not read yet Patrick de Cambourg's report, here it is.

Also: "the Commission will also support businesses and other stakeholders in developing standardised natural capital accounting practices within the EU and internationally". There has been already quite a lot of work on standardization (GHG Protocol is widely used, TCFD has set the pace, water is accounted for using "water footprinting) and the Natural Capital Coalition has issued a protocol in 2016. However, this will also be a game-changer. The accounting set by the EU commission will link to what is happening in pricing, in the NFRD... watch the space.

Experimentation is warranted! "Conventional approaches will not be sufficient. Emphasising experimentation, and working across sectors and disciplines, the EU’s research and innovation agenda will take the systemic approach needed to achieve the aims of the Green Deal." Additionally Big Data will support the Green New Deal (and accounting for sustainable development!): "Accessible and interoperable data are at the heart of data-driven innovation".

Education is the foundation of all that change "Schools, training institutions and universities are well placed to engage with pupils, parents, and the wider community on the changes needed for a successful transition. The Commission will prepare a European competence framework to help develop and assess knowledge, skills and attitudes on climate change and sustainable development."

This program links well with the work that is being pursued at Audencia in terms of research, teaching and impact on accounting for sustainable development:

1/ We are building a center of expertise on accounting for sustainable development

2/ We are already training students to measure differently impacts and value creation

3/ We train executives for the new skills needed

3/ We engage with think tanks, standard-setters, governments to allow research to percolate all the work that is going into laws, experimentations and more.

4/ We work closely aligned with organizations' needs in innovations. For example we have worked on Integrated Reporting, Carbon Accounting, SDG Reporting and Multi-Capital Accounting projects for large organizations in the past.

If you would like to be in touch with us, on Twitter: @DelGib, on Linkedin.

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