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Auditing is crucial for sustainable digitalisation

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Besides its focus on climate action policy the Von der Leyen Commission has selected Europe fit for the digital age as one of its top three priorities, the third one being An economy that works for people. But how compatible are these top priorities? How environmentally friendly is digitalisation, considering, for example, rapidly growing data centres that consume a lot of energy, and hardware for smartphones depleting scarce resources, often in a non-circular manner? Mats Engström is Senior Advisor at the Swedish Institute for European Policy Studies (SIEPS) and has written extensively on environmental and technological issues. Before that he was, inter alia, Deputy State Secretary in the Swedish government. In this article he looks at the possible symbiosis between going green and digitalisation, and how auditors can stimulate such developments.

By Mats Engström, Senior Advisor, Swedish Institute for European Policy

Digitalisation — promise or threat?

Digitalisation holds both promise and threat for sustainable development. Smart transport and intelligent energy systems can reduce energy consumption and carbon dioxide emissions. Collection of information on the environment and new methods for data analytics contribute to better knowledge and facilitate decision-making. Artificial intelligence might help us understand complex systems and find solutions to issues such as loss of biodiversity and climate change.

However, energy consumption from data centres and other electronic equipment is rapidly increasing, adding to a negative environmental footprint. The processing and storage of gigantic amounts of data require massive inputs of electricity. Manufacturing of computers, screens and smartphones adds to energy demand.

In their study published in 2018, researchers Lotfi Belkhir and Ahmed Elmeligi recently found that 20 years from now, greenhouse gas emissions from the use of ICT could correspond to more than 14% of today´s total emissions, compared to 1 to 1,6% in 2007 of that year´s level. Dangerous waste, unsustainable mining of rare earth metals and high water consumption by data centres are other environmental problems linked to digitalisation.

Growing awareness — but much remains to be done

Fortunately, a number of initiatives have been taken by industry to remedy negative aspects. Data centres now more often operate with electricity from renewable sources and new methods can limit their power consumption. But, with the need to quickly reduce emissions of greenhouse gases, more needs to be done. Greening digitalisation needs to feature more prominently in industry and in policy, including in the European Union.

The financial sector is one example of business becoming more aware of the environmental aspects of digitalisation. Banks and other financial institutions are rapidly becoming more digital. Some banks acknowledge that this can lead to larger energy consumption and negative environmental impact. This will be even more true with extensive use of artificial intelligence and blockchains. But others do not as yet include the environmental impacts of digitalisation in their sustainability reports.

Reducing emissions of greenhouse gases is one important aspect, contributing to a more circular economy is another. Much still remains to be done on recycling of electronic equipment, even if companies and governments have taken action, including legislation in the European Union. For example, recycling of critical metals such as neodymium and indium is still expensive and appropriate technology needs to be developed. Mining of such minerals is energy intensive and environmentally damaging. It is difficult for individual companies to solve these issues, implying a need for government-funded R&D, regulation, public procurement to create lead markets, economic incentives and to some extent new regulation, including extended producer responsibility (EPR).

Much attention has been focused on physical products, but to create a more circular economy there is also a need to reconsider business models. Do we really need a new mobile phone every year? In many countries, telecom companies offer contracts that include offers of renewal every year or so. Responsible companies need to reconsider such business models. Policy makers have been rather fixed on the products as such and have not thought enough about business models around products and measures to influence them, for example through taxation.

Policy is being developed, but is it enough?

After years of emphasising mostly the environmental benefits of digitalisation, negative effects are now taken more seriously by policy-makers in the European Union and its member states. Germany plays a key role in this development. The German Ministry for the Environment has already put forward a good analysis and relevant proposals in its policy paper Get the Environment into those Algorithms!, for example on eco-labelling of cloud providers and on the development of environmentally sound algorithms. The environmental impact of digitalisation will be on the agenda for the German Presidency of the Council of the EU this autumn, and if the European Commission comes forward with good proposals in time, this is a window of opportunity for the EU to become a global leader.

Other member states also have the issue on the agenda. In France, a task force led by mathematician Cédric Villani presented a number of useful recommendations in the report For a meaningful artificial intelligence. For example: supporting alternatives to today´s energy intense graphics processing units (GPU´s) and developing a platform for assessing the environmental impact of advanced digital systems.

The European Commission is also taking important initiatives on greening digitalisation. At the DG Communications Networks, Content and Technology (DG CNECT), Director-General Roberto Viola has highlighted issues such as blockchain energy consumption and the need for action. Environmental aspects are included in policy initiatives for a digital Europe, but still much remains to be done.

The EU can be a global leader

The large internal market creates unique opportunities to promote European values and interest globally. The European Union can set global standards, as has become clear in areas such as personal data protection (GDPR) or dangerous substances (Reach). This is also true for the environmental impacts of digitalisation, including artificial intelligence.

The European Green Deal is an opportunity in this regard. It could also include ambitious policy measures on sustainable digitalisation. There has been a positive statement to this effect by the Commission’s Executive Vice-President Marianne Vestager. From an EU policy perspective, greening digitalisation seems to be at a ‘tipping point,’ where important decisions will be made during the coming years.

However, so far there has been less visible action from DG Grow, the DG for Internal Market, Industry, Entrepreneurship and SMEs. They are also responsible for industrial policy, including artificial intelligence — AI. Still, the rapid development of AI is a key issue for sustainability. AI, and especially machine learning, creates both opportunities and threats from an environmental point of view. Algorithms can be green or brown in their way of finding solutions, depending on what data sets they are trained on and how possible bias is handled. Machine learning also often requires huge amounts of calculations, especially when computer systems are trained and trained again to learn how to handle similar problems, with unnecessary energy use because of silo thinking and competition between companies.

Strategies on AI are now rapidly being adopted by a number of governments. The European Commission is putting forward a White Paper on the subject. In an earlier Commission document on artificial intelligence there were some positive statements, for example on algorithmic awareness building and on reducing energy consumption for data processing. But it is crucial that other environmental concerns, including the ones I referred to earlier, are included and that sustainability issues are more urgently addressed.

Another important issue on the European agenda is the review of the non-financial reporting directive. Since the environmental footprint of digitalisation is becoming more significant in a number of business sectors, it would seem natural to include requirements in the directive to include these aspects in disclosing the effects of companies’ activities. This also holds for the EU Action Plan on Sustainable Finance, since digitalisation, including machine learning, is a fundamental driver of change in the financial sector.

Digitalisation helping climate change reduction? Source: Pixabay

It will be very interesting to see to what extent the European Commission will be able to merge policy initiatives that are relevant to this area, such as the Green Deal, climate policy, circular economy, Digital Europe, and the new industrial strategy. And clarify what the related disclosure arrangements will be. The Commission should seize the opportunity to build in the latter in each of these policy initiatives. Experiences from the current Covid19-crisis will be useful, for example innovative digital solutions to reduce the environmental impact of fossil-based mobility such as air transport.

Key roles for accounting and auditing

A key element in promoting sustainable business is how to measure the environmental footprint in a standardised way. Here accountancy and auditing have crucial roles to play. Accountancy is already developing such tools. During the Climate Week in New York in September 2019, international accountancy organisations, )were discussing how to implement climate disclosure systems in practice, and developing practical guides. This includes guidelines regarding the work of the Task Force on Climate-Related Financial Disclosures (TCFD).

When it comes to digitalisation, measuring energy consumption and carbon footprint is key. This is not as simple as it might seem. Yes, finding out what´s on your electricity bill does not take much advanced calculation, but there is no consensus on how emissions from the related electricity production should be accounted for. Finding out the environmental impact of different machine learning methods and blockchains is no less difficult.

Still, such issues are important for sustainable digitalisation. There are already policy proposals that will require more standardised measurement and accounting. For example, how do you eco-label software, as the German Ministry for the Environment wants to do? How do you prove that AI applications are environmentally sound? Related questions also appear within existing instruments, such as the EU directive on non-financial reporting (NFR) and the TCFD framework. With carbon dioxide emissions related to digitalisation rapidly increasing, both tech and more traditional companies will be required to report them correctly.

In general, sustainability reporting is likely to become more quantitative. Without quality assurance of non-financial disclosure, there is a risk of backlash where methods will be questioned and some companies might be accused of ´greenwashing.´ Accountancy and auditing will be decisive to achieve the declared aims.

Important role for public auditors

In addition to private initiatives, public auditing has a key role to play. The European Court of Auditors has highlighted sustainability reporting, for example, as well as broader sustainability issues. The ECA has also provided important input for the review of the non-financial reporting directive (NFR).

Many lessons from the broader sustainability agenda are relevant to digitalisation and the environment. For example, there is a need to audit how EU institutions are applying sustainability principles in their strategies and in their own activities. In connection with the NFR-directive and the upcoming climate law, important issues will also arise regarding measurement standards and reporting where public auditors have broad experience, not least because of their work in performance auditing.

More generally, integration of environmental concerns in all sectors is a key principle in the European Union Treaties, as is reflected in Articles 11 and 191 to193 of the Treaty on the Functioning of the European Union. Obviously, this also includes policies on digitalisation and AI, and public auditors have an important role in checking to what extent this is the case.

This article was first published on the 2/2020 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors

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The ECA Journal features articles on a variety of current audit topics, the ECA’s role and work. It is available in electronic form below, and paper copies can be ordered online at the EU Bookshop.

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