By Jeffrey Matsu, Chief Economist, CIPFA
With the pomp and circumstance of the United Nation's Climate Change Conference (COP26) behind us, governments around the world can reflect on their commitments and commit to change. Inaction brings inaction, so acting quickly couldn't be more important. From Greta Thunberg to the Extinction Rebellion, the public mandate is clear – act sustainably and be held to account.
The public sector plays an important part in addressing climate change. Sustainability reporting is the first step to disclose how current activities impact the environment. From April 2022, the UK will become the first G20 country to mandate a Taskforce on Climate-related Financial Disclosures (TCFD) for its largest businesses. While already a widespread practice in the private sector, climate reporting is not common in the public sector. This standardisation is to be welcomed and can set the tone for how government contributes to its own Net Zero Strategy.
As governments are often required to report on their effectiveness across a range of policy areas like health and education, it makes sense to widen the scope to include environmental concerns. What gets measured gets done. Specific, measurable, achievable, realistic, timely objectives and key performance indicators can help policy makers focus on longer-term objectives that span decades rather than years.
Here are four factors that can enable meaningful public sector sustainability reporting:
Framework and definitions: Reporting on sustainability will help to improve outcomes when there are clear terms of reference. From environmental, societal and governance (ESG) ratings to the framework on the UN's Sustainability Development Goals (SDGs), there is a range of human activity that contributes to economic growth and well-being. What may be considered 'sustainable' to one person or group may be considered differently by another. This idea can be amplified across time as well - an example being when countries experience industrialisation, which may coincide with a sudden, rapid phase of high greenhouse gas emissions.
By establishing a formal process for reporting activity, these types of differences will become more visible for public review and judgement. In this case, countries that are in, or about to enter, a growth spurt may be reluctant to disclosures their environmental performance if other 'rules of the game' that acknowledge economic development stages are absent or not well established. Ultimately, sustainability is a relative judgement that involves a broad range of activities and values that intersect at various points in time. Building a framework that recognises these interconnections, while speaking a common language, is a worthwhile challenge.
Capacity: Sustainability reporting requires a clear understanding of frameworks and their definitions. Reporting expertise and capacity may be particularly limited in poorer countries or local authorities in deprived areas. If reporting becomes mandatory without the offer of sufficient external support, the risk for inconsistency, error or noncompliance rises.
Unintended consequences of wider environmental reporting could include the shifting of resources away from other service areas or activities that may yield better economic or social value. The cost of reporting should be evaluated against the perceived benefits and judged accordingly. Moreover, there will be a need for quality assurance through an independent and impartial auditing body. In some jurisdictions, this may be lacking in part or wholly.
Metrics: Policy evaluation requires clear and understandable metrics that allow for objectives to be benchmarked and compared internationally. Measures of sustainability will need to be well-defined and structured so that progress in reporting can be monitored at regular intervals. Meanwhile, will success be measured as outputs or outcomes? If the latter, the rate of change in activities may be as important as the levels. Mechanisms should exist to recognise the value in reporting activities that evidence a step-change or progress toward more sustainable behaviours – small wins may encourage future improvements.
Carrots vs sticks: Sustainability reporting in the private sector has been led by investor and consumer demand rather than regulation. Transparency and accountability have gone hand-in-hand as more businesses compete on their green credentials. Would regulation then be a sensible approach to adopt in the public sector?
Credit ratings and capital flows can directly influence the kinds of activities that national and subnational governments engage. Equally, governments have the potential to leverage the populism of the past decade to shape an agenda for change that enhances civic participation as well. While there may be a natural inclination for policy makers to favour regulation, a coordinated approach between central and local governments can increase the chances of long-term success.
Public financial management has a critical role to play in determining how spending on public services can be done in a way that reduces our impact upon the environment. By encouraging open conversations across society in a way that develops trust and inclusivity, sustainability reporting can help to inform the narrative around public value for future generations. At the very least, the exercise can help to identify an appropriate discount rate and evaluation period.
Indeed, for such reporting to gain widespread adoption and produce the kinds of data that can affect change, it must create a sense of partnership – that we are all in this together. Technologies, skills and the full range of public resources should be shared to combat what is a global endeavour. Further brinksmanship can be avoided if there is clarity in purpose and action.