Public bodies have their work cut out to implement a rapidly evolving suite of Environmental, Social and Governance (ESG) reporting standards and guidance.
The newly created International Sustainability Standards Board (ISSB) has started to issue draft standards, but these are primarily focused on developing standards for the private sector. There is still much work to do to extend sustainability reporting to meet the needs of government departments, local authorities and other public sector organisations.
What does enterprise value mean in a public sector context?
The ISSB is consulting on draft climate standards that build on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and incorporate industry-based disclosure requirements derived from SASB Standards. These standards are primarily designed to meet the information needs of investors and use enterprise value as a basis for assessing the impact of climate change and other sustainability objectives on private sector entities.
This approach is less suitable for public bodies where wider social, economic, environmental, and public service quality objectives are often as, if not more, important than the future cash flows of an individual public body or even of the public sector as a whole.
Despite that, much of the content of the ISSB draft standards and other sustainable guidance for private sector entities is still applicable. While the concept of enterprise value may not be directly relevant, expectations of the amount, timing and certainty of future cash flows over the short, medium and long term that it embodies are still very important to understanding the impact of sustainability on public bodies. At an operational level, many public sector entities will share similar risks and opportunities to private sector entities that deliver services to the public.
So where does that leave public sector financial reporting?
It makes sense to start from the ISSB standards rather than re-invent the wheel, but there is a need to cover aspects they don’t deal with, such as policy and regulatory functions of government that extend beyond the operations of the public sector itself.
This needs to build on the Greening Government Commitments (GGC) that established five-year goals for central government departments to tackle carbon emissions and other climate related externalities from February 2011 onwards. The CGC targets started with ambitions to reduce greenhouse gas emissions, waste, paper consumption, domestic flights, and water usage, which over time have been extended to include nature recovery, biodiversity and climate adaption.
This is a good foundation to build upon, but there is a need to address the gaps that exist in the reporting of risks relating to climate and sustainability. TCFD disclosures are already included within the central government sustainability guidance on a voluntary basis and expectations are that these will become mandatory at some point, most probably with some adaptations.
Further developments
The International Public Sector Accounting Standards Board (IPSASB) is due to consult on their role in setting sustainability reporting standards for the public sector, with the expectation that they will follow ISSB’s standards with some adaptions.
The rapidly evolving landscape means that there is not yet a single set of standards or guidance for public entities to use in preparing their sustainability disclosures. The risk is that governments may lag behind the private sector in their development, despite the critical importance of public bodies in the delivery on net zero and sustainability objectives.
