ESG reporting: What lessons can the public sector learn from the private sector?

PWC’s Building Public Trust Awards invited accounts preparers, investors and regulators to discuss key outcomes, challenges and future developments around environmental, social and governance (ESG) and climate reporting. The awards celebrate organisations which are leading the way in delivering sustainable outcomes through insightful reporting.

Henning Diederichs, ICAEW’s Manager for Public Sector Reporting commented: “ESG and climate reporting is really improving in the biggest listed companies. We need a community of public sector account users that demand improvements to public sector reporting, particularly around ESG. This would better enable public sector organisations to play their part in the transition to net zero and for Parliament to hold them to account.”

PwC’s review of ESG reporting within the FTSE 250 shows high scores were achieved in areas looking at how sustainability fits with a company’s purpose and strategy. In fact, 91% of companies reviewed scored full marks when it came to describing the company’s key business activities and how they linked to sustainability. Yet only 5% achieved full marks on environmental and/or social impacts of the business.

While experts are in broad agreement that climate reporting is improving, there’s evident room for improvement in this specific area.

A collaborative approach to financial reporting

GlaxoSmithKline (GSK) won the ESG reporting category by combining data and their performance analysis across the key priorities in one report. Previously, the ESG summary only contained the data and the annual report contained the narrative. Transforming this reporting process was a direct result of investor feedback which also led to GSK obtaining reasonable and limited assurance over its social and governance data. Investor feedback plays an important role in how listed companies shape the format of their annual and supplementary reports, both in qualitative and quantitative terms.

Public sector accounts serve a different purpose to private sector accounts. Taxpayers don’t have the option of not paying their taxes in the way that private sector investors can choose which companies to invest in. HM Treasury’s Financial Reporting Manual identifies Parliament as the primary user of central government annual reports and accounts as they ultimately make the decisions over the budgets of central government entities.

However, we see little evidence of Parliament taking a keen interest in the information in the accounts. There are no formal processes for the contents of public sector accounts to be discussed in Parliament, although the Public Accounts Committee may hold an inquiry into certain accounts in the event of an audit qualification or other concern.

It's clear the public sector lacks an equivalent to the professional analyst community that reviews the accounts of large, listed companies. A community of users of public sector accounts would ensure quality and timeliness in reporting in a similar way to GSK’s example.

Utilising the right skills

The consensus is that the team responsible for ESG and climate disclosures needs to have a broad skill set and the ability to connect to the whole business to ensure that all material risks and opportunities are reflected. While larger companies often have dedicated ESG teams, it’s not the case for smaller companies.

Additionally, being able to balance competing objectives is crucial. The sustainability team at Aviva, winner of the climate change reporting category, was caught between the demands of the marketing department for simplified reporting that would appeal to a wider audience and the demands from the risk team who saw merits in more technical detail.

Aviva’s Board demanded that the sustainability metrics were on the same basis as those used for financial reporting. As a result, the sustainability team put in place more controls and due processes and worked closely with the group finance team.

Public sector teams face similar challenges but are likely to be compounded by budget constraints, unlike private sector companies. Short-term solutions and resources will eventually need to be replaced with viable long-term recruitment plans to ensure ESG reporting obligations can be met effectively.

Climate reporting frameworks

It was highlighted that ESG and climate reporting has come a long way. Moving from voluntary to mandatory Taskforce on Climate-related Financial Disclosures (TCFD) reporting has played a large part in this journey. But some companies are asking themselves if ever increased reporting requirements are going to lead to greener outcomes. They are concerned with how many reports a company could and should possibly produce.

Aviva asked the rhetorical question of whether customers would read TCFD reports at group level, at entity level and at product level? The direction of travel is to integrate sustainability reports into the annual report including reporting on social factors such as social value commitments.

There is also an increased expectation that climate risks will start to manifest themselves on the balance sheet. For example, some asset valuations will come under increased scrutiny for changes in estimates of future cash flows and residual values. The impact of carbon prices was also discussed, with attendees sharing the need for a global carbon tax to achieve net zero.

In an ICAEW report, questions were raised on why climate-related matters aren’t filtering through to the financial statements. It notes the disparities between the messaging on climate-related risks and climate-related impacts and suggests that intentions are not met with enough action.

Valuable lessons

Large, listed companies are probably four years ahead of the curve regarding ESG and climate reporting compared to many SMEs and government entities (TCFD voluntary adoption since 2017). Central government departments have been gathering some climate related data but more needs to be done, especially embedding sustainability into entity objectives.

Key messages for the public sector:

1. Create credible sustainability plans that government entities can link their strategy and objectives to. This will ascertain how the provision of government services links to sustainability and how it can become a core pillar of government strategy.
2. Government entities should learn from private sector shortcomings by thinking about the relevance and implications of risks and opportunities.
3. Performance monitoring against climate targets – have a clear strategy, measurable KPIs and hold relevant people accountable.