THE public sector needs its own set of sustainability accounting standards, and professional accountants should lead on this. So says FreeBalance, a developer of government resource planning software, in a recent blog posting.

The World Bank has called on the International Public Sector Accounting Standards Board (IPSASB) to develop sustainability guidance for the public sector. FreeBalance, supported by ACCA, is urging finance professionals to drive the initiative for the following three main reasons:

Global and country-level climate change, fragility, and food security risks require government social and infrastructure investments.

The benefits of tracking health spending and public financial management (PFM) for health were demonstrated during the pandemic, as was the importance of spending transparency.

Public spending integration with the UN’s sustainable development goals (SDGs) is necessary to achieve objectives and track progress.

Sector-specific

Sustainability standards for the public sector would need to differ from those for the private sector for a number of reasons.

Public sector finance involves more complexity, and has more complicated budget, accounting and performance management structures. It also has a greater number of stakeholders (in the form of citizens) compared with businesses (investors). Also, governments have significant regulatory, procurement and taxation powers that affect sustainability and which need to be accounted for.

In addition, there is less capacity in public sector entities than in businesses to manage the change, ongoing reporting, and greater differences globally in the way these organisations operate.

Advantages

The benefits of embedding sustainability in public finance accounting are many and varied. They include:

• National development strategy alignment. Context-based sustainability planning and implementation through a focus on what’s critical for individual countries could improve sustainability planning and decision-making across government.

• Citizen well-being embedded in public policy. Citizen priorities, which differ between countries and communities, could be leveraged to inform government strategy more effectively.

• Comparability. The use of an international standard enables the comparison of plans and outcomes across countries and public sector organisations, and will improve sustainability planning.

• Fiscal spending flexibility. Tying fiscal rules to sustainability concepts may bring flexibility to crisis spending while providing more effective envelopes for longer-term outcomes.

• Medium-term thinking. Sustainability methods could catalyse medium-term approaches beyond budget ceremonies and reduce short-term political thinking.

• Private sector input. The ability to articulate the impact of sustainability could expand the private sector financing of blue bonds, green bonds and insurance. It could also encourage the broader adoption of sustainability reporting in the private sector.

• Post-2030 sustainability. It could provide a structure for measuring public sector sustainability investments beyond the SDGs.

Alex Metcalfe, head of public sector at ACCA, says: “Governments and public sector institutions must step up and play a critical role in achieving a just transition to net zero, as well as making progress against the targets set out by the UN SDGs.

‘The public sector has a dual role to play in achieving a sustainable future. First, and uniquely, it must create an effective policy and regulatory environment, setting the agenda and creating the right incentives for positive change. Second, public sector institutions must ensure their own activities evolve to reduce their environmental impact and contribute to meeting sustainability targets.

“All of this will require a robust framework for sustainability reporting. I am pleased that ACCA is demonstrating our commitment to our values by making a financial contribution to IPSASB, which will support the development of global sustainability reporting guidance for the public sector.”

Takeaways

• A cost-benefit analysis will be helpful to identify which elements of sustainability reporting represent best value for money for governments.

• Simple standards for sustainability reporting could be implemented to support low- to high-capacity governments, with guidelines for extension, according to country context.

• Sustainability spending and resource usage can be embedded in government accounts.

• Advanced PFM practices such as programme budgeting, performance management, activity-based costing and accrual accounting will be helpful in achieving any new sustainability standards.

• A number of areas in sustainability reporting will need support from government resource planning systems. Examples include multiple-year programme and performance budgeting planning, government resource planning, activity-based costing approaches to track resources, and the use of accrual accounting.

Source: ACCA’s Accounting and Business magazine