This article explores the intersection between corporate sustainability reporting developments and public sector reporting in South Africa
Since the establishment of the Task-force on Climate-Related Financial Disclosures (TCFD) in 2015, the announcement of the International Sustainability Standards Board (ISSB) in 2021 at COP 26 and its subsequent establishment, and the introduction of new regulations in the EU, the need for entities to report on the financial impacts tied to sustainability risks (climate risk in particular) seems to have come into the spotlight. It’s as though the world has finally woken up to the fact that we have reached a critical tipping point with humanity’s impact on the environment.
King III highlighted the importance of integrated thinking and reporting on the triple context of the economy, society and environment in which an organisation operates. Listed companies are already applying these principles in preparing their integrated reports. The JSE has recently published draft Sustainability and Climate Change Disclosure Guidance which is expected to be issued soon.
Beyond our borders, a major shift is underway in the EU with the new Corporate Sustainability Reporting Directive (CSRD) which will require all large companies and listed companies to report on sustainability, prescribing specific minimum disclosure requirements and for this information to be independently assured.
Much of the attention globally seems to currently be on getting private sector or ‘for-profit’ companies to report on their sustainability, and to do so on a consistent comparable basis. A recent international study by the Chartered Institute of Public Finance and Accountancy (CIPFA)1 found that ‘climate reporting in the public sector is still in its infancy’. This is despite government expenditure making up a substantial proportion of the economy.
Apart from recognising the significance of government spending based on its magnitude, it is also worth considering the degree of interdependence with the private sector with respect to procurement and consumption of goods and services. It would clearly be inappropriate to exclude government entities from any regulated or best practice sustainability reporting.
South African government entities have (through legislation such as the PFMA and MFMA) for many years been required to publish their performance against predetermined objectives as committed to in their annual performance plans, derived from their strategic plans and legislative/political mandates, which in turn are cascaded from the National Development Plan (NDP). This non-financial information is also subjected to external assurance in line with the AGSA’s approach to the audit of performance information. Therefore, public sector entities and their auditors are already familiar with the complexities surrounding published non-financial reporting and the assurance thereof. This may provide somewhat of a head-start in the reporting of sustainability information. Several public sector entities have also adopted Integrated Reporting and recognised the importance of responsible corporate citizenship, and indeed some SOCs (which operate like commercial enterprises) have made good progress in sustainability reporting.
AREAS OF DIFFERENTIATION
However, what are some of the key areas of possible differentiation between public and private sector sustainability reporting?
The context is different
It is important to understand that there are two dimensions to sustainability reporting, also referred to as the ‘double materiality’ concept: one is how the external environment impacts the value and operations of the reporting entity (the ‘outside-in’ perspective, which is of particular interest to investors and financial analysts) while the other is how an entity is impacting the external environment (the ‘inside-out’ perspective, of particular interest to regulators, activists, consumers and the broader public). The distinction and inter-relation between these two approaches may be complex, as an entity’s impact on the external environment may also have direct and indirect consequences for its enterprise value.2
Private sector entities are predominantly focused on enterprise value, whereas government entities are established with primarily a service delivery mandate. This key difference is already well established when it comes to financial reporting, with the International Public Sector Accounting Standards Board (IPSASB)3 developing accounting standards that are based on IFRS, but with significant adjustments to cater for the public sector/service delivery context. It is reasonable to expect a similar distinction to arise when it comes to sustainability reporting. Users of public sector reports will no doubt expect disclosure using a double-materiality approach4 and, more specifically, information that enables an evaluation of the entity’s impact on society, the environment and the interplay thereof with its service delivery objectives. Therefore, disclosures would need to highlight both the positive and negative impacts of service delivery activities, which in turn could provide useful critique on the appropriateness of selected programmes and their performance measures, their trade-offs and any unintended consequences.
Consolidation into whole-of-government or country-level reporting
As mentioned above, the foundation of the government’s strategic planning is the NDP, which is generally aligned with the UN’s Sustainable Development Goals and broadly covers material issues of sustainability at a country level. To accurately monitor performance against these goals, robust whole-of-government sustainability reporting is an essential component.
When it comes to monitoring and evaluation of environmental impacts of government’s operations, the Climate Change Bill B9-2022 is a significant step forward. It provides that the Minister of Environmental Affairs must, inter alia, determine the indicators for measuring government’s progress toward achieving the national climate adaptation objectives, which will be based on adaptation scenarios. It further requires the setting of national and sector targets for government relating to both mitigation and adaptation. The Minister will issue regulations that will promote effective monitoring, evaluation and the assessment of national progress in relation to climate change mitigation and adaptation matters, including monitoring progress made by national departments, provinces and municipalities through sector adaptation strategies and plans as defined in the Bill. It also provides for regulations to be issued to govern the data collection arrangements across government for the development of a national greenhouse gas inventory.
However, it remains to be seen what further legislation will be issued, if any, to guide the underlying annual sustainability reporting processes of individual government entities. Although the information required (by the Bill) to be submitted directly to the Minister and the Presidential Climate Commission would be available to the public through the PAIA,5 what seems to be missing is a clear requirement for government entities to also proactively publish sustainability disclosures for general purpose users, and for assurance over such information. In the absence of robust systems and processes at the individual entity level, reliable and meaningful data collection for country-level reporting will be a challenge.
For government to comprehensively report on its collective sustainability performance, it is suggested that a similar consolidation process to what occurs with financial reporting (leading to whole-of-government accounts) may be required. For this to render maximum value for all users, a bottom-up approach is recommended whereby all government entities would need to collect the necessary data and prepare their own published and independently assured annual sustainability reports in a consistent manner using appropriate frameworks. Rules will also need to be established to eliminate any double counting where entity mandates and activities overlap.
There is a significant opportunity for government to further enhance reporting by building on existing statutory annual performance reporting to also cover the triple context and double materiality. Climate-related information required by the Bill could be derived from similar processes and systems used to prepare integrated entity-level sustainability and performance reports, providing a more useful holistic view of the impact of entities’ operations and service delivery on the external environment and society, and vice-versa. This would ultimately drive better integrated thinking at all levels of government, attract investment, and ultimately lead to better decision-making that improves the lives of citizens.
2 The EU is moving in the direction of requiring double materiality disclosures, whereas the US SEC and ISSB are currently more focused on single materiality (outside-in).
3 The IPSASB is in fact actively exploring the potential development of a public sector sustainability reporting framework and has previously issued some sustainability-related guidance in the form of the RPG on Reporting Service Performance Information and RPG 1 on Reporting on the Long-term Sustainability of an Entity’s Finances. Also refer to the IPSAS Staff Q&A on Climate Change Relevant Guidance.
4 It is worth noting that current IPSASB guidance (RPG 1) also focuses mainly on the outside-in financial impacts.
5 Promotion of Access to Information Act 2 of 2000.
Alexi Colyvas CA(SA), Associate Partner, Ernst & Young