The clock is ticking ever more loudly in two interconnected areas that impact on us all. “Scientific evidence for warming of the climate system is unequivocal,” according to the Intergovernmental Panel on Climate Change, and it is proceeding at an unprecedented rate. Simultaneously, we are on the countdown to 2030 by which time the 17 interlinked Sustainable Development Goals (SDGs) are intended to be achieved.
So, what should be done to address these twin challenges, and by whom? Furthermore, was Peter Bakker (the then CEO of TNT N.V.) right when he told the 2012 Rio+20 UN conference that “accountants will save the world” from climate change?
The power of the public sector
We should all play a part, however small, in addressing climate change and helping achieve the SDGs. At least one-fifth of leading global companies have committed to net-zero carbon targets. These commitments from the private sector are critical and must continue. However, only governments have the power to enact the macro changes that will propel societies towards more progress, faster. Public sector expenditure varies widely in its level and composition among countries, but it averages around 40% of GDP, and it employs roughly 20% of the workforce. In short: how and where governments spend money matters. Even more important, however, is the leadership governments exercise through their wide-ranging responsibilities for policy direction, legislation, and regulation, and how they use public money to incentivise action in other areas of the economy.
The crucial role of the public sector has been all too powerfully demonstrated by the COVID-19 pandemic. Governments have been able to mobilise record-breaking levels of resources at extremely short notice. By supporting economies through extended lockdowns while making healthcare programs and resources available, the public received a tangible reminder of the value that government services bring to their lives. Many saw the flaws of the public sector first-hand as well, and as a result, trust in governments declined by roughly eight points globally, falling more than trust in either media or businesses, according to the Edelman Trust Barometer. That’s worrying. Progress towards climate action and the SDGs requires unwavering commitment from us all, as well as action, particularly new public sector programs and policies.
Governments need good information with which to make the right choices in the overall public interest, as well as the best systems to implement them. However, they will also need to be transparent about the choices they have made, and to be accountable for the resulting outcomes if they are to rebuild public trust.
Strong governance and public financial management are essential
Where we stand now, public sector resources are scarce. According to the IMF April 2021 Fiscal Monitor, “global public debt climbed to 97.3 percent of GDP in 2020, a surge of 13 percentage points from the level projected before the pandemic”, in a context where the social and economic effects of COVID-19 will be felt for decades to come. At the same time, the UN estimates that meeting its 2030 agenda will require annual investments of $5-7 trillion. Governments, therefore, face some tough choices.
In line with good governance principles, governments as well as individual public sector organisations must put the right arrangements in place and act consistently in the public interest, to ensure they achieve their intended outcomes in relation to both climate change and the SDGs. They will also require strong public financial management (PFM) frameworks so that their financial resources are planned, directed, and controlled to enable their intended outcomes to be achieved in both areas.
Understanding their current financial positions – what they own and what they owe – as well as the true economic substance of the transactions they enter into will be fundamental for all governments moving forward beyond the pandemic. Yet, the majority of governments around the world still do not have the necessary accrual-based information. The recent International Public Sector Accountability Index 2021 Status Report shows that in 2020, only 30% of governments met this most fundamental requirement for the strong governance and PFM arrangements required to address climate change and deliver the SDGs successfully. Although 50% of governments are projected to be reporting on an accrual basis by 2025, this is still too few to support success on both fronts. It is, therefore, crucial that the upward trend in accrual implementation is sustained.
The accountancy profession has a central role to play in supporting the required changes – as advocates, implementers, and users. And, as recently highlighted by IFAC, it needs to provide the pipeline of skilled professionals able to successfully address the challenges involved.
Momentum towards global reporting frameworks
Finance is the key enabler for addressing climate change and the SDGs. Given the sums involved and the financial burdens many jurisdictions face post pandemic, funding will need to be raised externally. There is good evidence of the correlation between increased transparency and reduced borrowing costs. Financial credibility can be further enhanced by the comparability provided through regular publication of financial statements using the accrual-basis International Public Sector Accounting Standards (IPSAS).
However, financial statements on their own are not enough. There is an active and lively ongoing debate about the need to create a coherent set of non-financial global sustainability reporting standards. There is also strong support for the creation of an International Sustainability Standards Board (ISSB) under the oversight of the IFRS Foundation, to provide transparency and accountability for the activities of listed private sector companies. IFAC has been a strong voice for the profession in favour of this initiative.
Such standards are also likely to be relevant, whether directly or indirectly, in the public sector, so IPSASB is now actively participating in preparations for the creation of the ISSB. IPSASB will also play its part in highlighting the importance of sustainability programs in the public sector context, and platforming emerging experience, to help determine how further work in this critical area should be progressed.
The ability to act now
The easy thing for any entity to do is nothing—to wait for others to lead the way and for the standard setters to chart a course all can follow. But our time is finite. To quote Allan Frewin Jones, “all choices are fraught with peril, but inaction is the most perilous of all.”
In terms of public sector reporting, IPSASB has already provided strong foundations for reporting on programs addressing both climate change and the SDGs in its Recommended Practice Guideline (RPG) 3 on ‘Reporting Service Performance Information’. This can be applied now, together with RPG 1 ‘Reporting on the Long-Term Sustainability of an Entity’s Finances,’ which can be used to bring together the financial impacts of non-financial metrics and risks being managed as explained in the IPSASB staff guidance here. Although it is possible to use both RPGs without being on accrual, applying them in conjunction with the accrual IPSAS provides improved transparency, which facilitates better accountability and enhances information available for decision-making.
Ultimately, reporting is only the messenger, occurring during and at the end of the year after strategies have been set and programs implemented. That’s why I return to Peter Bakker’s assertion. He was one of the first people to highlight how real change would come from reconfiguring the millions of decisions that managers in business, NGOs, and the public sector make every day, all over the world. Part of the role of accounting is to produce information that decision-makers can use, whether or not the accountants are the decision-makers – which in many cases they are. Another part of the role is to provide the transparency and accountability that is so clearly urgently needed to rebuild trust in the public sector.
So, to answer the question of whether public sector accountants will help save the world, I say, unequivocally, yes! But time is short for both climate change and the SDGs, and we need to act now.