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by
Seneca ESG
- June 21, 2023
The International Public Sector Accounting Standards Board (IPSASB) has started the project on the exposure draft of the Climate-Related Disclosures standard for the public sector. [1] The International Accounting Standards Board (IASB) develops the International Financial Reporting Standards (IFRS) for the private sector. Similarly, the IPSASB develops accounting standards and guidance, but in the public interest and for use by public sector entities, such as governments and their owned enterprises and related agencies. [5] The release of its Climate-Related Disclosure Project Brief marks its first pivot to the public sector sustainability reporting standards since its consultation in May 2022. The consultation paper recognizes that government spending and taxation plays a key role in the development of sustainable economy and its policy and regulation can influence the public’s interest and the private sector’s ESG impact. [2]
Difference between the public sector and the private sector
In terms of financial and non-financial reporting, IPSASB identified several significant differences between private and public sectors. Non-exchange transactions are common in the governments such that one party in a transaction might receive a different value than what it gives, such as government taxes, subsidies, and penalties. For example, a government can set up a carbon tax scheme to promote the transition from fossil fuels to less carbon-intensive energy sources. In the private sector, such non-exchange transactions can be volunteering, philanthropy, or donations to charity. [3]
Another difference is the budget approved by the legislature. Unlike the private sector, the governments are usually required to prepare and publish their budget. Government activities are predominantly funded by taxpayers and therefore, readers of the financial and non-financial reports of governments should be able to understand whether their governments meet the financial budget at the end of the fiscal year and whether their money has been used in the interest of the public, such as sustainability or ESG initiatives. [3]
The longevity of governments and their programs is another difference from the private sector. The financial consequences of government programs can become clear many years in the future. The expected expenditure arising from such programs and future inflow of cash from taxation cannot meet the definition of liability and assets for financial statements. [3] For example, if a government sets out a program to use money raised only from carbon tax to subsidize green energy, over the decades the fund will eventually run dry as the low-carbon transition finalizes. From the private sector point of view, the government would have been doing a money-losing business. But from the public point of view, the government would have achieved a long-term sustainable goal for all, even if it needed to replenish the funds from other tax sources in later stages of the carbon transition.
There is also an implication for measuring government assets such as certain specialized property, items with historical and cultural values, and natural resources. While the private sector aims to generate profit on its owned assets, the public sector considers how such assets should serve the public. [3] In addition, these national assets can be linked to sustainability or ESG goals. A real-life example would be the Norwegian sovereign wealth fund. Norway discovered its deep see oil deposits within its territory in the 1970s. In 1990, the Norwegian government set up and infused its national pension fund with the economic surplus from its petroleum sector. Since then, the Oil Fund of Norway has been generating values by investing responsibly in global financial markets and satisfying the pension needs of generations of Norwegians to come. The Oil Fund follows a responsible and sustainable investment practice and excludes investees that violates their ethical guidelines. [4]
Lastly, governments have the regulatory role the private sector does not have but is subject to. Public sector policies and regulations apply not only to the private sector but also to state-owned enterprises. In such cases, state-owned enterprises can establish examples for others to follow. For these reasons, over a third of the IPSASB’s pronouncements on sustainability reporting standard are wholly or mainly public sector specific. [3]
What is likely included in the Climate-Related Disclosures standard for the public sector?
The feedback for the consultation paper unanimously agreed that the most pressing sustainability issue for the public sector is climate change. IPSASB will thus establish the Climate-related Topic Working Group to address this specific project. The Project Brief for the public sector considers IFRS S2 and GRI climate-related topic & sector standards as the draft basis. The draft will also be moderated by the Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities. The resulting draft is reported to have a similar structure to those of the Task Force on Climate-Related Financial Disclosures (TCFD) recommendation. The key issues considered by the Working Group are structured as Governance, Strategy, Risk & Impacts Management, and Metrics & Targets. However, it is expected that the draft will incorporate the differences between the public and private sector and address the specific challenges the public sector faces. The Working Group also will consider adding a general disclosure section, since a government may release its first climate-related disclosure report as its first sustainability report. [1]
The proposed project timeline indicates the exposure draft of Climate-Related Disclosures standard for the public sector will be published in June 2024. The final standard is expected to be approved in the second half of 2025. [1]
Sources
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