Sustainability reporting guidance released by the Treasury in July stipulates that state-funded bodies with more than 500 employees, or £500m operating income or grant funding, must follow the same reporting rules as central government ministries and non-ministerial departments. This involves declaring water usage, waste output, carbon offsets (if used) plus UK-based direct Scope 1 and indirect Scope 2 greenhouse gas (GHG) emissions in full.
The new guidance has been welcomed, including for its alignment with guidance from the other regulators.
Focus on interests
Under the guidelines, the larger state-funded bodies must also declare overseas GHG emissions, but only if a ‘materiality filter’ assessment concludes that this data is of interest to key readers of their sustainability reports. Smaller public sector bodies can also use that materiality assessment to decide if they need to release any of the sustainability information demanded from larger bodies, government departments and agencies.
Again, the interests of a report’s primary users are the key consideration; if they are interested in such sustainability data, smaller state-funded bodies must try to report it. Should that data be impossible or tough to source, or they are blocked from declaring it by legislation (like privacy laws), they like the larger entities, can explain away non-disclosure (eg, the data is unavailable or difficult to source).
Also, if a materiality assessment concludes that key potential report users are not interested in sustainability information, smaller state-funded bodies can still disclose it voluntarily, says the UK government.
‘Defining the users of financial reports and statements is central to materiality considerations’
The Scottish, Welsh and Northern Ireland administrations are also covered by these rules but retain significant authority over what sustainability information should be declared by public bodies under their control.
This is stressed by Joe Fitzsimons, ACCA’s regional lead policy and insights, EEMA & UK, who says the December 2024 financial reporting manual draft ‘delegated authority to the devolved governments to define applicability in their jurisdictions’. Indeed, Scotland already has statutory duties under the Climate Change (Duties of Public Bodies: Reporting Requirements) Order 2015, requiring around 180 major public bodies to annually report their sustainability impacts, for example.
Meanwhile, publicly funded bodies that are limited companies and charities must follow relevant legislation, such as the Companies Act, when issuing their sustainability reports, the guidance stresses. This is likely to follow the IFRS S1 and S2 standards developed by the International Sustainability Standards Board (ISSB), which are being adopted by the UK government, under ongoing consultation; the extent to which these private sector reports will become mandatory will be decided later.
Significant change
But the requirements for the public sector are now in place and are significant.
Mark Johnson, ACCA’s public sector research lead points out that: ‘Defining the users of financial reports and statements is central to materiality considerations.’ As a result, he is encouraged to see in the concepts, principles and foundations in Appendix A of the guidance to the Government Financial Reporting Manual that ‘entities should consider both internal and external stakeholders when determining the material topics and appropriate reporting boundaries’.
The new guidance follows a comprehensive review of UK government public sector sustainability reporting, which the Labour government had found wanting. In a paper, it argued there was an unhelpful ‘variation in reporting quality and scope’ and a need for ‘clearer, more consistent requirements’.
‘Implementing integrated reporting in the new guidance is welcome’
In a review, the government claimed there was support for ‘simplifying mandatory reporting, exploring alignment with international standards, tailoring to organisation size and focusing on material, decision-useful information’. The government has supported separating supplementary sustainability information from annual reports, following the materiality-led approach of the international Task Force on Climate-related Financial Disclosure (TCFD).
Johnson stresses that while ACCA supports the alignment between financial and sustainability-related information as far as possible, it recognises this can take time to implement. As a result, the government’s focus on implementing integrated reporting in the new guidance is welcome, he says. The paper noted that in this way, ‘entities shall demonstrate how sustainability considerations are embedded throughout the organisation, its operations, and its strategy’.
The TCFD has been a key influencer of the ISSB, which has focused on private sector reporting, but will also underpin work under way at the International Public Sector Accounting Standards Board (IPSASB) to create global sustainability reporting standards. The board has split into two phases its plans to develop climate-related disclosure guidance for governments and public sector entities, which may inform future UK requirements (see the AB article ‘Climate reporting separation welcomed’).
Going further
Until the IPSASB guidance is released, Johnson says aligning disclosures to the TCFD advice makes sense. He says that the new guidance ‘is a positive step forward and emphasises the importance of a range of sustainability-related information’, going beyond the UK’s ‘Greening Government Commitments’. They contained pledges to reduce public sector bodies’ GHG emissions, reduce their impact on waste and resources (including water) and curb their ICT impact, while boosting sustainable procurement, nature recovery and climate change adaptation.
In a paper, Preparing for Sustainability Reporting and Assurance, ACCA highlights six reasons why public sector bodies should undertake sustainability reporting. These include advancing sustainable development as a public interest goal, given public sector entities are supposed to have a positive impact.
In addition, sustainability reporting delivers better economy-wide understanding of progress towards sustainable development – crucial, given that the public sector amounts to almost half of the GDP of developed OECD member countries. That includes delivering useful information to capital markets and development partners such as investors and donors that finance the public sector via instruments such as bonds.
Also, given the size of the public sector, sustainability reporting can help hold these institutions to account, identifying ‘where progress is on track and issues that require more action’, says the paper. Sustainability reporting also helps public sector bodies make effective and informed internal decisions on operations and policies.
As a result, the new guidance and accompanying appendix provide a comprehensive resource. ‘They support the production of integrated annual reports and accounts, which apply the same boundaries for sustainability and financial information,’ says Johnson.
