In most countries sustainability reporting has so far largely remained a voluntary practice. In Europe however, through the CSRD (Corporate Sustainability Reporting Directive) and the CSDDD (Corporate Sustainability Due Diligence Directive), the EU has recently subjected large companies to far-reaching obligations regarding care for and reporting on sustainability for people and the environment.
The leading idea behind this policy is ‘What gets measured gets managed.’ However, another motto, ‘practice what you preach’, does not seem to apply yet for European public organizations. They are not subject to binding rules for their reporting on Environmental, Social & Governance (ESG) issues. This is remarkable since public sector organizations generate a significant sustainability impact from both their operations and their external policies.
Some claim that the new and complex European sustainability regulations present risks of a reporting and auditing explosion in the corporate sector. Certainly, substantial investments are taking place that are designed to improve the measurement and reporting of ESG impacts. Given these investments, it is important that sustainability reporting does not just become a compliance driven exercise and that this information finds its way into decision making. Governments have a role to play in further embracing the due diligence and reporting demands they have placed on the corporate sector.
Further embracing because many relevant sustainability initiatives have already been taken. In the Netherlands for example, the CBS (Statistics Netherlands) annually maps the development of many well-being indicators and their sustainability as well as progress on meeting the Sustainable Development Goals. Various ministries voluntarily provide reports on the sustainability of their operations. Additionally, information in the budgets and annual reports of ministries is increasingly colored by the government’s green policy ambitions.
However, a fully developed obligation to provide information on sustainability, and a set of detailed standards such as the ESRS (European Sustainability Reporting Standards), are currently lacking for most governments.
Just as for companies, focusing on the most important sustainability issues is a challenge for governments. The CSRD, for example, uses the concept of double materiality, where both the impact of the external environment on an organization and the organization’s impact on the environment must be considered. However, for national and sub-national governments there is an additional dimension to consider. Aside from their own operations, governments need to assess the impact of their policies on society. This requires a dual double materiality assessment.
The capacity to measure, report and audit sustainability data should focus on an organization’s most substantial ESG impacts. For many government organizations the most substantial ESG impact on the environment will more likely result from their external policies than from their internal operations. Similarly, the impact of the external environment on policy responses (e.g., natural disaster relief) will often be more substantial than the impact on the government’s own operations.
Sustainability in the context of external policy can be referred to as sustainability with a capital ‘S’. This includes, for example, the CO2 impact of a decision to reduce gas prices, or how effectively the Labor Inspectorate tackles any reported exploitation of migrant workers. Topics like the number of electric company vehicles and how often the works council meets fall under sustainability with a small ‘s’.
It is up to those responsible for policy development and implementation - operations, budgeting, and reporting - in the public sector to anchor both forms of sustainability in the legal framework. Ideally such regulations should be based on the CSRD and the CSDDD. In our view, good public governance implies sustainable governance, and taking on a leadership role will foster trust and will inspire citizens and businesses.
By introducing the concept of dual double materiality for ESG reporting by government we do not intend to overcomplicate an already challenging topic. By critically and systematically assessing government’s most substantial impacts, public sector sustainability reporting can become more meaningful and unnecessary administrative burdens can be avoided.
To ensure that sustainability reporting remains clear and focused, we advocate incorporating sustainability information in the annual reports of ministries and other public organizations. These reports should include, based on the dual double materiality analysis, core information on sustainability performance and impacts, both with a capital "S" and a small "s". The integrated reports should also be subject to external audits, just as companies are required to do.
Based on article published online on ‘Accountant.nl’ on September 5th 2024 (in Dutch):
