Blog:

Improving Sustainability in Central Government – ESG Considerations

22 April 2021

World Earth day, 22 April 2021, has been celebrated since the 1970s, to highlight the importance of working within communities to drive meaningful action for our planet; and raise awareness of how we can reduce our impact. Therefore it is only right that we focus on the importance of Environmental, Social and Governance factors for businesses, otherwise known as ESG.

ESG

The consideration of ESG has become critical to the success of organisations across all sectors. Key Stakeholders including employees, customers, suppliers, regulators and local communities are demanding organisations consider how their operations impact the world, their contribution to society and how they conduct themselves.

These three words have immense meaning in terms of how the world is to adapt and change; and our role in shaping this direction. However this acronym also has different meanings to those that use it. The criteria that organisations should be aware of include:

Environmental Criteria

Social Criteria Governance Criteria
  • The resources consumed and the waste discharged. This includes energy, water and other materials; all of which will have environmental consequences
  • Encompasses carbon emissions, waste, water and wider climate change considerations subject to industry
  • Every organisation creates positive and negative impacts. 
  • The relationships your Organisation has and the reputation it fosters with people and institutions in your communities
  • Includes workforce relations and diversity and inclusion
  • Every Organisation operates within a broad, diverse society and has the opportunity to choose how to create, influence and impact. 
  • The internal system of practices, controls and procedures your organisation adopts in order to govern  itself, make effective decisions, comply with the law, and meet external stakeholder needs
  • Can include board quality and cybersecurity.


To fulfil its wide range of functions, the public sector must satisfy a complex range of political, economic, social, and environmental objectives over the short, medium, and longer term. This subjects it to a different set of external and internal constraints and incentives than those found in the private sector, all of which affect its governance arrangements.

The long-term nature and impact of many of the public sector’s responsibilities mean that it should define and plan outcomes, which are sustainable. Bodies should take decisions based upon the finite resources available; while taking into consideration input from all stakeholder groups and current, applicable regulation.

ESG in Central Government

The Climate Change Act (2008) was one of the first to introduce legally binding carbon budgets which set a ceiling on the level of UK emissions, including from public sector organisations. However the world has moved on since then and there are other UK Government strategies in place, for example the 25 Year Environmental Plan, Clean Growth and Industrial strategy, aimed at working in partnership to increase economic growth whilst reducing environmental impact.  

With regards to central government bodies, the Greening Government Commitment (GGC) has been in place since 2011, and sets out the UK government’s commitments for delivering sustainable operations and procurement. The commitments apply to the office and non-office estate of central government departments and their Executive Agencies (EAs), Non-Ministerial Departments (NMDs) and executive Non-Departmental Public Bodies (NDPBs), unless specifically exempted.

The targets set for 2016-2020, using a baseline set in the 2009-2010, have been used across Government and include:

  • cut greenhouse gas (GHG) emissions by 32% from the whole estate
  • reduce the number of domestic business flights taken by 30% (excluding MOD)
  • reduce waste sent to landfill and increase the proportion of waste which is recycled
  • reduce paper consumption by 50%
  • continue to further reduce water consumption.

Targets for 2021-2025 and the evolving commitments are due to be published in spring 2021. This framework will align to the 25 year environmental plan and the goal of achieving net zero by 2050.

In September 2020, the UK Government published Procurement Policy Note (PPN) 06/20, which requires key ESG related themes to be evaluated in all UK central government procurement from 1 January 2021, through the use of a 'social value model'. A minimum weighting of 10% must be given to ESG objectives in each procurement contract. This applies to all contracts awarded by UK central government departments, their executive agencies and non-departmental public bodies that are regulated by the Public Contracts Regulations 2015 ("PCRs 2015").

The 'social value model' is divided into five broad themes, each containing one or more policy outcomes to be achieved that must be evaluated expressly through specific ESG objectives:

  1. COVID-19 recovery
  2. Tackling economic inequality
  3. Fighting climate change
  4. Equal opportunity
  5. Wellbeing.

ESG Reporting

ESG is also driving significant changes in reporting. There is currently a plethora of diverse reporting frameworks, some industry specific, which organisations can choose to adopt. In most instances these are voluntary, without a requirement for the independent verification of reporting numbers. This has invariably led to questions on the integrity of some numbers alongside the perceived (and real) risk that Organisations focus on metrics that portray them in a positive light, leading to suggestions of so-called ‘greenwashing’.

However recently there have been more encouraging signs of consistency of direction going forward. In March of this year a working group was set up to accelerate convergence in global sustainability reporting standards in preparation for a potential international sustainability reporting standards board under the governance of the IFRS Foundation. Other standard setters are united in support for this initiative which is set to come to fruition over the next 2 years.

In the UK, decisive action has also been taken to mandate TCFD reporting between now and 2025. The following thematic areas are the foundations of these requirements and are designed to interlink and inform one another:

  • Governance
  • Strategy
  • Risk management
  • Metrics and Targets.

The recommendations across these four areas have also been mapped across all non-financial reporting frameworks already in existence, including GRI, CDP, IIRC, SASB, CDSB and the G20/OECD Principles of Corporate Governance. Consequently, even if an organisation is already reporting information under another existing framework, the Recommendations can be integrated into its existing disclosure systems and practices without conflict.

Central Government bodies that fall under GGC and which produce annual reports and accounts (ARAs) in accordance with HM Treasury‘s Government Financial Reporting Manual (FReM), are required to report on sustainability. Although the format for reporting has not been defined, the reporting should consider:

  • GHG emissions
  • Waste minimisation and management
  • Finite resource consumption
  • Biodiversity action planning
  • Sustainable procurement
  • Climate change adaption
  • Sustainable consumption.

ESG Considerations

There are a wide range of social and environmental initiatives within central government bodies to reduce internal carbon emissions. There has also been focus on the 17 Sustainable Development Goals (SDGs), identified within the 2015 Paris Agreement. However, positive as these initiatives are, there has been a lack of clear strategy to meet the ambition. Therefore the key focus of those involved with navigating the ESG agenda going forward should include:

  • Identification of organisational impact
  • Strategy development:
    • Specific to the government body
    • Developed through engagement with internal staff
    • Reviewed by experts
    • Aligned to applicable frameworks
    • Approved internally
    • Incorporated in to key decisions
    • Aligned to the Covid-19 recovery.
  • Identification of key performance indicators (KPIs) and targets
  • Governance structures to achieve objectives
  • Collection of data
  • Transparent presentation of data against targets.

Whilst setting targets /KPI’s is also essential, developing an understanding of, collating and presenting key data sets on an ongoing basis is fundamental to the achievement of targets such as net zero emissions going forward.

How can BDO help

We assist Organisations of all sizes navigate the ESG agenda through a range of Advisory and Assurance related services including the following:

  • Board level presentations on the evolving ESG agenda
  • Strategy Workshops – facilitate and/or support in identifying key considerations in relation to climate change/ESG, relevant to the nature of the business
  • Governance – review current and proposed governance structures relating to climate change and ESG and provide recommendations for improvement
  • Risk Assessment – support in relation to the conducting of risk assessments in relation to climate change, such as scenario analysis and stress testing
  • Training – for Board and project members on climate change and ESG related matters
  • Advisory review of energy usage and emissions reporting
  • Advice and facilitation to develop a plan to carbon neutrality
  • ISAE 3000 / 3410 limited assurance engagements to provide confidence and credibility to reported metrics.

For more information, please contact Fiona Davis and Matt Brookland.