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What is Green Public Financial Management (PFM) and how is the public sector adopting it?

The International Monetary Fund (IMF) has recently issued a ‘How To Note’ on How to Make the Management of Public Finances Climate Sensitive[1]. This defines the concept of “green PFM” as the integration of a climate-friendly perspective into public finance practices, systems, and framework with the objective to promote fiscal policies that respond to climate concerns. It includes a holistic view of green PFM practices across budget preparation and execution, accounting and reporting, control and auditing, and the legal framework, and guiding principles for the successful design and implementation of green PFM reform. It also references examples from across the world and is from the perspective of integrating climate change into PFM practices, rather than a whole redesign.  

The Chartered Institute of Public Finance and Accountancy (CIFFA) recently surveyed public sector practitioners from around the world to explore what public bodies globally are doing to report their impact on the climate[2] and has published insights into sustainability reporting[3]. Both IMF and CIPFA note that there is some way to go as indicated by, for example, that most jurisdictions have not adopted green budgeting, and sustainability reporting is only just starting. CIPFA also identifies the need to develop existing frameworks and integration with wider reporting, the definition and scope of sustainability, and aspects such as skill sets, expertise and assurance activities, and scrutiny. 

While ‘Green PFM’ focuses on the environment, and in particular climate change, it is part of the wider environmental, social and governance (ESG) agenda. As the IMF report addresses, other areas of priority budgeting are important in delivering sustainability and ESG, such as Sustainable Development Goals and gender budgeting. Social and governance objectives also support the successful delivery of Green PFM and sustainable communities and jurisdictions. There may be conflict around them and factors like use of scarce resources. Different institutions within jurisdictions may also have different priorities, and face different challenges in delivery (e.g. central and local government).

As a country example of Green PFM, the United Kingdom’s Green Government Commitments[4] recognise the environmental, social and financial benefits from greener operations, estate management and procurement, and has a programme for delivering sustainability. The highest profile commitment is to achieve ‘net zero’ carbon emissions by 2050, so that emissions into the atmosphere are balanced by those removed. HM Treasury has set sustainability minimum requirements for emissions, water and resource consumption[5] covering both non-financial and financial information, such as absolute values for waste from the organisation‘s estate and by category (total waste arising. waste sent to landfill, waste recycled, and reused waste incinerated and energy from waste) and the total cost of disposal.

The IMF guide does not consider the design of fiscal instruments contributing to achieving green objectives. On the investment side, leaders in PFM have also been developing ESG solutions such as frameworks for rating ESG investments and assessing risk for treasury management, including pension funds. Again, the focus here is to encourage the take up of suitable ESG polies and investment practices that are appropriate to an institution’s existing policies and settings, not entire redesign. Institutions have also incorporated sustainability in their own processes. For instance, the UK government publishes a Green Finance Strategy[6] followed up with a Roadmap for Sustainable Investing Roadmap[7] and a Green Financing Programme[8]  to finance expenditures on climate change, biodiversity loss and other environmental challenges.

Investment is another aspect where public sector institutions have to balance their ESG priorities in the context of established operations such as investment strategies, risks, and yields, plus new risks such as greenwashing. The area is subject to increasing scrutiny to ensure that green benefits can be delivered, in particular because of concern about greenwashing, which the UK government defines in its Roadmap as when misleading or unsubstantiated claims about environmental performance are made about products or activities, which leads to incorrect product selection and misallocations, that in turn reduces credibility of sustainability initiatives.

There is therefore a lot of work going on which, while aiming to push on with green PFM within existing priorities, operations and processes, will also require development across the PFM field, from institutional engagement to professional development for PFM practitioners, and to balance green PFM with the wider ESG and other priorities. In addition, obtaining support from the population and stakeholders is a challenge when they perceive substantial impact such as change to lifestyles or extra costs.  

Join our course “Sustainability in Public Financial Management” at the end of March where Victoria will be taking you through all aspects of Green PFM. You can get more information and sign up here.

[1] How to Make the Management of Public Finances Climate Sensitive - “Green PFM“ - Prepared by Ozlem Aydin, Bryn Battersby, Fabien Gonguet, Claude Wendling, Jacques Charaoui, Murray Petrie, and Suphachol Suphachalasai - International Monetary Fund
https://www.imf.org/en/Publications/Fiscal-Affairs-Department-How-To-Notes/Issues/2022/12/08/How-to-Make-the-Management-of-Public-Finances-Climate-SensitiveGreen-PFM-525169

[2] Evolving Climate Accountability: A Global Review of Public Sector Environmental Reporting - Chartered Institute of Public Finance and Accountancy 
https://www.cipfa.org/protecting-place-and-planet/sustainability-reporting

[3] Sustainability insights- Chartered Institute of Public Finance and Accountancy
https://www.cipfa.org/cipfa-thinks/insight/sustainability-insights

[4] Green Governance Commitments 2021-2025 - Department for Environment, Food and Rural Affairs, United Kingdom
https://www.gov.uk/government/publications/greening-government-commitments-2021-to-2025/greening-government-commitments-2021-to-2025

[5] Sustainability reporting guidance 2019-202 - HM Treasury, United Kingdom
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/772723/Sustainability_report_19.pdf 

[6] Green Finance Strategy Transforming Finance for a Greener Future - HM Government, United Kingdom
https://www.gov.uk/government/publications/green-finance-strategy

[7] Greening Finance: A Roadmap to Sustainable Investing – HM Government, United Kingdom
https://www.gov.uk/government/publications/greening-finance-a-roadmap-to-sustainable-investing

[8] UK Green Financing Allocation Report – HM Treasury. United Kingdom
https://www.gov.uk/government/publications/uk-government-green-financing

About the Author

Victoria Bainbridge

Victoria Bainbridge

Victoria Bainbridge is a consultant and trainer with a specialism in public financial management. Most recently technical advisor and business development manager on international public financial management projects, alongside assignments in local commerce and academia in Germany. Qualified UK accountant (Chartered Institute of Public Finance and Accountancy) and has Certified Internal Auditor qualification. Other expertise includes audit, governance and control, financial systems and processes, and project management and implementation.

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