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ESG Reporting in State & Local Government

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Brooke Stout
March 24, 2023

Environmental, Social and Governance (ESG) disclosure is an increasingly noteworthy topic in the corporate world, and should be on the radar of state and local government officials. Although the proposed Security and Exchange Commission (SEC) reporting requirements do not apply to state and local governments, these entities should expect to see increased pressure from stakeholders in regard to ESG disclosure expectations, even if reporting is not required by the Governmental Accounting Standards Board (GASB). Stakeholders want to know how ESG factors are influencing decision-making when it comes to asset purchases and debt decisions, and how state and local governments are promoting the public interest through ESG influence. Examples of potential environmental disclosures for state and local governments include energy diversity, water availability, risk of natural disaster and pollution cleanup costs. Social issues include affordable housing, social equity, diversity and public health. Governance issues include financial reporting transparency, cybersecurity, governance structure and internal controls. Potential challenges for state and local governments in ESG disclosure include transparency, comparability and resource management. 

ESG disclosure in the Annual Comprehensive Financial Report (ACFR) is particularly important for municipal issuers as there is potential for credit rating agencies to take note of these disclosures, or lack thereof. According to GFAO, “Issuers of governmental securities should be aware that there could be credit rating differentiation depending on their approach to addressing ESG factors.” A lack of disclosure could lead to a lower credit rating. The ethical implications of ESG disclosure are also a significant consideration. State and local governments will need to be forthcoming in this reporting in order to maintain stakeholder confidence. As ESG disclosures become more prevalent, they will also become a stakeholder expectation from a transparency perspective.

ESG disclosure allows for added transparency and accountability in state and local government financial reporting, but state and local government officials need to be aware of potential issues that may arise due to this reporting. The first issue is greenwashing. Greenwashing, defined by T. Larcker and E. Watts (2022) in Seven Myths of ESG, is the practice of overstating ESG disclosures to the point of falsifying information. Greenwashing would defeat the intended purpose of state and local government disclosure of ESG by projecting a lack of transparency and the absence of accountability to its stakeholders. Due to the increasing concern about greenwashing, the SEC (November 29, 2022) launched the Climate and ESG Task Force within the Division of Enforcement to probe “ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment.” This circles directly back to municipal issuers, and represents the increased scrutiny stakeholders will place on ESG-related disclosures and concerns.

The second issue to be addressed is the need for comparability, a vital component of transparency. Comparability comes in the form of reporting standards. There are three ESG reporting standards state and local governments should be aware of: 1) Global Reporting Initiative (GRI), 2) Sustainability Accounting Standards Board (SASB) and 3) Task Force on Climate-related Financial Disclosures (TFCD). These three standards are the prominent standards available in the private sector, and provide a baseline for state and local governments to incorporate into their ACFR.

  • GRI has a focus on continuing improvement, and these standards are regularly reviewed and updated “to ensure they reflect global best practices for sustainability reporting,” (https://www.globalreporting.org/standards/). GRI standards are geared to allow any organization to “understand and report on their impacts on the economy, environment and people in a comparable and credible way” (https://www.globalreporting.org/standards/). These standards are thus relevant to a broad range of stakeholders and allow for relatively straightforward disclosure reporting for transparency and comparability.
  • SASB standards are industry specific. Although industry based, “SASB’s rigorous and transparent standard-setting process includes evidence-based research, broad and balanced participation from companies, investors and subject matter experts and oversight and approval from an independent Standards Board” which provides a foundation for disclosing financially-material information to stakeholders (https://www.sasb.org/). Examples of industries covered in the standard (all profit-seeking) that may be useful for state and local governments include: Electric Utilities & Power Generators, Engineering & Construction Services, Gas Utilities & Distributors, Waste Management and Water Utilities & Services.
  • The TFCD was created by the Financial Stability Board (FSB) in an effort to “develop recommendations on the types of information that companies should disclose to support investors, lenders and insurance underwriters in appropriately assessing and pricing a specific set of risks—risks related to climate change” (https://www.fsb-tcfd.org/about/). Based on this purpose, the TFCD is committed to market transparency. Although this may not be directly applicable to all state and local governments, it is essential to understand for municipal issuers and provides a solid foundation for ESG disclosure.

The third issue state and local governments may face in incorporating ESG disclosures into their ACFR is resources. Not only do state and local governments need to research and become familiar with ESG reporting standards, but they need to do so effectively and efficiently. Understanding how to measure environmental, social and governance data is vital to effective reporting, but understanding takes time and investment in education (two things often in short supply in state and local governments). One resource that is free for state and local governments is the GASB publication, Intersection of Environmental, Social and Governance Matters With Governmental Accounting Standards (gasb.org). Although GASB does not have a statement specific to ESG, this publication provides an outline of ESG matters and considers how they are related to public accountability and the objectives of GASB standards.

ESG disclosure is an intimidating topic for state and local governments, particularly small governments with limited resources. Implementation of these disclosures is daunting, but increased pressure from stakeholders and credit-rating agencies along with private sector disclosure requirements are noteworthy predictors of future ESG disclosure requirements for state and local governments. Awareness of ESG disclosure standards and GASB expectations will be vital for transparency and accountability of state and local governments in the future.

Author: Brooke Stout is a Certified Public Accountant, Certified Internal Auditor, an experienced governmental auditor, and Assistant Professor of Accounting at Eastern Oregon University. Email: [email protected]

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