In the accountancy world, sustainability has tended to focus on reporting and, more recently, assurance. However, while they are critical elements in enabling markets to function, reporting and assurance are not the end goals. 

Public sector entities need to deliver value from finite resources to meet governments’ objectives. The budgeting process allocates those resources according to political priorities, critical services and other societal needs. Increasingly, a warming planet and the resulting consequences requires entities to incorporate climate into this budgeting process to ensure overall resilience. And so the green budgeting framework was created. 

What is green budgeting?

The OECD Paris Collaborative on Green Budgeting was launched at the One Planet Summit in 2017. The collaborative aims to design innovative tools to assess and drive improvements in the alignment of national expenditure and revenue processes with environmental goals.

It is an important part of international efforts to align national policy frameworks and financial flows with global goals and targets under the Paris Agreement on climate change, the Kunming-Montreal Global Biodiversity Framework and the United Nations’ Sustainability Development Goals. 

It defines green budgeting as using the “tools of budgetary policy-making to integrate climate and environmental considerations into budget frameworks and practices”, to provide a “clearer understanding of the climate and environmental impacts of budget decisions, and ensure public budgets are aligned with climate and environmental objectives”. 

Why green budgets matter

Environmental breakdown is already slowing growth around the world. Its impacts include water and resource shortages, flooding, soil erosion and extreme heat. These are affecting international supply chains and disrupting domestic activities. 

This is not just an environmental crisis; it is also an economic and social one. Under future scenarios, businesses and financial institutions will be increasingly exposed. Central banks are increasingly concerned about systemic nature-related financial risks and the UK’s Office for Budgetary Responsibility (OBR) warns that climate change will put public finances on an unsustainable path.

Public expenditure is a significant proportion of economic activity, in the UK averaging around 45% of gross domestic product. Government spending decisions, therefore, have powerful social, environmental and economic implications for a country. 

Public expenditure, regulations and taxation influence individuals' decisions regarding work, investment and consumption, as well as having an impact on private finance. Given that a government’s budget is the key central policy driver that determines how taxpayers’ money is allocated, it is appropriate to evaluate and allocate this spending based not just on economic metrics, but also on metrics related to climate and other societal goals. 

Who is using green budgeting?

In a growing list of countries, such as Denmark, France and Norway, environmental impact assessments are a pre-condition for advancing budget proposals. The UK is also seeing increased climate and environmental considerations being included in macro-fiscal projections and scenarios. The OBR’s ‘Fiscal risks and sustainability report’ is a good example, looking at the economic and budget impacts of climate change and making the case that costs of inaction will be greater than if we act now. 

Most countries adopt a results-based approach for green budgeting, which enables governments to consider a broad range of potential impacts from a budget proposal. 

Figure 1 (below) shows the basic principle that the budgeting process combines resources (mainly capital) and activities to produce desired outputs, outcomes and impacts. 

The activities are the actions that government entities undertake with the given resources. Those activities result in outputs which are the tangible or intangible goods or services that an entity provides. 

The outcomes evaluate the effectiveness that these goods and services are having in relation to the stated objectives of carrying out those activities. 

The impact is a longer-term assessment of whether the activities are achieving their ultimate purpose, taking into account causal effects and secondary impacts. 

Figure 1. Budgeting – combining resources and activities to create outputs, outcomes and impacts

Accountability and transparency

It is important for governments to be on top of the overall mix of programme and policy expenditure. Not all government expenditure will be positive for the climate or environment. However, being aware of and transparent about how individual spending decisions (and overall aggregate spending) align with sustainability goals is fundamental to delivering value for money and making evidence-based decisions to drive the transition to more resilient net-zero, nature-positive and socially just economies.

Tagging expenditure to indicate whether it has a positive or negative impact on climate, biodiversity and other metrics is growing in popularity, as an initial way to get started on green budgeting. However, defining what is and is not ‘green’ can be challenging and there is a risk that such tagging complicates/obscures spending by focusing on narrowly defined expenditure types instead of the desired outcomes and impacts. 

That said, green budgeting can help improve transparency and deliver value for money, ensuring taxpayers money is spent wisely to deliver growth while also tackling the climate and nature crises. 

Green budgeting is an increasingly important part of the public sector toolkit and given the vital role that public spending plays in shaping economic development, it can help to catalyse private sector activity, innovation and investment on a more sustainable path.