Involvement of Supreme Audit institutions in climate performance assessment: International and local experience. Realities and challenges–SAI Azerbaijan

Climate change is one of the biggest global problems of modern time. Greenhouse gas emissions, melting glaciers, forest fires, deforestation and misallocation of water resources have a negative impact on the environment, economic and social conditions. The solution of the mentioned problems should be implemented on the whole planet.

Despite the national and international measures taken by governments to reduce the greenhouse gas emissions in the last two decades, the warming process in the climate system is still observed. According to the 2023 Report of the Intergovernmental Panel on Climate Change (IPCC), the scale of changes in the climate system as a whole in recent years and many aspects of the climate system have reached to an unprecedented extent. So, according to the report, the global surface temperature in 2011-2020 is 1.1°C higher than in 1850-1900. It is predicted that climate changes will continue in the scenarios for the future period.

Although the global climate action is a shared responsibility of many stakeholders in the public and private sectors, the dominance of the former in this area has so far been felt to be significant. Thus, national governments play an important role in climate action by allocating public resources, implementing state policies, and through various governance mechanisms to combat climate change and its consequences. Political commitment by governments, an institutional framework, good strategic management, and broad access to finance and technology can contribute to effective climate action.

Apparently, access to financial resources, especially public finance, is an important tool in the implementation of mitigation and adaptation activities for climate change.

Image. Financial commitments under the Major Climate Change Agreements

Historical Background of Climate Governance

As the climate action affects the entire planet, significant financial, including public resources are used for the implementation of this action, and in this process, a national government-based approach to the entire cycle of public finance management is required, the Supreme Audit Institutions (SAI) can contribute to this issue through their audits.

The conducted analyzes show that the experience of conducting environmental audits by SAIs, including their involvement in climate performance assessment, has been expanding in recent years. In the past, the traditional role of SAIs was to oversee the financial operations of public sector organizations. Since the end of the last century, SAIs have realized their responsibilities in a number of areas, including the environment, and started research in a new direction of audit.

The Working Group on Environmental Audit (WGEA) was established within INTOSAI to stimulate and support environmental audit, exchange information and methodological base, as well as meet other cooperation needs.

This process is accompanied by the adoption of field-specific guidelines, as well as their revision in the light of the changing environment. In the last 20 years, INTOSAI adopted Activities with an Environmental Perspective (GUID 5200), Guidelines for Environmental Auditing in the Context of Financial and Compliance Audits (GUID 5201). In addition, the Guidance on Sustainable Development: The Role of Supreme Audit Institutions (GUID 5202) also covers environmental aspects. As can be seen from the guidelines, although environmental issues can be covered by compliance and financial audits, performance audits come to the fore in audit topics related to climate change. Environmental performance audits mainly cover the following:

• implementation of environmental programs;
• environmental impact of other programs;
• environmental management systems and environmental reports;
• evaluation of proposed environmental policies and programs;
• solving cross-cutting environmental problems.

Currently, climate action is becoming topical as an environmental audit for many SAIs being aware of the risks posed by climate change to society and the economy. It is no coincidence that the majority of the INTOSAI WGEA survey respondents put adaptation to climate changes as the number one environmental audit topic for future audits.

The assessment of climate action by SAIs aims to achieve the outcome - "contributing to the improvement of accountability, effectiveness and inclusiveness of government climate change adaptation measures" through the following three outputs:

1. High-quality audits and recommendations in various areas (disaster risk reduction, water resources management, sea level rise, implementation of climate change adaptation plans/activities, audit of SDGs implementation on climate change adaptation measures);
2. timely submission of audit reports in accordance with legislation;
3. audit impact throughout the audit process.

On the basis of discussions and research conducted within the international SAI community, IDI and INTOSAI WGEA have identified 5 thematic areas related to climate change adaptation measures and the activities that can be covered by audits in those areas.

1. Disaster risk reduction: Audits can cover a range of adaptation measures (flood barriers, early warning systems, hurricane warnings, tree planting, resettlement, preparedness plans and establishment of organizational structures).
2. Water resources management: Audits can be conducted on a number of adaptation measures (ensuring access to clean water for all, including vulnerable populations, remote areas, innovative ways of using limited water resources in drylands, water conservation, smart use of water resources in agriculture).
3. Sea level rise and coastal erosion: Floods cause deterioration of living conditions, mostly affecting the poor, especially women and people with disabilities. Moreover, sea level rise is a major risk in coastal cities, including the world's largest cities.
4. Implementation of plans or actions related to climate change: Audits in this area can cover topics related to the planning process of climate change activities, the quality of the plan and, where applicable, the implementation.
5. Realization of national adaptation goals related to SDG13: Audits can be conducted on national targets for climate change adaptation measures linked to one or more of the SDG climate change adaptation targets of governments. In this case, a more government-based audit approach is recommended.

Regardless of the thematic area, SAIs should focus on 3 main issues (accountability, effectiveness, inclusiveness) for each audit.

In general, although the SAI mandates differ, they all have a mission to provide independent evaluation of the management and use of public resources. Audit on management and use of resources in most cases is conducted as a component of compliance, financial and performance audits. For this reason, SAIs do not need special authority to assess the effects of funds allocated to climate action. In a number of countries, including Azerbaijan, this has been established at the legislative level and attributed to the direct duties of SAIs. Thus, according to Article 7.0.3.9 of the Law "On the Chamber of Accounts", the Chamber of Accounts can implement external state financial control measures in the field of environmental protection, prevention of disasters and the use of funds allocated for elimination of their consequences.

According to INTOSAI WGEA, in the last 5 years, the number of environmental audits by SAIs is more than 400, and more than 50 of them are directly related to climate performance assessment. Performance audits are significantly predominant here.

Table. Audits conducted by SAIs

Considering the topicality of the issue, SAI Brazil, the Federal Court of Accounts (TCU), the current INTOSAI Chair, made a slightly different proposal, and together with INTOSAI WGEA, experts and international organizations (UNDESA, the World Bank, UNDP, etc.) launched Climate Scanner initiative.

A number of fiscal diagnostic tools also encourage the active involvement of SAIs in assessing the climate action. For example, the PEFA Climate (Climate Framework) prepared by the Public Expenditure and Financial Accountability (PEFA) Secretariat also envisages the involvement of SAIs in this activity. PEFA's Climate Framework tool is a set of indicators based on the PEFA framework to gather information on how prepared the public financial management system is to support and promote the implementation of government climate change policies. Note that, on the one hand, SAI reports act as a source of information for this evaluation, and on the other hand, the effectiveness of SAI’s activity in the climate field is measured through some indicators of the tool.

The experience of the Chamber of Accounts of the Republic of Azerbaijan in assessing the national climate activity related to climate changes

In accordance with the Paris Agreement, the Republic of Azerbaijan submitted its Nationally Determined Contributions (NDC) document in 2016 and as a contribution to global climate change initiatives, it has set a target of reducing greenhouse gas emissions by 35% by 2030 compared to 1990.

"Azerbaijan 2030: National Priorities for Socio-Economic Development" provides for the transformation of Azerbaijan into a country of clean environment and "green growth". The priorities include climate change and the fight against it, as well as the application of renewable energy in all areas of the economy based on the principles of the green energy space in our country. Climate change mitigation measures are reflected in the "Socio-economic Development Strategy of the Republic of Azerbaijan for 2022-2026”, “State Programs on the Socio-Economic Development of Regions" and other documents.

Although substantial work has been done by the Azerbaijani government within the framework of the fight against climate change, the global development trends of the world economy have determined the issues of climate change as an actual problem in the Republic of Azerbaijan. So, according to the Ministry of Ecology and Natural Resources, the total annual greenhouse gas emissions in 2021 increased by 26.3% compared to 2010, and by 7.8% compared to 2020.The results of various assessments show that the agricultural sector, water resources sector, coastal zones and forest sector are more sensitive to climate change in Azerbaijan.

Such conditions define the important tasks for the Chamber of Accounts by highlighting the importance of external state financial control of environmental activities. To assess the effectiveness and efficiency of the government's national climate and environmental activities, a number of audits (mainly performance audits) have been carried out by the Chamber of Accounts recently. Some of the identified topics are directly related to the 5 thematic areas identified by the international SAI community.

On the assessment of efficient use of irrigation water. Due to the recent drought, the trend of depletion of fresh water resources has also been observed in Azerbaijan. According to the results of scientific studies, Azerbaijan is currently ranked 20th in the list of countries that may face water shortage in 2040.

Although more than 75% of fresh water resources in the Republic of Azerbaijan are formed from sources outside the country, the effective use of fresh water resources is one of the topical and priority issues for Azerbaijan. Nevertheless, as the underground irrigation canals prevail it causes a large amount of water loss, and the lack of necessary infrastructure for accurate measurement of the amount of water used does not allow to determine the water loss amount.

In addition, to increase the production of agricultural products, the involvement of uncultivated lands into crop rotation has resulted in the destruction of agricultural crops in areas far from water sources due to drought and lack of irrigation water.

Under SDG 6 (Clean water and sanitation), it was determined that the efficient use of irrigation water was not organized. The 24.3% decrease of indicator 6.4.1 on "Changes in water use efficiency" (showing GDP per m3 of water, defined as the ratio of a country's GDP to drinking water taken from all sources) compared to 2018 showed that the increase in the amount of water taken from sources is not adequate to the level of GDP growth, and thus less efficient use of water.

Assessment of the efficiency of the "Pirshaghi" wastewater treatment plant" project. Due to insufficient funding, the lack of infrastructure for drinking water supply and sewage system in the scope of the facility has made it impossible to deliver sewage to the facility and use it for its intended purpose. The failure of the plant to operate at its full capacity according to the purpose of the economic, ecological and social goals of the Project, and the indicators "6.2.1 Safe sanitation and hygiene", "6.3.1 Proportion of domestic and industrial wastewater", "6.6.1 Water-related ecosystems" showed that the SDG 6 goals were not achieved.

Performance audit of Forestry Development Service. The conducted audit shows that a strong legislative base has been formed to regulate forest-related issues in the country, and the Forest Code has been adopted. The Code defines the legal bases of the regulation of forest relations in the territory of the Republic of Azerbaijan, the use of forests, their protection, reservation, restoration, and the improvement of the ecological and reserve potential. Against the strong legal framework, the previous forestry works that are the basis of forestry activities, have not been completed, efficient use of forest areas has not been ensured, although certain measures have been taken against illegal deforestation, measures in the field of protection and protection of forests from the effects of other anthropogenic factors and pests have been insufficient.

At the same time, national goals for forest activities have not been determined, and since the activities towards achieving the goals specified in SDG 15 (Life on Land) on forest restoration are not sufficient, no significant increase in the number of areas covered by forests has been observed, and there are cases of non-calculation of the indicators defined by SDG15.

The Agalı "smart village" project audited in 2023 are directly related with the 8 of the 17 Sustainable Development Goals ("1. No poverty", "6. Clean water and sanitation", "7. Affordable and clean energy", " 8. Decent work and economic growth", "9. Industry, innovation and infrastructure", "11. Sustainable cities and communities", "12. Responsible consumption and production", "13. Climate action"). Currently, the audit process on the relevant topic by the Chamber of Accounts is ongoing. The audit results are expected to be presented at COP 29 to be held in Baku, Azerbaijan.

In addition, the Chamber of Accounts analyzed the indicators within the medium-term expenditure frameworks under the "Environmental protection" section of the functional classification of state budget expenditures. Within the framework of the analysis, the forecast and performance indicators for the costs of 4 programs (Protection of biological diversity, Efficient use of natural resources, Provision of hydrometeorological data and Environmental protection), as well as the indicators were analyzed, directions for further improvement of the activity were indicated.

The conducted control measures have determined that there are a number of challenges in the government's activities related to the national climate and environment.

• The restoration of the areas liberated from occupation, the forests in those areas and the ecosystem as a whole requires a lot of resources and time. In 2021-2022, more than 3 billion dollars have been allocated to the restoration of liberated territories from the state budget. This creates new challenges for the government to organize and implement the efficient use of those funds, and for the Chamber of Accounts, to assure the efficient use of the funds.
• As renewable energy, the production of electricity in hydropower plants requires the availability of large sources of running water. Large water sources are mainly transboundary waters and thus 75% of fresh water resources are formed outside of Azerbaijan. The recent drought and the use of water by the origin countries cause a decrease in the water resources of the transboundary rivers until they reach the territory of Azerbaijan. This creates difficulties in the construction of new hydropower plants and the more efficient use of existing plants. In addition, the pollution of transboundary rivers beyond the relevant norms before reaching the territory of Azerbaijan, requires additional time and resources to adapt those waters to be used for domestic and economic purposes.
• Azerbaijan is among the most mine-contaminated countries in the world, and it is estimated that there are more than 1.5 million unexploded mines and munitions in Azerbaijan. In the period from 08.11.2020 to 27.02.2024, 345 people became victims of 205 mine explosions. The threat of landmines has made it impossible to use the lands in the liberated territories for both residential and agricultural purposes, as well as for ecosystem restoration.

The above-mentioned issues were mostly related to the factors characterizing the impact on the country. In addition, there are other factors that affect the activity of almost every SAI in this field. These may include:

Above all, it is very important to have a strategic management framework and consider the climate issue by public financial management (PFM) system in the field of climate action. It is particularly important that the government's environmental and climate strategic priorities and objectives are clearly defined to assist financial planning. Although concepts such as climate finance, green budget, etc. are currently becoming popular in the field of public finance management, there are still few examples that can be noted as good practice in this field.

Our research shows that it is very important to have budget indicators, along with specific policy goals, in the strategic documents adopted in the country (for example, the National Adaptation Plan) in the field of climate action. Also, references to these documents should be increased during the preparation of the National Climate Action Plan and other strategic budget documents. This will also enable to determine the sufficiency of the budget commitments to implement the adopted strategic documents on the national climate action. At the same time, the inclusion of more institutions in the program budget initiative can create acceptable conditions for monitoring the costs of climate actions.

Another approach is the application of budget tagging. Climate change budget tagging should be viewed more within the framework of budget classification. The first reference point is the GFSM (including COFOG). It should be adapted to the methodology of the State Financial Statistics Manual. Usually, climate change related issues (COFOG) are funded under the functional classification "environmental protection" expenditure. However, the "environmental protection" section cannot act as a financial source of the climate change process in the full sense.

Another challenge regarding the first issue is related to the impact of environmental issues on financial statements. However, the possibilities of reflecting these effects in cash-based budget reporting are limited.

The second issue is the variety and timeliness of climate action data. As it is known, in some cases financial data on activities are submitted to SAIs shortly after the end of the year. It is difficult to say this about non-financial information. Of course, relatively favorable conditions are formed in the countries where the program budget is applied.

Sometimes governments include their environmental programs into a single environmental plan and report. In the absence of such a plan, SAIs face some difficulties. In such cases, SAIs can review the main environmental problems affecting their country and list programs carried out by the government.

It is crucial for SAIs to agree on critical success factors and KPIs for non-financial climate action data. Timely and high-quality presentation of data also requires the integration of IT systems in the relevant field.

As the 3rd issue, we can mention the formation of personnel potential for climate action assessment. As it is known, audits in this field require specific knowledge besides on financial issues and performance audits. Currently, there are various trainings in this field, and employees of the Chamber of Accounts participated in these trainings and obtained the relevant certificates. There is a great need to proceed in this area. In the future, the formation of a more comprehensive training program on climate action assessment by INTOSAI and its relevant working groups can also serve to capacity building.