Background
Established in 2015 by the Financial Stability Board (FSB) under the chairmanship of Michael Bloomberg, the Task-Force on Climate-related Disclosures (TCFD) set out to develop consistent recommendations for companies to report on climate-related financial risks. It recognised that a changing climate, increasing frequency and magnitude of extreme weather, and decarbonisation of the global economy, could all have a material impact on companies’ financial statements. TCFD recommendations were designed with an eye to helping markets better understand such risks and manage their risk exposure.
Published in 2017, the TCFD set out its recommended disclosures across four areas:
Governance: the organisation’s governance around climate-related risks and opportunities;
Strategy: the actual and potential impacts of climate-related risks and opportunities on the organisation’s business, strategy, and financial planning where such information is material;
Risk Management: the processes used by the organisation to identify, assess, and manage climate-related risks;
Metrics & Targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
What’s changing?
From 2024, the ISSB, a part of the IFRS Foundation, is set to take charge of monitoring progress from the FSB, incorporating TCFD into its reporting standards. In June 2023, these standards (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures) were issued, with the latter effective for annual reporting periods beginning on or after 1 January 2024.[1]
IFRS S1 sets out the overarching requirements for a company to disclose information about sustainability-related risks and opportunities. These core content requirements integrate the TCFD recommendations.
IFRS S2 sets out supplementary requirements that relate specifically to climate-related risks and opportunities.
What is the ISSB?
Formed by the IFRS Foundation at COP26 in Glasgow, the International Sustainability Standards Board (ISSB) was established to focus specifically on developing global sustainability reporting standards to assist investors and financial markets. The group seeks to simplify the alphabet soup of different voluntary sustainability-related standards and requirements, thereby reducing cost and complexity for both investors and companies. In addition, the standards developed by the ISSB are designed to not only provide the required information for investors, but to allow international comparability in reporting where jurisdictional requirements are built on the ISSB’s baseline.
While this development means that the TCFD itself has disbanded, the four core recommendations and 11 recommended disclosures requested by the Taskforce endure and are fully integrated into the ISSB standards.
The differences between the original TCFD recommendations and the IFRS S2 Climate-related Disclosures are slight. While the ISSB standards closely follow the TCFD recommendations, in some places the ISSB requires more detailed information, and/or additional requirements.
The IFRS Foundation has since compiled a comparison of how the requirements of the IFRS S2 and TCFD recommendations differ (see: https://www.ifrs.org/content/dam/ifrs/supporting-implementation), with the most significant differences outlined below.
Key differences between TCFD recommendations and ISSB standards
1. Governance
IFRS S2 requires more detailed disclosure, for example, regarding how the governance responsibilities for climate-related risks and opportunities are reflected in the terms of reference, mandates, and role descriptions.
2. Strategy
IFRS S2 requires consideration of industry-based disclosure topics and requires more detailed information on where risks and opportunities are concentrated in the business model and value chain.
More detailed information is required when describing the effects of climate-related risks and opportunities. For example, when disclosing responses and planned responses to identified risks and opportunities, the company will be required to disclose its transition plan and how it plans to achieve its climate-related targets.
IFRS S2 sets out criteria for when quantitative and qualitative information is required relating to effects on a company’s financial position, performance, and cash flows. Disclosure of only qualitative information is permitted under some circumstances, for example, when a company cannot separately identify the effects of the risk or opportunity, or when the level of measurement of uncertainty involved is too high.
IFRS requires additional information regarding resiliency on:
Significant areas of uncertainty considered by the company in its assessment;
A company’s capacity to adjust and adapt its strategy and business model over time;
Details on how and when the climate-related scenario analysis was carried out.[2]
3. Risk Management
IFRS S2 requires disclosure of more detailed information, for example:
The input parameters it uses to identify risks, such as data sources, the scope of operations covered and the detail used in assumptions;
Whether and how the company uses climate-related scenario analysis to inform its identification of risks; and
Whether it has changed the processes used to identify, assess, prioritise and monitor risks compared to the prior reporting period.
IFRS S2 also requires additional disclosure on the processes used to identify assess, prioritise and monitor opportunities.[3]
IFRS S2 explicitly requires additional disclosures on the extent to which, and how, the processes used to identify, assess, prioritise and monitor opportunities are integrated into and inform the company’s overall risk management process.
4. Metrics and Targets
IFRS S2 requires additional disclosures related to a company’s GHG emissions, including:
A separate disclosure of Scope 1 and Scope 2 GHG emissions for (1) the consolidated accounting group, and (2) associates, joint ventures, unconsolidated subsidiaries or affiliates not included in the consolidated accounting group;
Scope 2 GHG emissions using a location-based approach and information about any contractual instruments that is necessary to inform users’ understanding;
Scope 3 GHG emissions disclosures, including additional information about the company’s financed emissions if the company has activities in asset management, commercial banking, or insurance; and
Information about measurement approach, inputs, and assumptions used in measuring Scope 3 GHG emissions.
IFRS S2 differs from the TCFD guidance in, for example, requiring disclosures about how the latest international agreement on climate change has informed the target and whether the target has been validated by a third party.
IFRS S2 requires disclosure of more detailed information on GHG emissions targets, including additional information about the planned use of carbon credits to achieve a company’s net GHG emissions targets.
How we can help
CEN-ESG can help your business understand and manage climate-related risks and opportunities and report in alignment with the new ISSB standards. We have extensive experience in helping clients from diverse industries identify, analyse, quantify and report the significant climate-related risks and opportunities facing their business. Our expertise extends beyond compliance, offering a strategic approach to help your business fully understand and respond to its salient climate risks and opportunities. We have a proven four-step process:
1. Governance and risk management review
Conduct a comprehensive gap analysis against regulations and best practice, providing recommendations and a clear path to adoption.
2. Climate-related risks and opportunities development
Screen key risk exposures, assess potential climate-related risks and opportunities, and develop a strategy for mitigation or exploitation.
3. Scenario analysis
Enhance understanding of business model robustness by conducting scenario analysis, applying various climate-related scenarios to quantify impacts and inform strategic decisions.
4. Development of report and appetite for disclosure
Guide your business through the creation of an ISSB-aligned report ensuring internal alignment and approval for external disclosure.
Contact us
CEN-ESG helps businesses maximise their sustainability potential, performance, and ESG disclosure.
Our team will be happy to discuss our process for implementing the ISSB requirements, and how we can help.
Jasper Crone, Director
Roger Johnston, Director
For more information about our Sustainability Consultancy, Investor Relations, or CEN Data services and expertise, please click on Services above or go to https://www.cengroupholdings.com.
[1] Earlier application is permitted as long as IFRS S1 is also applied.
Comments