IFRS S2 – New climate-related disclosure requirements

The International Sustainability Standards Board (ISSB) recently published its long-awaited sustainability disclosure standards, starting with IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2). We have published our thoughts on the overall standards in a separate blog - ISSB’s first sustainability standards – enabling consistent and comparable sustainability reporting. This blog looks specifically at the climate-related standard, what it is, how it compares and interacts with existing requirements, and things to look out for.

The climate-related disclosure landscape

UK-listed companies are already reporting under the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), with a larger array of UK entities required to report under the UK Government’s Climate-Related Financial Disclosures (CFD), which are broadly aligned to TCFD. The new IFRS S2 adopts the same four-pillar construct as TCFD, meaning companies already making TCFD or CFD disclosures have an excellent foundation for IFRS S2 reporting. There are, however, a few crucial differences that we’ve highlighted below. In moving from TCFD to IFRS S2, disclosures should provide further details, including but not limited to:

Governance

• The role of the board and management, which have been grouped under “governance body”.
• More detail: On how the responsibilities for climate-related risks and opportunities are reflected in the terms of reference/board mandate/policies of the governance body.
• Any dedicated controls and procedures which are applied to the management of climate-related risks and opportunities. Note, unlike TCFD, a description of the associated organisational structure(s) is not specified.

Strategy

• Consider the applicability of industry-based disclosure topics in the industry-based guidance in identifying climate-related risks and opportunities and where they are concentrated in the value chain.
• 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 uncertainty involved is too high.
• When preparing disclosures on the anticipated financial effects, IFRS S2 requires a company to use all reasonable and supportable information that is available at the reporting date without undue cost or effort and requires the use of an approach that is commensurate with the company’s circumstances.
• How and when climate-related scenario analysis was carried out, including information about inputs used and key assumptions made. An entity’s approach to scenario analysis should be based on its particular circumstances, including its exposure to climate-related risks and opportunities and the skills, capabilities and resources available for the scenario analysis. Those circumstances will likely change over time and an entity should reassess them each time it conducts its scenario analysis.

Risk Management

• A description of monitoring and managing climate-related risks and opportunities, including climate-related policies.
• Details of the input parameters used (for example, data sources, the scope of operations covered, and the detail used in assumptions) in climate-related risks and opportunities.
• Any process changes compared to the prior reporting period (if applicable).
• The extent to which and how climate-related opportunity identification, assessment, and management processes are integrated into the entity’s overall management process.

Metrics and Targets

• Relevant cross-industry metrics and industry-specific metrics.
• Scope 1 and 2 emissions for associates, joint ventures, unconsolidated subsidiaries, or affiliates not included in the consolidated accounting group.
• 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.
• Information about the planned use of carbon credits to achieve GHG emissions targets.
• Whether the target was derived using a sectoral decarbonisation approach.

For an overview of IFRS S2, we have produced a useful one-page summary.

The UK Government has stated its intention for an endorsement decision on the ISSB standards to be made within 12 months of the standards being published. However, it’s unclear as to the exact interaction between the standards. Will UK companies have to comply with both IFRS S2 and TCFD/CFD or will IFRS S2 replace these requirements? Regardless, it’s clear that climate-related disclosure requirements will become more granular, integrated, and far-reaching.

Next steps

Given the scale of the new disclosure requirements, many will be looking to get a headstart, but where to begin? The pathway appears more straightforward for existing TCFD (and soon-to-be CFD) reporters. This means fulfilling existing requirements will likely put companies in a strong position to fulfil IFRS S2 requirements. The two more significant differences – on transition plan progress and sector metrics – look likely to be covered by the work of the Transition Plan Taskforce (TPT), while the next Financial Reporting Council’s (FRC) Thematic review on metrics and targets will provide a view on the quality of current reporting.