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IFRS S1, IFRS S2, ISSB and the future of TCFD

Your next ESG and climate reporting priorities

August 9, 2023

International climate reporting is evolving fast. This Q&A breaks down the latest developments around ISSB and IFRS S1 and S2 and where these could leave current drives on TCFD compliance.
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In June, the International Sustainability Standards Board (ISSB) issued its inaugural standards on climate-related financial disclosures — International Financial Reporting Standards Standard 1 (IFRS S1) and International Financial Reporting Standards Standard 2 (IFRS S2). ISSB described the move as “ushering in a new era of sustainability-related disclosures in capital markets worldwide,” with the new standards aiming to improve trust and confidence in company disclosures about sustainability to inform investment decisions.

ISSB also described S1 and S2 as creating a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects for the first time.

The challenges around organizations unpacking their priorities from the breadth of developing climate-related financial disclosures led WTW to recently publish a comparative table as a guide, which we intend to continue to update. The table compares the key elements of:

  • The Financial Stability Board (FSB)’s Task Force on Climate-related Financial Disclosures (TCFD)
  • The proposed Securities and Exchange Commission (SEC) climate proposal to standardize climate-related disclosures for investors in the U.S.
  • For the EU, the Corporate Sustainability Reporting Directive (CSRD) alongside the EU Taxonomy common classification scheme for sustainable economic activities
  • ISSB standards, as they were being developed at the time of writing.

The rapid evolution in climate reporting is exemplified by the latest developments. Soon after the publication of IFRS S1 and IFRS S2, the FSB announced it had asked the IFRS Foundation to take over the monitoring of the progress on companies’ climate-related disclosures from TCFD.

Given the pace of change and the proliferation of standards (and, indeed, acronyms), this insight considers what the latest developments mean for your organization’s climate reporting priorities. It also examines what you need to know about the new IFRS standards and where this may leave any current moves to comply with TCFD.

We begin with a quick reminder of the key parties and obligations, before moving onto the implications of the latest standards, specifically:

What is TCFD?

The Financial Stability Board (FSB) created TCFD in 2015 to provide guidance for organizations to demonstrate to investors, lenders and insurance underwriters how they will be impacted by climate change and how to disclose this information.

Although currently voluntary in many territories, TCFD reporting is mandatory in the U.K. for publicly listed and large private companies for accounting periods starting on or after 06 April 2022. It is anticipated climate risk disclosure requirements could be extended to the rest of the economy by 2025.

There are four key pillars of TCFD:

Governance

This concerns disclosing your organization’s governance around climate-related risks and opportunities.

Strategy

This pillar focuses on disclosing the actual and potential impacts of climate-related risks and opportunities on your organization’s businesses, strategy, and financial planning.

Risk management

This is about disclosing how your organization identifies, assesses, and manages climate-related risks.

Metrics and targets

This requires your business to consider the metrics and targets you use to assess and manage relevant climate-related risks and opportunities.

TCFD also recommends scenario analysis to allow your company to understand and quantify the risks and uncertainties it may face under different hypothetical climate scenarios to help decision-making and shape your overall strategy.

What is the IFRS and ISSB?

International Financial Reporting Standards (IFRS) announced the formation of ISSB in 2021 at COP26 in Glasgow. ISSB defines its mission as developing standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets in the public interest.

ISSB also says its formation responded to the desire to address a fragmented landscape of voluntary, sustainability-related standards and requirements which risks adding cost, complexity and risk to both companies and investors.

What does IFRS S1 cover?

IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the material information associated with sustainability-related risks and opportunities they face over the short, medium and long term.

Both S1 and S2 standards are accompanied by guidance on the presentation of information, timing and place of reporting. There is also industry-specific guidance your organization should reference as appropriate.

Building on the pillars of TCFD, IFRS S1 requires organizations to provide disclosures about:

  • The governance processes, controls and procedures the entity uses to monitor, manage and oversee sustainability-related risks and opportunities
  • The entity’s strategy for managing sustainability-related risks and opportunities
  • The processes the entity uses to identify, assess, prioritize and monitor sustainability-related risks and opportunities as part of risk management
  • The entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any metrics and targets the entity has set or is required to meet by law or regulation.

What does IFRS S2 cover?

IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. It applies to climate-related physical risks, climate-related transition risks and climate-related opportunities. Based on our analysis of the standard, we have found it is closely aligned with the current form of TCFD.

How different are IFRS S1 and IFRS S2 from TCFD?

IFRS S1 and IFRS S2 include TCFD recommendations, with the FSB noting the Standards represent "the culmination of the work of the TCFD”. In addition, at a July ISSB webinar on IFRS S1, ISSB Vice-chair Sue Lloyd commented, “If you know TCFD, you’ll feel right at home with S1,” and emphasized how both S1 and S2 build on TCFD. Lloyd also indicated TCFD compliance readies organizations for the inaugural standards.

However, there are still some key differences between ISSB Standards S1 and S2 and TCFD, specifically:

  • ISSB S1 and S2 are standards, which means adoption requires compliance with specific, replicable and detailed requirements. Meanwhile, TCFD is a framework, which means it provides principles-based guidance on how information should be structured and prepared.
  • Unlike TCFD, S1 captures sustainability-related issues beyond climate.
  • Unlike TCFD, S2 requires Scope 3 emissions reporting. It also includes more in-depth requirements for material climate-related risks and opportunities compared to TCFD.
  • There is a greater focus on material information in S1 and S2 than there is in TCFD; ISSB S1 and S2 require all material sustainability-related information to be disclosed, defining information as ‘material’ if omitting, misstating or obscuring it could reasonably be expected to influence investor decisions.
  • Industry and sector-specific disclosures and information are required by ISSB Standards S1 and S2 to allow for information to be more relevant and enable benchmarking.

Where will the ISSB Standards IFRS 1 and IFRS 2 apply and when?

ISSB states IFRS S1 and IFRS S2 provide for a global baseline of sustainability-related disclosures worldwide, including capacity building and monitoring progress towards the broad use of high-quality disclosures.

Both ISSB standards are effective for annual reporting periods beginning on or after 1 January 2024. There are transition ‘reliefs’ for companies when they are first applying the standard. These first year reliefs are special dispensations at the point an organization adopts the ISSB standards, and include:

  • Allowance for applying only S2 climate-related disclosures, rather than both S1 and S2
  • Comparative information for prior years at the point of disclosure is not required
  • Allowance for different publishing dates for sustainability-related financial disclosures, depending on interim information release
  • Scope 3 greenhouse gas (GHG) emissions not being required, with additional relief to not report under the GHG Protocol as a basis of measurement where disclosures are made.

What does this mean for organizations’ TCFD-aligned reporting?

As already noted, despite a change of acronyms and ownership of reporting monitoring, the original principles of TCFD will continue to heavily influence climate-related disclosure requirements. TCFD is coded into many other requirements, and this clearly extends to IFRS S1 and S2.

Indeed, at the announcement of the takeover process, ISSB Chair Emmanuel Faber said, “TCFD has been a trailblazer in raising the practice and quality of climate-related disclosures, providing much-needed information to investors about climate-related risks and opportunities,” adding how the request to transfer the TCFD’s monitoring responsibilities to the ISSB from 2024 represented the opportunity to “build on TCFD’s legacy”. Faber also expressed hopes the announcement would provide further clarification of the “so-called ‘alphabet soup’ of ESG initiatives for companies and investors”.

Will there be further standards set by ISSB?

The ISSB has described IFRS S1 and IFRS S2 as ‘inaugural standards’ and is currently consulting on future standard-setting priorities with continued discussions with European Financial Reporting Advisory Group (EFRAG) and Global Reporting Initiative (GRI).

The current ISSB standards represent the building blocks onto which IFRS expects to add further standards. S1 will be the baseline and general building block for standards that may follow on a variety of subject areas covering environmental as well as governance and social factors. This may mean you can expect further, broader ESG standards to apply in addition to S1 and S2, depending on how different jurisdictions react and whether they opt to translate all of these into local regulation.

What does this mean for strategic priorities on climate and ESG reporting?

Many organizations are already shifting from ‘compliance and reporting’ approaches to deeper, strategic mindsets when addressing climate and wider ESG issues, as well as emerging global and regional standards and frameworks.

We would also argue moving to a ‘beyond compliance’ approach to climate reporting will both enable organizations to meet their current/impending reporting obligations, as well as secure long-term sustainable success. This approach will enable organizations to align with TCFD whilst also providing the groundwork on which they can base disclosure in line with other emerging standards, such as IFRS and climate-related elements of the CSRD.

Generally speaking, we anticipate climate risk reporting approaches will need to be responsive to potential evolutions around a number of areas. This includes quantifying financial impacts, greater integration of climate into risk management, and around issues relating to boards being sufficiently informed to exercise due climate risk-related governance.

WTW will continue to monitor announcements and analyze what these rapidly evolving expectations and obligations mean for organizations and share further insight as more detail emerges.

For specialist support understanding your climate reporting priorities and revealing the opportunities climate disclosures can offer, get in touch.

Contacts

Julien Hornacek
Enterprise Risk Management & Climate Transition, Risk & Analytics Director Europe

Senior Director - Catastrophe & Climate Risk Management

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