Global momentum is steadily and quietly increasing with many jurisdictions taking steps to endorse and ultimately adopt the International Sustainability Standards Board ("ISSB") standards. The ISSB is the standard-setting body responsible for creating and maintaining the newly formed International Financial Reporting Standards Foundation ("IFRS") S1 and S2 guidance to be adopted by jurisdictions relating to sustainability-related financial disclosures. With opinions on sustainability currently fractured and under pressure from both sides of the political divide, the ISSB standards could provide useful clarity and a global baseline for climate‑related reporting following the disbanding of the Task Force on Climate‑related Financial Disclosures ("TCFD").
With the ISSB's continued focus on the disclosures to be decision‑useful to investors, lenders, insurance underwriters and other stakeholders from a financial perspective, it could be that this is the middle ground for climate‑related disclosures that the significant majority of parties can agree on — with the further step of reporting impact materiality and how a business affects the environment and/or society remaining very much optional.
With the momentum gathering a pace towards ISSB standards, we explore in this alert:
- Key concepts of the ISSB standards — including the differences between ISSB and TCFD;
- Progress toward adoption of the ISSB standards in key jurisdictions; and
- Practical tips on how to get ready for the ISSB standards implementation.
Recap on the TCFD Recommendations (and the foundations for IFRS)
In late 2023, the TCFD team disbanded noting they had reached the climate‑related reporting aims they had set out to complete. From 2024, the IFRS has taken over the responsibility to monitor climate‑related reporting whilst also implementing a new framework ("IFRS S1" and "IFRS S2") that is built on the TCFD foundations. Given the integral part TCFD plays in the structure and approach of IFRS S1 and IFRS S2, we briefly recap on TCFD's establishment and its four central pillars.
Back in 2015, Mark Carney, the newly elected President of Canada, had established TCFD in his role as Chairman of the Financial Stability Board, with a keynote speech on "Breaking the Tragedy of the Horizon," in which he said:
"The horizon for monetary policy extends out to 2‑3 years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle — about a decade. In other words, once climate change becomes a defining issue for financial stability, it may already be too late."
TCFD was born and the TCFD Recommendations sought to create voluntary, consistent climate‑related disclosures for businesses to provide information to investors, lenders, insurance underwriters and other stakeholders. By the end of 2023, over 5,000 companies were reporting on the TCFD Recommendations with this financial lens, which were structured across the following disclosures:
- Governance: describing the organization's governance around climate‑related risks and opportunities, including the board's oversight and management's role in assessing and managing these issues.
- Strategy: focusing on the actual and potential impacts of climate‑related risks and opportunities on the organization's businesses, strategy and financial planning, often including scenario analysis to understand long‑term implications.
- Risk Management: explaining how the organization identifies, assesses and manages climate‑related risks, with the expectation to show how these processes are integrated into the overall risk management framework.
- Metrics and Targets: assessing and managing relevant climate‑related risks and opportunities. This includes greenhouse gas (GHG) emissions and other related performance indicators.
Whilst described as the four pillars, the TCFD expectation was for the four reporting areas to be connected and reliant on each other; for example, the scenario testing should inform the risk management.
IFRS leans heavily on this structure — for those familiar with TCFD reporting, this will be a significant advantage for ISSB Standards reporting.
IFRS S1 & IFRS S2 – The New Regime
The ISSB Standards are structured into a Foundational IFRS S1 and Climate‑Specific IFRS S2.
IFRS S1 focuses on general disclosure relating to sustainability financial information — it has guidance considerations for assessing the materiality of risks and opportunities, on value chains, connected information, commercially sensitive information and disaggregation of data — all with consideration as to what investors, creditors and underwriters might find most useful.
IFRS S2 focuses specifically on the climate‑related disclosures which should be provided, in conjunction with the general requirements of IFRS S1.
TCFD to IRFS S2 – What's the difference?
The IFRS are not a "copy and paste" of TCFD, and we set out the key additional or new disclosure requirements below.
TCFD Is Dead, Long Live ISSB – Are You Ready?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
