At a Glance
- As the financial sector faces the challenges and opportunities of climate change, the ISSB has taken on the responsibility for overseeing climate-related disclosures previously managed by the TCFD, in order to simplify reporting for financial institutions with globally recognised guidelines.
- Enhanced disclosure requirements under IFRS S1 and S2 demand greater transparency and comprehensive reporting from FIs, giving a competitive advantage to those that embrace change.
- FIs lagging in climate action face increasing pressure to adapt, and transitioning to IFRS S1 and S2 is not only mandatory, but a critical step towards a sustainable future.
The financial sector finds itself at a critical juncture, marked by both unprecedented challenges and abundant opportunities in the wake of climate change. For financial institutions (FIs), the imperative to comprehend and proactively address these challenges, while harnessing the opportunities, has never been more pronounced.
Over the past decade, the Task Force on Climate-related Financial Disclosures (TCFD) framework has emerged as a potent instrument for FIs to navigate the intricate terrain of climate-related risks and opportunities. Conceived in response to the escalating demand for consistent and comprehensive climate-related financial disclosures, the TCFD framework furnishes FIs with a structured approach to assess and report on the ramifications of climate change. Comprising 11 recommended disclosures, the TCFD framework encompasses a broad spectrum of climate-related facets, motivating FIs to contemplate climate risks and opportunities within the spectrum of their financial activities. By doing so, FIs are poised to make judicious investment decisions and effectively gauge climate-related risks.
However, the International Sustainability Standards Board (ISSB) of the International Financial Reporting Standard (IFRS) Foundation has now assumed the responsibility of overseeing climate-related disclosures previously managed by the TCFD. The IFRS Foundation elucidates that the stipulations in IFRS Sustainability disclosure standards closely align with the four core recommendations and 11 recommended disclosures issued by the TCFD.
This alignment is designed to foster interoperability for companies adhering to the TCFD recommendations. The ISSB’s decisive action aims to simplify the landscape of climate reporting for FIs, fostering uniformity across sectors. It underscores the significance of TCFD recommendations by embedding them within its standards, thus streamlining reporting endeavours for FIs and aligning them with globally acknowledged guidelines. Notably, the Financial Stability Board (FSB) recently announced that companies adhering to IFRS S1 and IFRS S2 will satisfy the TCFD recommendations, given their full incorporation into the ISSB Standards.
IFRS and TCFD: Harmonising Standards for Climate Reporting by FIs
The TCFD framework has garnered widespread acclaim and support within the financial industry. Numerous countries, including the United Kingdom, New Zealand, and Canada, have already mandated TCFD-aligned reporting for large corporations and FIs. Many others are guiding businesses and FIs toward adopting these standards through regulatory recommendations. This drive toward standardised reporting underscores the significance of transparency and consistency in climate-related disclosures.
IFRS incorporates the TCFD recommendations into its foundational requirements, fostering harmonisation and eliminating redundancy. Companies adhering to ISSB Standards will automatically meet TCFD requirements, simplifying the reporting process and providing a clear roadmap for FIs to communicate climate-related risks and opportunities. However, for institutions just embarking on this journey, aligning with IFRS S2 in the fiscal year 2024-2025, need to follow a steeper curve of transition. This necessitates a transformation approach for integration of climate action requirements across their business operations and disclosure of pertinent information.
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Transitioning from TCFD to IFRS S1 & S2: A Closer Look
IFRS S1, known as “General Requirements for Disclosure of Sustainability-related Financial Information,” lays down fundamental principles for disclosing sustainability-related risks and opportunities. IFRS S1 establishes the general framework for disclosing sustainability-related information and provides specific guidelines for presenting a comprehensive set of sustainability-related financial disclosures. It outlines rules for aggregating and disaggregating information, which also apply to disclosures mandated by IFRS S2.
Building on the foundation laid by IFRS S1, IFRS S2 known as “Climate-related Disclosures” introduces supplementary requirements specifically tailored to focus on climate-related risks and opportunities. The core content requirements in IFRS S2, including associated application guidance, and the TCFD’s core recommendations, recommended disclosures, and guidance are similar but delve deeper. Here’s a closer look at how IFRS S2 compares with the TCFD’s 11 recommended disclosures:
- IFRS S2 broadly aligns with TCFD Governance Recommended Disclosure a) to
Describe the board’s oversight of climate-related risks and opportunities. However, IFRS S2 requires more detailed information, such as illustrating how governance body responsibilities for climate-related risks and opportunities are reflected in related policies. - IFRS S2 closely aligns with TCFD Governance Recommended Disclosure b) to
Describe management’s role in assessing and managing climate-related risks and opportunities. - IFRS S2 is generally consistent with TCFD Strategy Recommended Disclosure a) to
Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term, but goes further by incorporating industry-based disclosure topics and demanding more detailed information on the concentration of risks and opportunities in the company’s business model and value chain. - IFRS S2 aligns with TCFD Strategy Recommended Disclosure b) to
Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning, but requires more detailed information. This includes disclosure of transition plans and the methodology for achieving climate-related targets. IFRS S2 also sets criteria for when quantitative and qualitative information is necessary, allowing qualitative disclosure under certain circumstances. - IFRS S2 broadly aligns with TCFD Strategy Recommended Disclosure c) to
Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario, but does not specify the scenarios for climate-related scenario analysis. IFRS S2 mandates additional information on areas of uncertainty, a company’s adaptability, and the process and timing of scenario analysis. - IFRS S2 broadly aligns with TCFD Risk Management Recommended Disclosure a) to
Describe the organisation’s processes for identifying and assessing climate-related risks but requires more detailed information. This includes disclosing input parameters, the use of climate-related scenario analysis, and changes in risk identification processes compared to the prior reporting period. - IFRS S2 closely aligns with TCFD Risk Management Recommended Disclosure b) to
Describe the organisation’s processes for managing climate-related risks and focuses on providing information about processes related to risk management. - IFRS S2 is consistent with TCFD Risk Management Recommended Disclosure c) to
Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management, but explicitly requires additional disclosures regarding the integration of processes for managing opportunities into the company’s overall risk management. - IFRS S2 requires the same cross-industry metrics as the TCFD Metrics and Targets Recommended Disclosure a) to
Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process. It also mandates industry-based metrics relevant to the company’s business model and activities. - IFRS S2 broadly aligns with TCFD Metrics and Targets Recommended Disclosure b) to
Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks, but demands additional disclosures related to GHG emissions. This includes separate disclosures for Scope 1 and Scope 2 GHG emissions, details on Scope 2 GHG emissions, Scope 3 GHG emissions, and information on measurement approaches and assumptions. - IFRS S2 is generally consistent with TCFD Metrics and Targets Recommended Disclosure c) to
Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets, but includes more detailed information, such as disclosures on how international agreements on climate change inform targets and whether targets have been validated by third parties.
Transition from TCFD to IFRS S1 and S2 brings about notable changes and enhancements in climate-related disclosures for companies. While IFRS S2 maintains alignment with TCFD principles, it introduces detailed requirements that demand a more comprehensive and transparent approach to reporting climate-related risks and opportunities.
FIs having existing alignment with TCFD and embracing these changes are better equipped to navigate the evolving landscape of sustainability reporting. This existing preparedness contributes to a more sustainable future in comparison to the ones who have not prioritised TCFD considerations in their businesses yet. It is crucial to acknowledge that numerous FIs remain vulnerable to these upcoming disclosure requirements and face the imperative to expedite their climate action efforts with utmost urgency. They must adopt a transformative approach to ensure compliance and harness the benefits of enhanced climate action.
How Renoir can help
At Renoir Consulting, we stand as industry leaders with deep-rooted expertise in ESG (Environmental, Social, and Governance) within the financial sector. Our mission is to empower organisations during this pivotal transition. We offer ready-to-use tools, frameworks and a set of robust processes designed to facilitate the seamless implementation of this transformative journey across any level of organisational readiness. Our endeavours ensure that our FI clients not only meet the evolving standards but also excel in their commitment to sustainability and maximise value from this transition.
Collaborative efforts, such as those offered by Renoir, play a pivotal role in helping FIs successfully implement and benefit from these standards, driving positive change for a sustainable future.
Do you want to adopt IFRS and TCFD? We can support you throughout the process.
