This paper continued the ISSB’s redeliberations of the proposed requirements in [draft] IFRS S2 Climate-related Disclosures for entities to disclose their resilience to climate-related changes, developments or uncertainties.

In its October meeting, the ISSB discussed several staff recommendations associated with these requirements. Specifically, the ISSB tentatively decided:

• To confirm that an entity is required to disclose the results of its analysis of climate resilience and the particular information set out in IFRS S2
• To confirm the disclosures that describe how the climate resilience analysis has been conducted
• To confirm the that an entity discloses whether it has used, among its scenarios, a scenario consistent with the latest international agreement on climate change. The ISSB thus confirmed:
  • That IFRS S2 will refer to the latest international agreement on climate change (i.e. the Paris Agreement will not be ‘hard coded’ into the requirements)
  • That entities are not required to use a specific scenario related to the latest international agreement on climate change or a 1.5C° scenario
• To add a requirement to disclose whether and how an entity uses climate-related scenario analysis to inform the identification of climate-related risks and opportunities.

Building on the ISSB’s prior tentative decisions, the staff prepared additional recommendations to address feedback received during the comment period.

Staff recommendations

The staff recommended that the ISSB address the feedback from respondents related to climate-related scenario analysis and alternative methods by taking the following steps to amend and enhance the proposals in [draft] IFRS S2:

• Require an entity to use climate-related scenario analysis to conduct its climate resilience assessment using a method that is commensurate with its size, capabilities and level of exposure to climate-related risk, and accordingly, remove references to ‘alternative methods’
• Develop application guidance, drawing on and referring to the TCFD guidance on climate-related scenario analysis, to assist entities in applying the requirement

The staff also recommended that the ISSB clarify key aspects of the requirements proposed in [draft] IFRS S2 by making the following targeted drafting amendments:

• Amend the definition of ‘climate resilience’ in Appendix A of IFRS S2 to clarify that an entity’s climate resilience includes both its strategic resilience and its operational resilience to uncertainties associated with climate change
• Clarify that, although entities are likely to perform climate-related scenario analysis as part of a multi-year strategic planning cycle, the relevant information is required to be disclosed annually
• Amend the terminology used in [draft] IFRS S2 to clarify that scenario analysis is a tool with multiple possible applications and the assessment of climate resilience is one of those applications

Finally, the staff recommended that the ISSB consider developing additional guidance to support preparers in selecting scenarios, including by providing guidance to consider the publicly available, off-the-shelf scenarios that are most relevant to their circumstances and most likely to support investor-focused disclosure.

ISSB discussion

ISSB members were generally supportive of the staff recommendations. The discussion focused on scenario analysis and ISSB members agreed that the ‘level’ of scenario analysis should be commensurate with the size, capabilities and level of exposure of an entity. Although one ISSB member said the scenario analysis should only be commensurate with the level of climate exposure of an entity and not its size and capabilities. High levels of climate exposure will almost always mean that the climate resilience information is material.

Some ISSB members commented on the three categories the staff suggested with regard to the ‘levels’ of scenario analysis that preparers could do. These are:

• Just beginning: Qualitative scenario narratives to help management explore the potential range of climate-related implications, using a more focused boundary such as a critical business unit or specific commodity inputs
• Gaining experience: Scenarios and associated analysis using quantitative information to illustrate potential pathways and outcomes, ideally for the entity and its operations as a whole
• Advanced experience: Greater rigour and sophistication in the use of data sets and mathematical models to support statistical analysis and quantitative, entity-specific outputs

One ISSB member said that these levels and the criteria for them should be clearly defined, especially for the ‘advanced experience’ and ‘gaining experience’ level, so that ‘just beginning’ can be a residual category. Another ISSB member said that it should be clear that the level is not a choice but depends on the facts and circumstances of the entity. If an entity’s climate exposure requires scenario analysis based on the ‘advanced experience’ level, it should be required to apply that level. One of the Vice Chairs clarified that ‘just beginning’ should be the minimum level required. An ISSB member, however, warned that the requirement to do scenario analysis may be a reason for jurisdictions not to adopt IFRS S2, especially as the requirements go further than that of TCFD.

The Chair highlighted that TCFD has rich guidance on how to conduct scenario analysis and welcomed the staff recommendation to develop application guidance based on TCFD material. One ISSB member added that there should also be illustrative examples of scenario analysis as that would be the best way for preparers to learn how to do it.

ISSB decision

All ISSB members voted in favour of the staff recommendations.