Climate-related Disclosures

Date recorded:

Cover note and summary of redeliberations (Agenda Paper 4)

At this meeting, the ISSB continued redeliberating the proposals in the Exposure Draft (ED) IFRS S2 Climate-related Disclosure ([draft] S2), in particular, by continuing the redeliberations of:

  • Climate resilience—the proposed requirement in paragraph 15 of [draft] S2, focusing on how an entity would determine which approach to climate-related scenario analysis it should apply
  • Climate-related metrics—the proposed requirement in paragraph 21(a) of [draft] S2, focusing on whether and what relief the ISSB should provide relating to the compilation of an entity’s Scope 1 and Scope 2 GHG emissions information when there are differences in the reporting entity’s reporting period and that of entities in its value chain
  • Climate-related targets—the proposed requirement in paragraph 23(e) of [draft] S2, focusing on the requirement that an entity disclose how its target compares with those created in the latest international agreement on climate change
  • Current and anticipated effects—the proposed requirements in [draft] S1 and [draft] S2 that an entity disclose the effects of sustainability-related (and climate-related) risks and opportunities on an entity’s financial position, financial performance and cash flows for the reporting period and the anticipated effects over the short, medium and long term
  • Reasonable and supportable—the proposed requirements in [draft] S1 and [draft] S2 that involve a high level of outcome or measurement uncertainty, particularly requirements where forward-looking information is required to be considered or disclosed

The ISSB also redeliberated on topics led by the General Sustainability-related Disclosures project that have implications for [draft] S2. This included the proposed requirements in [draft] S1 and [draft] S2 related to opportunities, which raised concerns among stakeholders that those requirements may result in the disclosure of commercially sensitive information.

Using scenario analysis to assess climate resilience (Agenda Paper 4A)

This paper continued the ISSB’s redeliberations of the requirements proposed in paragraph 15 of [draft] S2 for entities to disclose their resilience to climate-related changes, developments or uncertainties.

In relation to this topic, at its supplementary meeting in November 2022, the ISSB decided:

  • To require an entity to assess its climate resilience using climate-related scenario analysis
  • That entities be required to apply a method of climate-related scenario analysis commensurate with their circumstances

The ISSB also asked the staff to do further work to clarify the criteria an entity would use to select a method of climate-related scenario analysis, including by developing application guidance for the requirements proposed in paragraph 15 of [draft] S2 based on guidance from the TCFD.

At this meeting, the ISSB discussed the staff’s recommended requirements that would enable an entity to determine the approach to climate-related scenario analysis the entity should apply.

Staff recommendation

The staff recommended that the ISSB require an entity to use an approach to climate-related scenario analysis that enables the entity to consider all reasonable and supportable information that is available without undue cost or effort, at the reporting date, including information about past events, current conditions and forecasts of future economic conditions, taking into consideration:

  • The degree of the entity’s exposure to climate-related risks and opportunities
  • The skills, capabilities and resources available to the entity to conduct climate-related scenario analysis

ISSB discussion

ISSB members were generally supportive of the staff recommendations.

A number of ISSB members said that the reasonable and supportable and without undue cost or effort notion is very important both in preparers’ perspectives and in assurers’ perspectives because it would provide them with comfort that the scenarios being selected would be appropriate. In contrast, one ISSB member expressed a concern over this notion, which he explained comes from expected difficulties associated with how an entity could demonstrate whether it has used all reasonable and supportable information.

One ISSB member observed that this notion would be used in S1, S2 and potentially future standards and suggested that it is important to use the notion in a consistent manner to minimise the risk that stakeholders have a different understanding or interpretation depending on where the notion is used in.

One ISSB member preferred the original approach where an entity would be required to apply an approach required for experienced preparers unless unable to do so, in which case the entity would apply the method one level lower and so on. He observed that the staff recommendation would work in the opposite direction.

One ISSB member asked whether resources available to an entity included not only internal resources but also external resources, such as TCFD guidance. The staff replied that that was the staff’s intention.

A number of ISSB members observed that the two figures included in the agenda paper would be very helpful in applying the proposed requirements and suggested that those figures should be included either in the finalised Standard itself or in the application guidance.

Some ISSB members, including the Chair and one of the Vice-Chairs, said that it is important to acknowledge that the choice an entity first makes in selecting an approach to climate-related scenario analysis is not a static decision and it is expected to change over time as the entity gains more experience and more methodologies develop. They suggested that this should be noted either in the finalised Standard or in the basis for conclusions.

ISSB decision

13 of 14 ISSB members agreed with the staff recommendation to require an entity to use an approach to climate-related scenario analysis that enables the entity to consider all reasonable and supportable information that is available without undue cost or effort, at the reporting date, including information about past events, current conditions and forecasts of future economic conditions.

All ISSB members agreed with the staff recommendation that the guidance should require an entity to consider:

  • The degree of the entity's exposure to climate-related risks and opportunities
  • The skills, capabilities and resources available to the entity to conduct climate-related scenario analysis

Greenhouse gas emissions—reporting period relief (Agenda Paper 4B)

At its December meeting, the ISSB tentatively decided to provide relief that allows an entity to measure its Scope 3 GHG emissions using information for reporting periods that are different from its own reporting period when that information arises from entities in its value chain with reporting periods that are different from that of the entity, on the condition that:

  • The entity uses the most recent data available without undue cost or effort to measure and disclose its GHG emissions
  • The length of the reporting periods is the same
  • The entity discloses the effects of significant events and changes in circumstances (relevant to its GHG emissions information) that occur between the reporting dates of the entities in its value chain and the date of the entity’s general purpose financial reporting

During the ISSB’s discussion on this matter in December, the question was raised whether a similar relief should be provided for an entity’s disclosure of Scope 1 and Scope 2 GHG emissions because these disclosures also may include GHG emission information from entities in the reporting entity’s value chain that have reporting periods that do not align with that of the reporting entity.

At this meeting, the ISSB discussed whether it should extend the relief described earlier to an entity’s disclosure of Scope 1 and Scope 2 GHG emissions.

Staff recommendation

The staff recommended that the ISSB provide relief that allows an entity to measure its GHG emissions using information for reporting periods that are different from the entity’s reporting period when that information arises from entities in its value chain with reporting periods that are different from that of the entity, on condition that:

  • The entity uses the most recent data available without undue cost or effort to measure and disclose its GHG emissions
  • The length of the reporting periods is the same
  • The entity discloses the effects of significant events and changes in circumstances (relevant to its GHG emissions information) that occur between the reporting dates of the entities in its value chain and the date of the entity’s general purpose financial reporting

ISSB discussion

One of the Vice-Chairs shared with other ISSB members that the staff had considered whether a similar relief relating to information from an entity’s value chain should be provided in [draft] S1 but decided not to do so because there had been a concern that providing such a broad relief without any specific context would be too big a decision for the ISSB to make at this time. She also emphasised that this does not mean that a similar relief would never be provided in S1 and any other future standards. A few ISSB members suggested that this should be explained in the Basis for Conclusions.

ISSB decision

All ISSB members agreed with the staff recommendation to extend the relief that the ISSB tentatively agreed on in December to an entity’s disclosure of Scope 1 and Scope 2 GHG emissions.

Climate-related targets—Latest international agreement on climate change (Agenda Paper 4C)

Background

In the initial Exposure Draft IFRS S2 Climate-related Disclosures ([draft] S2), paragraph 23(e) proposes that entities disclose how their climate-related targets compare with those created in the latest international agreement on climate change. Feedback was received that this wording caused two common interpretations of the disclosure requirement:

  • Entities provide a yes-or-no disclosure of whether the entity’s climate-related targets compare with the latest international agreement on climate change
  • Entities provide a qualitative or quantitative disclosure on the extent to which their climate-related targets compare with the latest international agreement on climate change, for example, an entity may compare their emissions reductions target to the Paris Agreement

To address this inconsistency in interpretation the staff analysed stakeholder feedback within comment letters and surveys to provide two alternative approaches for ISSB members to consider.

Summary of proposed approaches

Approach 1: Amend the proposal in paragraph 23(e) to require an entity to disclose how the latest international agreement on climate change has informed any climate-related targets it has set.

For example, an entity may disclose how the Paris Agreement has informed their climate-related targets including the amount of the emissions reduction target, the GHG emissions scopes included in the target and the timeframe over which the target applies.

The staff believe this approach will allow users of general-purpose financial reporting to understand how the entity is thinking about its exposure to risks and opportunities associated with the latest international agreements and/or associated jurisdictional Nationally Determined Contribution (NDC) measures. This approach will also enable users to understand whether the entity’s actions align with the latest international agreements. Further, the staff believe this approach is closer to the proposed objectives stated in [draft] S2, specifically, that disclosures should allow users ‘to evaluate the entity’s ability to adapt its planning, business model and operations to significant climate-related risks and opportunities’.

Based on this analysis, the staff recommended the ISSB use Approach 1.

Approach 2: Confirm the requirement as proposed in paragraph 23(e) of [draft] S2, and provide additional guidance—for example, illustrative examples—of this disclosure requirement.

This approach would not change the current wording of paragraph 23(e); however, it would provide additional guidance for preparers. The staff noted that although illustrative examples will help preparers understand the Standard, these examples may be difficult to develop in a way that is not too general nor too specific to translate to other contexts or circumstances. Further, entities are not required to use illustrative examples when preparing their disclosures, which may limit the usefulness of this approach.

The staff also raised concerns that this approach would not address questions related to how an entity would ‘compare’ all climate-related targets to the Paris Agreement, which encompasses a range of ambition from curbing global temperature rise to well below 2°C above pre-industrial levels to pursuing efforts to limit warming to 1.5°C.

Staff recommendation

Based on the analysis, the staff did not recommend the ISSB use Approach 2. Instead, they recommended amending [draft] S2 paragraph 23(e) consistent with Approach 1.

ISSB discussion

The staff began by clarifying that the latest international agreement, referred to within [draft] S2 paragraph 23(e), does not only refer to the Paris Agreement but could also encompass the NDCs or other related agreements.

Several ISSB members commented on whether additional guidance would be provided to preparers regardless of which approach is chosen. The staff responded that additional educational materials to inform the application of this standard could be considered if necessary and selecting Approach 1 does not rule out providing these supplemental materials.

Another ISSB member clarified that the ISSB does not intend to call out entities who do not create targets informed by the latest international agreement on climate change with this disclosure requirement, the intention is to improve comparability for those who are using international agreements to inform their target setting. 

One of the Vice-Chairs recommended that the staff include discussion on what the ISSB is attempting to achieve with this disclosure to increase the consistency of interpretation of this requirement.

An ISSB member questioned the appropriateness of the word “political” which is used to describe the latest consensus on limiting climate change as this may affect the interpretation of the standard, given varying political views. The staff responded that this was a poor choice of words, and that they were trying to convey the regulatory and policy making implications within jurisdictions, not the political climate; wording choices in future will be more conscious to avoid similar misinterpretation.

Other ISSB members asked the staff to include additional documentation on what a “climate target” refers to within the standard and asked the staff to ensure the term “international agreement” is defined as more than just an agreement on emissions in order to ‘future proof’ this definition.

ISSB decision

All ISSB members voted in favour of using Approach 1 to adjust [draft] S2 paragraph 23(e) with the following additions: the staff will clarify that the latest international agreement does not only refer to the Paris Agreement but could also include NDCs or other similar agreements and the staff will add discussion on what kind of understanding this disclosure paragraph is trying to elicit from prepares in order to increase clarity.

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