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, in particular, by continuing the redeliberations of:

• The proposed requirements for an entity to disclose information on strategy and decision-making (including transition planning) and climate-related targets
• The proposed disclosures on the effects of significant 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 (current and anticipated effects)

Strategy and decision-making and climate-related targets (Agenda Paper 4A)

In its October meeting, the ISSB made the following tentative decisions relating to strategy and decision-making and climate-related targets, specifically on emission targets:

• To confirm the proposed requirement to disclose the intended use of carbon credits but to clarify that an entity’s net emissions target(s) and intended use of carbon credits should be disclosed separately from the entity’s gross emission reduction target(s)
• To use the term ‘carbon credit’ in the ED in the context of offsetting emissions in the transition plan
• To clarify the different types of targets—in particular, that, under the proposed requirements, a climate-related target is set by an entity to address aspects of its climate-related risks and opportunities and the role of emission targets in transitioning to a lower-carbon economy
• To clarify that an entity would be required to disclose any emission targets it has set (both net emission targets and gross emissions reduction targets) and those it is required to meet by local legislation

This paper continued the ISSB’s redeliberation of the proposed requirements in the ED relating to strategy and decision-making, including transition plans, and climate-related targets.

The ISSB was asked whether it agreed with the recommendations as laid out below.

Staff recommendation

The staff recommended that the ISSB confirm, but clarify, that an entity would be required to disclose:

• Information about its strategy and decision-making, including:
  • The effects of climate-related risks and opportunities on its overall strategy and decision-making
  • Its plans to transition towards a lower-carbon economy
• Information about its climate-related targets, including:
  • The climate-related targets it has set (and those it is required to meet by local or regional legislation and regulation), including information about greenhouse gas (GHG) emission targets
  • How it plans to achieve any such climate-related targets

To address requests from users of general purpose financial reporting, the staff further recommended that the ISSB introduce the following additional disclosure requirements:

In relation to an entity’s plans and actions for its transition towards a lower-carbon economy:

• Assumptions made, and dependencies identified, by the entity in developing its transition plan
• Implications for the entity’s transition plan if the assumptions are not met

In relation to an entity’s climate-related targets:

• The scope of the target, to enable users to understand whether the target applies to the entity in its entirety or to only a part of the entity (for example, specific business units or specific geographic regions)
• The following information regarding an entity’s emission targets:
• Which GHG (for example, carbon dioxide, methane) and which GHG emission scopes (ie Scope 1, Scope 2 and Scope 3) are covered by each of its emission targets
• To which ‘latest international agreement on climate change’ the entity is comparing its emission targets.

ISSB discussion

The ISSB first discussed the staff recommendation to confirm, but clarify, that an entity would be required to disclose information about its strategy and decision-making and about its climate-related targets.

ISSB members generally agreed with the staff recommendation. Through the discussion on this particular recommendation, ISSB members agreed that it is important to make it clear that the mandate of the ISSB is to require entities to provide sustainability-related disclosures that are useful to investors and it is not the ISSB’s role to dictate what entities should do in their climate strategy.

One ISSB member asked whether the proposals to require an entity to disclose the climate-related targets it has set, including those it is required to meet by local or regional legislation and regulation, would also cover nationally determined contributions. With the staff responding that it is the case, the ISSB member suggested to make it explicit as a reference.

Some ISSB members, including one of the Vice Chairs, suggested that the ISSB should provide illustrative examples, either as part of the standard or illustrative guidance, especially on the difference between climate-related targets and emission targets.

One ISSB member said that disclosures about any regional and national relevant commitments that affect entities are important from an investor perspective because they will affect the likelihood and the costs of their transition plan.

Overall, ISSB members expressed general support for the staff recommendations.

The ISSB then moved its discussion to the staff recommendation to introduce additional discsloure requirements.

There was also general support from ISSB members for this staff recommendation, but a number of ISSB members expressed concerns relating to some aspects of the staff recommendation, namely disclosures on implications if the assumptions used in an entity’s transition plan are not met, and to which international agreement an entity is comparing its emission targets.

With respect to the disclosures on the implications, one ISSB member observed that information about implications would go beyond information on uncertainties about an entity’s transition plan, and asked whether that was the intention of the staff. The staff responded that by implications they mean uncertainties and that implications play a role in terms of the sensitivity analysis around some of the uncertaines of the transition plan.

Some ISSB members, including one of the Vice Chairs, suggested that the recommended disclsoure on implications would be too broad to be useful. They said that such a disclosure would risk resulting in an entity provoding boilerplate disclosures. Furthermore, one of the Vice Chairs said that introducing such a dislocure requirement would be too priscriptive and that, even without it, information that is captured by it would still be dislclosed if it is relevant to understand an entity’s transition plan and risks related to the plan. Another ISSB member observed that it may be possible that users would have different opinions about whether an entity’s transition plan could be achieved given the inherent assumptions and some of the dependencies. The ISSB member further said that it might be enough to give users that context and let them draw their own implications about the likelihood of the transition plan, instead of having entities disclose implications if assumptions are not met.

With respect to the disclosures relating to a comparison of an entity’s transition plan to the latest international agreement, ISSB members asked the staff what the staff’s intent was for this disclosure requirement. The staff responded that with such a requirement an entity would explain how the entity’s transition plan compares to the Paris agreement target, for example, by explaining whether the entity’s plan is higher or lower relative to the Paris agreement and whether the entity is decarbonising slower or faster than a Paris pathway. A few ISSB members suggested that, instead of aksing entities to disclose which latest international agreement they compare their targets to, it would be more useful to aks them to provide information, such as whether they are considering to align their plan with the latest international agreement or whether and if so, how the latest international agreement influenced their plan.

One ISSB member suggested that there should be a requirement for entites to provide information about the costs associated with their transition plan. Another ISSB member said that it would be covered by current and anticipated financial effects disclosures.

ISSB decision

All of the 13 ISSB members supported the staff recommendations to confirm and clarify the proposed requirements for an entity to disclose how climate-related risks and opportunities affect its strategy and decision-making, its plans to transition towards a lower-carbon economy, and its climate-related targets.

With respect to the staff recommendations for introducing additional discosure requirements relating to an entity’s plans and actions for its transition towards a lower-carbon economy, all of the 13 ISSB members supported the recommendation to disclose assumptions made, and dependencies identified, by the entity in developing its transition plan and 12 of the 13 ISSB members did not support the recommendation to disclose implications for the entity’s transition plan if the assumptions are not met.

With respect to the staff recommendations for introducing additional discosure requirements relating to an entity’s climate-related targets, all of the 13 ISSB members supported the recommendation to disclose the scope of the target, GHG and emission scopes that are covered by the entity’s emission targets and which international agreement on climate change the entity is referencing when applying the requirements in IFRS S2. For the staff recommendation relating to the proposed requirement for an entity to compare its climate-related targets to the latest international agreement on climate change, the ISSB decided to ask the staff to bring back a paper taking into account the feedback provided at this meeting.