With the Task Force on Climate-related Financial Disclosures (TCFD) winding down, organizations are worried about yet another change in sustainability standards. However, the aim of the transition from a standalone framework to an integral part of the International Sustainability Standards Board (ISSB) standards is to prevent just that. The ISSB was formed to better align global regulations and help reduce both the reporting burden and the alphabet soup of sustainability acronyms. As organizations prepare for the transition, here’s a look at the TCFD and ISSB standards and how they connect.
What Is the TCFD?
The TCFD was established in 2015 by the Financial Stability Board (FSB), and is a framework of 11 recommendations “designed to help companies provide better information on climate-related matters to support market transparency and more informed capital allocation.”
The TCFD’s recommendations are based on four areas:
- Governance: How the organization is governed in relation to climate-related risks and opportunities
- Strategy: How climate-related risks and opportunities impact the organization’s strategy, financial planning, and business
- Risk Management: How the organization identifies, assesses, and manages climate-related risks
- Metrics and targets: The metrics and targets used to assess and manage climate-related risks and opportunities
The Task Force monitored the adoption of and alignment to the framework and released yearly status reports to demonstrate adoption across the globe. The TCFD was also a mandatory regulation for many firms and companies in the UK. However, in 2023, the FSB handed over the job of monitoring climate-related disclosure standards to the IFRS Foundation.
What Is the ISSB?
The International Sustainability Standards Board (ISSB) was established in 2021 by the IFRS Foundation, a public interest organization that develops accounting standards. The ISSB’s standards are based on Integrated Reporting, Climate Disclosure Standards Board (CDSB), Sustainability Accounting Standards Board (SASB), and TCFD. In June 2023, the ISSB published two new standards, IFRS S1 and IFRS S2, which became effective on January 1, 2024.
ISSB Standards and TCFD
The IFRS S1 requires the disclosure of material information for general sustainability-related risks and opportunities. The IFRS S2 relates specifically to climate-related risks and opportunities. Despite being two separate standards, it is crucial that they are applied together. This is because certain concepts established in the IFRS S1 are important for the application of IFRS S2, such as:
- The definition of the value chain
- The definition of what should be classified as ‘material’
- The definition of what constitutes as ‘commercially sensitive’ and does not need to be disclosed
The IFRS standards (S1 & S2) ‘fully incorporate’ the TCFD recommendations. Although the IFRS S1 and TCFD have a familiar structure, the content differs significantly. However, the TCFD recommendations can be seen as a foundation for IFRS S2 reporting — a study by ISS suggests that 23% of the TCFD and IFRS S2 requirements are the same. IFRS S2 provides much more granularity around reporting than the TCFD recommendations, which should give organizations clearer guidance to disclose in a more structured way.
Similar to the TCFD, the IFRS S1 and S2 standards are also used as a foundation for mandatory regulations in various jurisdictions around the world.
Differences between the IFRS 2 and the TCFD
While the IFRS S2 aligns with the TCFD, it is useful to identify the key differences and areas where this standard expands upon the TCFD the most. Even organizations with relatively mature TCFD disclosures will find they must collect more granular data to align with the IFRS S2. This may require a mapping exercise, but the hope is that once this has been done, the explicit and detailed requirements of the IFRS S2 should guide organizations in the future.
IFRS S2 typically requires more detailed and, in some cases, additional information compared to the TCFD. For instance, companies must now disclose the following:
- How the Board’s responsibilities for climate-related risks and opportunities are embedded in terms of reference, role descriptions, and related policies
- SASB-derived, industry-specific disclosure topics and metrics relevant to the company’s business model and activities
- Areas within the company’s business model and value chain where risks and opportunities are most concentrated
- Data sources used to identify risks and the extent of operations covered
- Processes for identifying, assessing, prioritizing, and monitoring opportunities
- Separate reporting of greenhouse gas (GHG) emissions for the consolidated accounting group as well as for associates, joint ventures, and unconsolidated subsidiaries or affiliates
- Any transition plans, including the company’s strategies to meet climate-related targets, the use of carbon credits, and whether targets have been validated by a third party
- For companies in asset management, banking, or insurance, additional disclosures on financed emissions are required
The IFRS provides a full comparison document of the IFRS S2 Disclosures with the TCFD Recommendations.
ESG Reporting with Novata
With new regulations on the horizon, getting started with ESG data collection now has never been more important for investors and companies to ensure compliance. The complete set of IFRS and TCFD metrics is available on the Novata platform to make it easy to collect data aligned with these frameworks. Plus, our in-house experts can guide firms in collecting, analyzing, and reporting on ESG data to meet the relevant requirements for their business. Learn more about how Novata can help.
