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  • Charlie Watson

TCFD vs IFRS S2 Reporting


This paper presents a high-level overview of the differences in reporting between the Taskforce for Climate-related Financial Disclosures (TCFD) Framework and the IFRS S2 standard.

The analysis uses both frameworks alongside the ISSB’s comparison document (IFRS, 2023) to highlight the major differences between IFRS S2 and TCFD. 


Both sustainability reporting methods use the same four pillar structure; Governance, Strategy, Risk and Metrics and Targets. 


Overall, the IFRS S2 standards require more detailed reporting than the TCFD Framework. However, the degree of difference in required disclosures is not evenly spread across the four pillars, with the Governance and Risk pillars being the most consistent across reporting, while both Strategy and Metrics and Targets have significant differences in the type and detail of disclosures required.


Governance

IFRS S2 and TCFD are broadly consistent across the governance pillar, with IFRS S2 requiring more detail around the governance body(s) or individual(s) responsibilities as well as any policies or mandates concerning governance.


Strategy

There is broad alignment between TCFD and IFRS 2 across Strategy. However, the increase in detail required for IFRS S2 reporting is significantly higher than for the Governance pillar. 


More detailed information on the identified climate-risks faced by the company, resilience to climate change, the type of climate risks and opportunities, and how these will impact the company across its entire value chain are required


There are also requirements to disclose the current and anticipated adaptation and mitigation methods of the company, climate transition plans, and how the company plans to resource these. 


Financial information detailing the expected financial impacts of climate-related risks and opportunities, as well as how the entity’s financial position will change over the short, medium and long term, for example through investments or divestments, funding and acquisitions, is also required.


For reporting on financial information, entities are expected to use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort’ (IFRS, 2023) and while circumstances are acknowledged where only qualitative information can be provided, there is a requirement that if quantitative data is not provided then the reporting company must explain why.


Furthermore, there is a requirement for a more in-depth description of the entity’s climate resilience, including reporting on any significant areas of uncertainty when assessing the entity’s climate resilience as well as disclosures around the availability of the entity’s financial resources to respond to predicted climate-related risks and opportunities and the effects of the entity’s current or planned investments on these.


Finally, the IFRS S2 standards require more detailed explanation of an entity’s climate-related scenarios, detailing the inputs used and key assumptions as detailed in the standard.


Risk

This is another pillar where there is broad alignment between IFRS S2 and TCFD however there are additional disclosures that are required for the S2 standards around the identification, assessment, prioritisation and monitoring of climate-related opportunities. 


For climate-related risks, S2 requires companies to provide more detailed information on the inputs, parameters and processes by which a company identifies climate-related risks and how it monitors these.


Metrics and Targets

The IFRS S2 standard requires additional information and disclosures across this pillar, compared to the TCFD framework.


Firstly, industry-based disclosure topics, as outlined in Industry-based guidance on Implementing IFRS S2, are required to be referred to and considered as part of the S2 standards whereas the TCFD framework doesn’t have such a requirement. 


Secondly, there is much greater depth and detail required around greenhouse gas emissions measuring, reporting, recording and target setting. Emissions must be reported according to the Greenhouse Gas Protocol unless they are reporting in a jurisdiction or on an exchange that requires a different method. Scope 1, 2 and 3 emissions must also be reported in absolute gross values and expressed as metric tonnes of CO2 equivalent. 


When reporting Scope 2 emissions, a location-based Scope 2 emissions value must be disclosed and for Scope 3 reporting the categories of Scope 3 being reported must be specified.


There are also requirements for disclosing the percentage of the business’ activities that are vulnerable to climate-related physical and transition risks as well as the percentage of the business' activities that are aligned with climate-related risks and opportunities.

If an internal carbon price is used, then this needs to be disclosed along with an explanation for how it is being applied.


With regards to target setting, the IFRS S2 standards once again require more detailed information on the objective of the target, the part of the entity to which the target applies and how the latest international agreement of climate change has informed the target


Details about how the entity has set the target and how and when the target is reviewed is also required, including whether the target and methodology are validated by a third party

Detailed descriptions of any emissions targets, along with whether they are absolute or intensity, which scopes and categories they cover, and which gases they include, are also required.


Finally, there are disclosures around the entity’s planned use of carbon credits including the amount of emissions being offset, whether the offsets have been verified or certified, the type of offset and whether it is a carbon reduction or removal.


In summary, there is broad overall agreement between the TCFD Framework and IFRS S2 standard reporting. It is clear that the IFRS standards have been developed using the same structure and central themes as the TCFD framework, indicating that companies that already report to the TCFD will be well situated to take on IFRS S2 reporting. The S2 standards are more data intensive, and have more specific and comprehensive reporting requirements than TCFD, especially across Strategy and Metrics and Targets. 


The UK government is planning to incorporate the IFRS S1 and S2 standards into the UK Sustainability Reporting Standards with only minor changes. An announcement is expected in July this year, with mandatory reporting expected to be phased in to allow companies time to report.


 


References


IFRS. (2023). Comparison: IFRS S2 Climate-related Disclosures with the TCFD Recommendations. London: IFRS Foundation. Retrieved from https://www.ifrs.org/content/dam/ifrs/supporting-implementation/ifrs-s2/ifrs-s2-comparison-tcfd-july2023.pdf

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