We explore the nuances of the TCFD recommendations, the new ISSB sustainability and climate-related standards, and their connectivity to existing financial reporting systems.
Demands for transparency on climate-related risks and opportunities continue to increase for businesses globally. Organisations naturally have different appetites for risk and take differing approaches to responsibility and reporting. However, most accept the need for published information to be accessible, informative, comparable, and – of course - not misleading.
One complication is the number of disclosure frameworks and standards that exist and continue to emerge as we attempt to navigate climate-related risks in a genuine way.
Of the existing frameworks, the recommendations from the Task Force for Climate-related Financial Disclosures (TCFD) have steadily grown in popularity and acceptance as the universal guide on climate-related disclosures. Meanwhile, a new, highly anticipated set of sustainability and climate-related standards is expected to be released by the International Sustainability Standards Board (ISSB) in the coming months. But will these ISSB standards complement or distract from the TCFD framework? And how do organisations navigate the most appropriate approach to take?
This is the first article in a series to explore the similarities and differences between the TCFD recommendations and the new ISSB sustainability and climate-related standards, along with a discussion of the connectivity with existing financial reporting systems.
First things first, what is the TCFD?
The Financial Stability Board (FSB) is an international body that monitors and makes recommendations to support financial authorities and international standard setters about the global financial system. It recognised the material risks climate change and the associated economic transition pose to businesses. and established the industry-led Task Force on Climate-related Financial Disclosures (TCFD). The Task Force aimed to "develop voluntary, consistent climate-related disclosures that would be useful to lenders, insurers, investors and other stakeholders in understanding material financial risks.”
The TCFD developed a series of recommendations which it released in 2017. The published ‘Recommendations of the TCFD’ include eleven recommended disclosures, grouped into four core elements, being:
- Risk management, and
- Metrics and targets.
Organisations can disclose as little as one recommendation or all eleven should it be appropriate for their organisation. According to the TCFD’s 2022 Status Report, disclosures have steadily increased over time, with the average number of disclosures per company rising from 1.4 in 2017 to 4.2 in 2021 (a growth rate of 32%).
The TCFD has also published detailed guidance to support preparers. This includes general guidance for all, plus more detailed guidance for particular sectors like banks, insurance, asset owners and managers, energy, transportation, materials and building, and agriculture, food or forest production.
Notably, to provide a more standardised approach for preparers and readers of climate-related disclosures, the TCFD recommendations seek to provide consistent categorisation of climate-related risks and opportunities. These categories provide a considered lens through which to view the broad range of potential impacts of climate change on the financial outcomes of an organisation. The key categories for assessment are:
- Transitional risks – such as policy & legal, technology, market and reputation
- Physical risks – both acute and chronic, and
- Opportunity – resource efficiency, energy source, products/services, markets and resilience.
Adopting the TCFD recommendations
Regulators have long been communicating that climate-related risk is a material, financial risk to businesses. It is incumbent upon boards and executives to appropriately manage that risk. Legal opinion prepared for The Centre for Policy Development and The Future Business Council as far back as 2016 established that, in accordance with the Corporations Act 2001 (Cth), “It is conceivable that directors who fail to consider “climate change risks” now could be found liable for breaching their duty of care and diligence in the future.”
The Australian Securities and Investment Commission (ASIC), the Australian Prudential Regulation Authority (APRA), and the Australian Securities Exchange (ASX), have been advocating for the adoption of TCFD recommendations within disclosure frameworks for quite some time. Other organisations have also referred to the TCFDs as a basis for their developments, including the International Sustainability Standards Board (ISSB).
So, what is the ISSB’s climate-related standard?
The ISSB has been working to produce two new sustainability-related standards, which are expected to be released imminently. They are:
- IFRS S1 - General requirements for disclosure of sustainability-related financial information
- IFRS S2 - Climate-related disclosures.
Acknowledging the thought and consideration given to the TCFD recommendations already, along with a preference for efficiency, the ISSB utilised the work of the TCFD in developing IFRS S2. Notably, the ISSB has structured IFRS S2 based on the TCFD recommendations’ four pillars of governance, strategy, risk management, and metrics & targets. Furthermore, the ISSB has published a side-by-side guide that steps through each TCFD recommendation and notes the differences that IFRS S2 requires, typically in the form of additional information or detail.
What does the release of IFRS S2 mean for the TCFD
The release of IFRS S2 will essentially consume the TCFD, with the ISSB having stated that it would “build upon the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).” Therefore, by complying with IFRS S2, organisations would expect to be aligning with the TCFD framework. Organisations already disclosing one or more TCFD recommendations, or considering disclosures for their business, will be on the front foot for the adoption of the ISSB climate-related standards.
How will the new sustainability standards fit in with existing reporting?
The good news is, the ISSB is a younger sibling to the long-established International Accounting Standards Board (IASB), and consideration has been given to the ongoing connectivity through the development phase.
In short, organisations should consider how they can provide a holistic picture including the risks and opportunities they face. Consideration, however, is required to ensure the format meets all stakeholder and regulator needs and all information is disclosed in the relevant component of the report.
Australian adoption of sustainability standards
Furthering the Australian regulators' calls to adopt TCFD recommendations, the Australian Government has recently engaged in two consultation processes relating to sustainability standards and climate-related disclosures. Interestingly, the climate-related consultation explicitly sought views on the level of alignment Australia should seek with ISSB and TCFD. The outcomes of the consultations are yet to be seen, but early indications show that the adoption of climate-related reporting under IFRS S2 is expected to be mandated for eligible organisations as early as the 2025 financial year. A recent update from the ISSB has indicated there will be some transitional relief for organisations reporting on scope 3 emissions, although it is yet to be confirmed what approach the Australian Government will take with respect to any phasing in of disclosure requirements.
Now is the time to prepare
Our free eLearning course lets you learn more about the TCFD history and framework.
To discuss what this might mean for your organisation, or the steps to mature your climate-related disclosure capability, please contact a member of our Sustainability team.