Climate-Related Disclosures. Unpacking the ISSB Standard and TCFD
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The world of climate-related disclosures is full of acronyms, from TCFD (Task Force on Climate-Related Financial Disclosures) to CDSB (Climate Disclosure Standards Board) to GRI (Global Reporting Initiative). Each of these acronyms represents different, and sometimes competing standards, companies have to keep up with.
A new entrant was recently added to the existing alphabet soup: ISSB (International Sustainability Standards Board).
Rather than muddy the waters, the ISSB’s draft climate-related disclosure standards will actually help to clarify and consolidate existing standards. In this article, we explore the ISSB’s new standards and how they relate to existing standards, particularly the TCFD, which is currently the global best practice when it comes to climate-related disclosures.
Introduction to climate-related disclosures and the ISSB
The ISSB was established at the 2021 COP26 summit in Glasgow to develop global baseline standards for sustainability disclosures for capital markets. It’s operating under the oversight of the IFRS Foundation, which sets global best practice financial reporting standards.
In March 2022, the ISSB released two proposed standards:
- Climate-related disclosure requirements
- General sustainability-related disclosure requirements
This article focuses on the ISSB’s climate-related disclosure requirements. These require a company to disclose information to enable investors to assess the impact of climate-related risks and opportunities on its enterprise value.
A consultation period on the new standards closed in July 2022, and the ISSB is aiming to issue the final standards by the end of 2022. *Update, the new standards were released in 2023.
What will companies need to disclose under the ISSB’s climate-related disclosure requirements?
The ISSB’s proposed standards describe the requirements for identifying, measuring and disclosing climate-related risks and opportunities under four categories:
- Governance – the governance processes, controls and procedures an entity uses to monitor and manage climate-related risks and opportunities
- Strategy – the climate-related risks and opportunities that could enhance, threaten or change an entity’s business model and strategy over the short, medium and long term
- Risk Management – how climate-related risks and opportunities are identified, assessed, managed and mitigated by an entity
- Metrics and Targets – the metrics and targets used to manage and monitor an entity’s performance in relation to climate-related risks and opportunities
The objective of these disclosures is to provide information to capital markets on a company’s exposure to climate-related risks and opportunities. In doing so, investors will be better able to assess its future cash flows and accordingly its enterprise value.
How do the ISSB climate-related disclosure requirements relate to the TCFD?
The TCFD is the current global best practice standard for disclosing climate-related risks and opportunities.
Those who are familiar with the TCFD will note that the four categories to report under in the ISSB’s proposed requirements are the same as those in the TCFD. The ISSB’s climate-related disclosure requirements are generally consistent with the TCFD’s recommendations – they simply extend them by requiring additional or more granular information. This means if a company complies with the ISSB’s climate-related disclosure requirements, it will also comply with the TCFD’s recommendations.
What can companies do to prepare?
The ISSB’s requirements are likely to become the new global best practice standard for climate-related disclosures. Capital markets will expect such disclosures to assist in their assessment of enterprise value. Accordingly, companies should commence preparations for being able to report in line with the ISSB’s requirements following their expected implementation in late 2022.
Companies that are not yet reporting in line with the TCFD, should commence benchmarking their practices against the recommendations of the TCFD.
This may include steps such as:
- Governance – establishing structure and processes to ensure board and management oversight of climate-related risks and opportunities
- Strategy – assessing climate-related risks and opportunities the company faces, the impact of these on its business, strategy and financial planning, and performing scenario analysis to determine the resilience of the company’s strategy
- Risk Management – developing processes for identifying and assessing climate-related risks, and integrating these processes into a company’s overall risk management
- Metrics and Targets – implementing metrics to assess climate-related risks and opportunities, disclosing greenhouse gas emissions and setting targets to manage the risks and opportunities identified
Where a company already reports in line with the TCFD or has implemented some or all of its recommendations, gaps and areas where practices can be improved should be identified, and plans for enhancing climate risk reporting should be developed.
Finally, a company should collect detailed data relating to the steps it has taken. This should include the metrics and targets it has implemented in relation to climate risks and opportunities. This data will be necessary when a company then commences reporting in line with the ISSB’s climate-related disclosure requirements.
Don’t wait to start analysing your climate-related disclosures
The level of detail required in climate-related disclosures is continuing to increase as more and more companies and investors realise the wide-ranging impact that climate change will have.
The ISSB’s draft climate-related disclosure requirements mirror this trend, requiring more additional and more granular information than the TCFD. It is crucial for businesses to implement steps to comply with such standards to meet the expectations of capital markets.