What are the requirements for disclosure of climate-related financial information?
The objective of IFRS S2 is to ‘require an entity to disclose information about its climate-related risks and opportunities that is useful to primary users of general-purpose financial reports in making decisions relating to providing resources to the entity’. This encompasses information about climate-related risks and opportunities that could reasonably expected to have an impact on cash flows, access to capital, or cost of capital over the short, medium, or long term, collectively referred to as ‘climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects’.11
This standard encompasses climate-related physical risks, climate-related transition risks, and climate-related opportunities that the entity has available.
Physical risks — ‘Physical risks can either be acute, driven by weather-related events such as storms, droughts, floods, heatwaves, etc., or they can be chronic, arising from longer-term shifts in climatic patterns including changes in precipitation and temperature that can result in sea level rise, reduced water availability, biodiversity loss, and changes in soil productivity’.12
Transition risks — ‘Tansition risks relate to efforts to transition to a lower-carbon economy, including policy, legal, regulatory, technological or market risks.’13
Financial impacts to the organisation from climate-related risks range from direct impacts to facilities, employee health and safety, or supply chains, to the indirect effects of shifting consumer preferences and technological innovations.
Core content
As noted earlier, and consistent with IFRS S1, the core content of IFRS S2 disclosure requirements follows the structure of the TCFD recommendations. Although this may result in some overlap of requirements between the two standards, especially with respect to governance and risk management processes, IFRS 2 advises entities to avoid unnecessary duplication of disclosures.
Governance — The objective of governance disclosures is to enable users to understand the entity’s governance processes, controls, and procedures to monitor and manage climate-related risks and opportunities. Governance disclosures encompass information about:
Governance body responsibilities, role descriptions, skills and competencies, and processes, including target setting and monitoring progress oversight.
Management’s role in the governance process, including supervision and oversight, and how controls and procedures are integrated with other internal functions14
Strategy — The objective of strategy disclosures is to enable users to understand the entity’s approach to managing climate-related risks and opportunities. Also, to assess the entity’s overall risk profile and its overall risk management processes. Strategy disclosures are intended to provide an understanding of:
Climate-related risks and opportunities that could affect the entity’s prospects and the current and anticipated effects on the entity’s business model or value chain; also, financial effects and the impact or risks and opportunities on decision-making and financial planning15
See below for further details about climate-resilience strategy considerations.
Risk management — The objective of risk management disclosures is to enable users to understand the processes the entity uses to identify, assess, prioritise, and monitor climate-related risks and opportunities. Disclosures to enable understanding of the entity’s risk profile and risk management process include:
Information about inputs, parameters, and sources of information the entity uses; whether and how scenario analysis is used, and whether qualitative factors, quantitative thresholds, or other criteria are used to assess the likelihood and magnitude of risk
The processes used to identify and monitor climate-related opportunities
The extent to which climate-related processes are integrated into the entity’s overall risk management process16
Metrics and targets — The objective of metrics and targets disclosures is to enable users to understand the entity’s performance in relation to climate-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation. Disclosures about the metrics and targets measure and monitor a climate-related risk or opportunity; and the company’s performance in relation to that climate-related risk or opportunity provide an understanding of the entity’s progress in relation to climate-related risks and disclosures include:
Industry-based metrics and cross-industry metric information (in particular, regarding greenhouse gases) and targets set by the entity17
See below for additional details about climate-related metrics and targets
Climate resilience
The climate resilience requirements in the core strategy component of IFRS S2 require the entity to ‘use climate-related scenario analysis to assess its climate resilience’18 This requirement does allow the use of an approach commensurate with circumstances (exposure to climate-related risks and opportunities; skills, capabilities and resources available) and enables it to consider all reasonable and supportable information available at the reporting date without undue cost or effort. It allows for disclosing a specific amount or range of values if quantitative disclosure is made. Specific areas of disclosure intended to enable the understanding of general-purpose financial report users include:19
Implications — To strategy, business model, and anticipated potential response to effects identified
Uncertainties — Significant areas of uncertainty in the assessment
Capacity to adjust or adapt — Over the short, medium, and long term, including:
Availability and flexibility of existing resources to respond to risks and take advantage of opportunities
Ability to redeploy, repurpose, upgrade, or decommission existing assets
Effect of current and planned investments in risk mitigation or adaptation approaches and opportunities20
Additional disclosure requirements include details about the timing of the scenario analysis, information used to conduct the analysis, and key assumptions made.
Climate-related metrics
The disclosure requirements in the core metrics and targets section of IFRS S2 relate primarily to cross-industry metrics of greenhouse gas emissions, metrics associated with physical and transition risks, carbon pricing, and remuneration. The following points summarise these requirements for climate-related metrics:21
Scope 1, scope 2 and scope 3 greenhouse gas emissions
Expressed as metric tons of CO2 equivalent, in accordance with the Greenhouse Gas Protocol
Scope 1 and scope 3 disclosures must be disaggregated between the consolidated accounting group and other investees, including associates, joint ventures, and unconsolidated subsidiaries.
Scope 3 emissions disclosures should encompass the 15 scope 3 categories. Additional information is required for category 15 — financed emissions.22
Climate-related physical risks — Amount and percentage of assets or business activities vulnerable23
Climate-related transition risks — Amount and percentage of assets or business activities vulnerable24
Climate-related opportunities — Amount and percentage of assets or business activities aligned with opportunities25
Capital deployment — Amount of capital expenditure financing or investment deployed towards climate-related risks and opportunities26
Internal carbon prices
Whether and how prices are used for decision-making
Price for each metric ton of greenhouse gas emissions used to assess cost of emissions27
Remuneration
Whether and how climate-related considerations are factored into remuneration
The percentage of executive remuneration in the current period linked to climate-related considerations28
Climate-related targets
The core metrics and targets section of IFRS S2 requires disclosing quantitative and qualitative climate-related targets an entity sets to monitor progress towards achieving its strategic goals, including greenhouse gas emissions targets. Required disclosures related to both general targets and greenhouse gas emissions targets include:29
General targets — Disclosure requirements include the metric used to set the target, the objective of the target (e.g., mitigation, adaptation, or compliance with science-based initiatives), information about various aspects of the target, and performance against the target.30
Greenhouse gas (GHG) emission targets
Which greenhouse gas emissions are covered; whether scope 1, scope 2 or scope 3 are covered; whether a net or gross target; and whether derived from a sectoral decarbonisation approach.
Planned use of carbon credits to achieve the target, the extent of reliance on carbon credits, the type of credit, whether nature-based or technological, and which schemes are involved in verifying or certifying the credits.31
Application guidance
Appendix A and B to IFRS S2 provide extensive application guidance with the same authority as other parts of the standard.32 Topics addressed by this guidance include:
Climate resilience — This guidance provides more detail for entities to:
Assess their circumstances based on their exposure to climate-related risks and circumstances and the skills, capabilities, and resources available
Determine the appropriate approach, considering all information available to the entity without undue cost or effort33
Greenhouse gas emissions — In addition to general information about reporting periods and measurement approaches, including the Greenhouse Gas Protocol, this section addresses:
Scope 2 greenhouse gas emissions — location-based, contractual arrangements
Scope 3 greenhouse gas emissions — consideration of all 15 categories, reassessment in the event of significant events or changes in value chain, measurement approach and verification, financed emissions in asset management, commercial banking, or insurance activities34
Cross-industry metric categories — Time horizons, concentration of risks, etc.35
Climate-related targets — Including characteristics, gross or net, use of carbon credits36
Other material
As with IFRS 1, there is also accompanying guidance, including illustrative guidance, illustrative examples and industry-based guidance on implementing IFRS S2.