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Are companies ready to adopt the planned climate disclosure standard?
Climate change is one of the most pressing challenges facing the world. There are increasing calls from investors and society for companies to provide more transparent and consistent reporting both about how they are dealing with climate change, and about the impacts of their activities on the climate.
In March 2022, the newly-formed International Sustainability Standards Board (ISSB) issued a draft standard – ED IFRS S2 Climate-Related Disclosures (‘IFRS S2’) – for public comment. IFRS S2 aims to provide a global baseline for consistent and comparable climate-related disclosures. In doing so, it builds upon existing standards and frameworks including the TCFD Recommendations, while also adding a number of ‘new’ disclosure requirements. Along with IFRS S2, the ISSB also published ED IFRS S1 General Sustainability-Related Disclosures, which provides overarching requirements applying to investor-focused sustainability reporting, including the materiality judgement that should be applied and the location of disclosures.
Over the coming 2-3 years, jurisdictions around the world are expected to adopt the ISSB’s finalised standards. However, are companies ready for the change ahead?
Research from ACCA and the Adam Smith Business School at the Univeristy of Glasgow gauged the extent of ‘preparedness’ of companies to provide the disclosures proposed in IFRS S2, by reviewing current reporting practice from companies in two industries (construction materials and chemicals). These two industries face significant risks due to climate change, while also emitting high levels of greenhouse gas emissions from their operations. The analysis was based on the most recent corporate reporting packages produced by 100 companies: 50 of the largest emitters worldwide from each of the two industries.
Companies that have adopted the TCFD Recommendations are significantly better prepared to comply with the disclosure requirements in IFRS S2 than those that have not. Linked to this, where IFRS S2 introduces ‘new’ disclosure requirements that extend beyond the TCFD Recommendations, these see very low, even zero disclosure.
Low disclosure areas include:
- 0% of disclosure on climate-related risks and opportunities for which there is a significant risk that there will be a material adjustment to the carrying amounts of assets and liabilities(ED IFRS S2, para 14(b))
- 0% disclosure on processes for reviewing targets for companies’ indirect adaptation and mitigation efforts(ED IFRS S2, para 13(b)(iii))
- 0% disclosure on companies’ climate resilience in relation to existing financial resources and their ability to redeploy, repurpose, upgrade or decommission their assets (ED IFRS S2, para 15(a)(iii)1-2)
Moreover, disclosures are often scattered, duplicated, with little to no cross-referencing. The result is information overload that hinders, instead of enabling, transparency and comparability, with readers having to spend considerable time and effort to find the information that they need.
- About half of the disclosures are found in the annual report
- Over a third of the disclosures are duplicated across multiple reports
- Less than half of companies provided cross-references
- Companies in the chemicals industry exhibit a slightly higher degree of adherence to ED IFRS S2 than companies in the constructions materials industry, but observations across the two industries are broadly similar.
- The four reporting dimensions covered in ED IFRS S2 see varying levels of compliance:
- The Governance dimension sees the highest level of disclosure;
- The Metrics and Targets dimension comes second overall, but the high level of disclosure about targets masks very low disclosure about metrics;
- The Strategy dimension see less engagement with companies, with low to nil disclosure rates in relation to quantitative financial information and climate resilience;
- The Risk Management dimension also sees low levels of disclosure, particularly around how companies prioritise climate-related risks and opportunities, and the input parameters used
- Most companies already engage with various existing reporting frameworks: 77% claim to adopt the TCFD Recommendations.
- Only 7% of companies don’t reference any standard or framework, and they display much lower levels of disclosure.
- 55% of our sample companies do have some form of assurance for their disclosures
For the ISSB
1. Clarify ‘new’ disclosure requirements and provide additional guidance: they represent unchartered territory
2. Field-test costs on preparers of implementing ‘new’ disclosure requirements
3. Work with national/ regional authorities to align the location of disclosures
4. Focus on materiality and conciseness
For national and regional standard-setters and regulators
1. Where possible, align jurisdictional disclosure requirements to the TCFD Recommendations
2. Focus support on those companies that have not adopted TCFD Recommendations (including SMEs)
3. Work multilaterally to align location of disclosures
1. Get onboard with TCFD Recommendations
2. Engage as early as possible with the ISSB’s ‘new’ requirements; consider need for changes to processes, systems and resourcing
3. Focus on connecting climate-related disclosures and financial information
4. Rationalise and simplify the reporting package; make it as clear and concise as possible