New IFRS Document Outlines Key Differences between IFRS S2 with the TCFD Recommendations

Authored By Celia Le Lievre, Senior Regulatory Compliance Specialist, Compliance & Risks

On 24 July, the IFRS Foundation published an educational document to compare the requirements of the global sustainability reporting standard IFRS S2 Climate-related Disclosures and recommendations of Task Force on Climate-related Financial Disclosures (TCFD).

IFRS S1 and IFRS S2 were published on 26 June 2023 by the IFRS Foundation’s International Sustainability Standard Board. These standards serve as a comprehensive global baseline of sustainability disclosures for the capital markets. IFRS S2 sets out specific climate-related disclosures and is designed to be used in conjunction with IFRS S1. This information is intended to help investors make informed decisions about providing financial resources to private and public entities. IFRS S2 must be used conjointly with IFRS S1.

Comparison of IFRS S2 with the TCFD Recommendations

The IFRS Foundation explains that the requirements in IFRS S2 are largely consistent with the four core recommendations and eleven recommended disclosures published by the TCFD. The alignment of IFRS S2 with the TCFD recommendations aims to facilitate interoperability for companies applying the TCFD recommendations. According to IFRS, companies that already apply the ISSB Standards “will meet the TCFD recommendations and so do not need to apply the TCFD recommendations in addition to the ISSB Standards”.

IFRS S2 differs from the TCFD recommendations on certain recommended disclosures by requiring more detailed information from companies. The IFRS Foundation explains that IFRS S2 contains more stringent requirements for companies “to disclose industry-based metrics, to disclose information about their planned use of carbon credits to achieve their net emissions targets and to disclose additional information about their financed emissions”.

For example, with respect to the TCFD recommended disclosure (b), which requires companies to describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning, IFRS S2 also requires companies to disclose transition plans and to explain how the company plans to achieve its climate-related targets.

Furthermore, for the same recommended disclosure, IFRS S2 also sets out criteria for where qualitative and quantitative information must be provided to support disclosures about the current and anticipated effects on a company’s financial position, financial performance and cash flows. When preparing disclosures on the anticipated financial effects, IFRS S2 also requires a company to use “all reasonable and supportable information that is available at the reporting date without undue cost or effort”. This notion is defined in IFRS S1. Generally speaking, this means that companies do not need to undertake exhaustive search of information. They should rather consider information that is readily available to them at the time of reporting. 

Another key difference relates to the board’s oversight of climate-related risks and opportunities (TCFD recommended disclosure a). IFRS S2 requires more information about “how the governance body(s)’ or individual(s)’ responsibilities for climate-related risks and opportunities are reflected in the terms of reference, mandates, role descriptions and other related policies applicable to that body(s) or individual(s)“. 

The TCFD recommendations (c) recommends that organizations “describe the resilience of their strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario and, where relevant to the organization, scenarios consistent with increased physical climate-related risks“. Here, IFRS S2 contains additional information requirements regarding resiliency on a company’s capacity to adjust and adapt its own strategy and business model to climate risks over time and on how its climate-related scenario was carried out. IFRS S2 does not prescribe any climate scenario analysis. However, in its supporting guidance, IFRS S2 requires companies to use a scenario analysis that is “commensurate” with the entity’s circumstances (see paragraphs B1-B18).

A detailed comparison table can be found on the IFRS Foundation’s website.

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