New guidance for users of climate-related financial disclosures includes three key developments

02/04/2024

In 2020, IEMA and the Institute and Faculty of Actuaries (IFoA) jointly wrote and published A User Guide to Climate-Related Financial Disclosures. This has now been updated to include three key developments in the field. First, the numbers of entities reporting climate-related financial disclosures has quadrupled. There are now more than 4,000 supporters of the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, from over 100 countries and with a combined market capitalisation of $27trn. Second, the International Sustainability Standards Board (ISSB) has published two sustainability disclosure standards: IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information, and IFRS S2 Climate-Related Disclosures. These incorporate and build on recommendations made in 2017 by the TCFD, and the TCFD has now effectively been ‘rolled into’ the International Financial Reporting Standards (IFRS) Foundation. Many jurisdictions around the world are expected to go on to endorse and incorporate these disclosures into requirements by way of domestic legislation or regulation. Meanwhile, the EU has adopted European Sustainability Reporting Standards (ESRS). Thankfully, emerging reporting standards are converging on a common set of themes and requirements, with ESRS, ISSB and the Global Reporting Initiative having a high degree of interoperability. This minimises the need for near-duplicative reporting. Third, the impacts of climate change are really beginning to hit home. Companies are increasingly aware that they must mitigate their impacts on the environment while ensuring that their own operations and those of their selected supply chains are resilient to shifting weather patterns. As risks become reality and climate impacts hit the balance sheets, organisations are no longer waiting for regulation or consumer demand to force change. Many are proactively looking at their transition options, and reporting on current baselines is a non-negotiable starting point. While plenty of guidance has been written for people preparing climate-related financial disclosures, very little was available to those who had to read, understand and use such reports. IEMA’s climate specialists and IFoA’s experts in financial risk management teamed up in 2020 and now again in 2024 to fill this gap, creating guidance on reading the disclosures with an informed and critical mindset, the ultimate goal being to make best practical use of them. The new guidance explains how readers should approach the disclosures, including defining their objectives, interpreting the content and establishing what any additional requirements might be. Disclosures are written to be all things to all people and it is up to individual stakeholders to decide what it is they need to understand, which will be framed by the decisions they will be making on the basis of the information given. Not all of the information will be of use to all of the readers. Once the user has established what they need to draw from the report, attention can turn to understanding whether the reporting entity’s strategy meets given requirements. This can be in terms of how it has identified risks and opportunities relating to climate change, how it is planning its transition and the consistency of the planned transition with the time horizons identified. The metrics and targets used by an organisation provide an insight into what it considers important enough to measure and work towards, and for this the guidance paper sets out pointers on both the big picture and the detail for a range of indicators. Although greenhouse gas emissions are an important part of impact assessment, there are other climate-related sustainability issues to consider, such as water availability, human rights, biodiversity and the benefits provided to humans by ecosystem services. Governance is an overarching consideration, encompassing strategy, risk management, and metrics and targets. The overall governance structure an organisation has in place for climate-related matters is key: without sound processes, any strategy will fall apart. See www.bit.ly/IEMA-IFoA-guide for the new edition of the guide