Choosing a framework for reporting climate risks

With an absence of globally accepted sustainability reporting standards until now, many entities have prepared disclosures regarding climate risk using the Task Force on Climate-related Financial Disclosures (TCFD).

Given the release of the International Sustainability Reporting Standard IFRS S2 Climate-related Disclosures on 26 June 2023 – what now? Should entities discard previous work and focus only on IFRS S2 in future? The short answer is ‘no’, but read on to find out why.

The International Sustainability Standards Board (ISSB) recently published a comparison between the requirements of IFRS S2 and the TCFD recommendations. Both IFRS S2 and TCFD are structured around the same following four core elements, i.e. Governance, Strategy, Risk management, Metrics and targets, but are laid out differently:

TCFD - For each of the four core elements, there are two or three recommended disclosures, supported by guidance for all sectors, and supplemental guidance for certain sectors
IFRS S2 - Contains a list of detailed disclosures and illustrative guidance.

So, the two are similar but different.

TCFD is a good stepping stone to IFRS S2

Although the terminology may differ, the good news is that IFRS S2 and TCFD are generally consistent. Therefore, using the TCFD recommendations is a good stepping stone to applying IFRS S2 when it becomes mandatory in the future in Australia. So Australian entities, particularly listed entities already applying TCFD, need not feel that any prior climate reporting has been a waste of time and effort.

IFRS S2 goes further than TCFD recommendations

The bad news, however, is that IFRS S2 contains additional disclosures not contained in TCFD. Some of these include (as referenced in red bold font in the comparison document):

Core element	Additional IFRS S2 disclosures
Strategy	Entities must refer to and consider industry-based topics in the industry-based guidance when identifying climate-related risks and opportunities.
Strategy	Entities must disclose quantitative and qualitative information about the current and anticipated effects of climate-related risks and opportunities on the entity’s financial position, financial performance and cash flows (quantitative information is not mandatory for TCFD). However, entities may omit quantitative information if either: They cannot separately identify the effects of the risk or opportunity The level of management uncertainty involved in estimating the effects is too high, so quantitative information would not be useful.
Risk management	In addition to disclosing information about climate-related risks, entities must also disclose information about climate-related opportunities.
Metrics and targets	Entities must disclose industry-based metrics relevant to their business model and activities.
	Entities must disclose more information regarding Scope 1, 2 and 3 emissions, including financed emissions.
	Entities must disclose how the latest international agreements on climate change have informed their chosen targets, and whether the target has been validated by a third party.
	Entities must disclose additional information about the planned use of carbon credits to achieve their net GHG emissions target.

Entities applying TCFD recommendations must include these additional disclosures when IFRS S2 becomes mandatory in Australia.

More information

Our TCFD disclosure checklist can also assist in your journey towards climate-risk reporting.

How BDO can help

No matter where you are on your sustainability journey, our national team of sustainability experts can help with:

Sustainability reporting
Developing your sustainability strategy
Carbon footprint calculations or mandatory climate-related disclosures
Carbon emission reduction strategies
Assurance over your carbon footprint or sustainability reporting.