The TPT Disclosure Framework in the Global Landscape
There is a growing global momentum surrounding private sector transition plans. The TPT is actively supporting efforts to build consensus and avoid the proliferation of different standards.
There is a growing global momentum surrounding private sector transition plans and their vital role in supporting the global shift to net zero, both in the financial sector and in the real economy. This year has witnessed significant movement towards the emergence of regulatory norms for what constitutes a credible, high-quality transition plan. . The TPT is actively supporting efforts to build international consensus on this topic and to avoid fragmentation of standards.
Progress towards global sustainability reporting standards through the TCFD and ISSB
The Task Force on Climate-Related Financial Disclosures (TCFD) created Recommendations in 2017 to guide entities in disclosing how they are considering and responding to climate-related risks and opportunities. The International Financial Reporting Standards (IFRS) Foundation’s board for sustainability disclosures – the International Sustainability Standards Board (ISSB) – emerged in 2021 as a new international standard-setter for sustainability reporting. In June 2023 the ISSB published IFRS S1 General Requirements for Disclosures of Sustainability-related Financial Information (IFRS S1) and IFRS 2 for Climate-related Disclosures (IFRS S2), both of which incorporated the TCFD’s recommendations. The TCFD’s market monitoring activities will pass to the ISSB from 2024.
The TPT Framework is designed to be consistent with and build on the wider climate-related disclosure requirements incorporated in both the TCFD and the IFRS S1 and S2 standards. To support preparers through the process of integrating content from their transition plan into disclosures aligned with TCFD and recommendations and the ISSB Standards, the TPT has developed two technical mappings:
IFRS S2 - TPT
Technical mapping: sets out the main provision in IFRS S2 that contain disclosure requirements relevant to transition planning. For each provision, the TPT has identified the Recommendations in the TPT Framework that an entity may wish to consider as a source of additional guidance when making its disclosures.
The Transition Plan Disclosure Landscape
The TPT has ensured its outputs align with other frameworks and standards. In particular, the TPT draws on the components identified by GFANZ of a good transition plan, ensuring the outputs of both initiatives lock together to form an integrated approach to transition planning. The TPT also complement, and builds on, the ISSB Standards.
These frameworks and requirements come together in the transition plan disclosures landscape, set out in the below figure. The figure shows how preparers of transition plans may draw on the resources of the TPT and GFANZ to support reporting against the ISSB Standards. Preparers may benefit from the additional depth and detail provided by the various pieces of guidance.
Note: TPT sector guidance for the seven individual sectors has not yet been released. Drafts will be published for consultation in November 2023.
Summary of key global sustainability reporting developments
The tables below outline key global sustainability reporting developments, highlighting any transition plan disclosure requirements and, specifically, the interaction with the TPT Disclosure Framework.
The TCFD – established by the Financial Stability Board (FSB) – developed a framework for organizations to embed and report their consideration of the financial impacts of climate change.
TCFD recommends 11 disclosures across four areas (Governance, Strategy, Risk Management and Metrics and Targets). Key features of the recommendations are that they are:
- Adoptable by all organizations
- Included in financial filings
- Designed to solicit decision-useful, forward-looking information on financial impacts
Strong focus on risks and opportunities related to transition to a lower-carbon economy
In June 2023, the International Sustainability Standards Board (ISSB) issued the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and the IFRS S2 Climate-related Disclosures standards. The objective of these standards is to create a global baseline of sustainability disclosures, which meet the information needs of investors and enable companies to provide comprehensive sustainability information to global capital markets. The ISSB also aims to facilitate interoperability with disclosures that are jurisdiction-specific and/or aimed at broader stakeholder groups.
The ISSB standards are based on the TCFD recommendations. The IFRS Foundation has now taken on responsibilities for monitoring the progress on companies’ climate-related disclosures from the TCFD.
The CSRD is an EU Directive that requires entities that meet certain criteria to report on sustainability information in a dedicated section within its management report.
The information will be subject to mandatory limited assurance and mandatory digital tagging.
The sustainability reporting required under the CSRD will start replacing the Non-Financial Reporting Directive’s (NFRD) requirements for the preparation of non-financial information for periods beginning on or after 1 January 2024.
The CSRD requires the application of the European Sustainability Reporting Standards (ESRS) for entities within its scope.
One of the central pillars of the CSRD is the requirement for in-scope companies to produce disclosures in accordance with the European Sustainability Reporting Standards (ESRS). Companies within the scope of the CSRD are required to disclose (in accordance with the ESRS):
- Information on sustainability matters
- Information necessary to understand:
- The company’s impacts on sustainability matters
- How sustainability matters affect the company’s performance, position, and development
The first set of sector-agnostic ESRSs was published in July 2023.
The US SEC developed a proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors, in early 2022. As of this proposal has not yet been finalised by the SEC and is therefore subject to change.
Under the proposed rule, public companies would present climate-related financial metrics as well as a discussion of climate-related impacts on financial estimates and assumptions, in a footnote to the audited financial statements. These disclosures would be subject to management’s internal control over financial reporting (ICFR) and external audit. Scope 1 and Scope 2 GHG emission disclosures would be subject to mandatory external assurance.
In addition to disclosure within the financial statements, a registrant would need to provide disclosures in a separately captioned ‘Climate-Related Disclosure’ section.
Launched in April 2021, the Glasgow Financial Alliance for Net Zero (GFANZ) is a global coalition of leading financial institutions committed to accelerating the decarbonization of the economy.
GFANZ brings together independent, sector-specific Alliances to tackle net-zero transition challenges and connects the financial community to the Race to Zero campaign, climate scientists and experts, and civil society.
Implications for UK Companies
UK listed companies are required to make a statement in their Annual Report as to whether their disclosures are consistent with the TCFD recommendations and all sector guidance, or to explain why not, together with the steps taken to enable disclosure in future, and by when.
Similarly, FCA-regulated asset managers and owners are required to make TCFD aligned disclosures and take reasonable steps to ensure these disclosures are consistent with the TCFD’s all-sector guidance.
In its 2023 Green Finance Strategy – Mobilising Green Investment, the UK Government committed to adopting the first two ISSB standards within 12 months of publication. The scope and timing of any requirements is yet to be confirmed.
In August 2023 the UK Government published guidance on its framework to create UK Sustainability Disclosure Standards (UK SDS) confirming that the Secretary of State for Business and Trade will consider the endorsement of the IFRS Sustainability Disclosure Standards to create UK SDS by July 2024.
The CSRD affects entities registered or listed in the EU and has extraterritorial reach. UK companies or groups with listed shares or debt on an EU regulated market and meeting the size criteria under the EU Accounting Directive will be required to include sustainability information in line with the CSRD. EU subsidiaries of non-European groups with significant business activities in the EU will also be required to present sustainability information, including information for the entire non-European group that they are part of.
GFANZ has developed voluntary guidance setting out what financial institutions expect to see with a companies’ climate transition plan.
Alliance members commit to report individual progress at least annually, including publishing disclosures aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and climate action plans.
Interaction with the TPT Framework
The TPT Disclosure Framework is designed to complement, and build on, wider Climate-related Disclosure Requirements in the TCFD.
Further detail can be found in the TPT – TCFD Technical Mapping (see above).
The TPT Framework is designed to complement, and build on, the global baseline provided by IFRS S1 and IFRS2, and help preparers to implement IFRS S2 requirements.
Further detail can be found in the TPT – IFRS S2 Technical Mapping (see above).
The TPT Framework and ESRS 2 General Disclosures ESRS E1 Climate Change require disclosure of related information.
Further detail can be found in the TPT – ESRS Comparison.
The TPT Framework includes additional aspects in its definition of a transition plan to the proposed SEC rule as it includes how a company might ‘contribute to a rapid global transition towards a low GHG-emissions economy’.
The TPT Framework provides an additional layer of specificity for transition plan disclosures.
Note that under the proposed SEC rule, Scope 1 and Scope 2 GHG emission disclosures would be subject to mandatory external assurance. This is not specified in the TPT Framework
The Disclosure Framework draws on the components identified by GFANZ of a good transition plan, ensuring the outputs of both initiatives lock together to form an integrated approach to transition planning.
Transition plan requirements
IFRS S2 Climate-related disclosures requires an entity to make disclosures that relate to transition planning – including the requirement in IFRS S2 par. 14(a) that an entity disclose information about “any climate-related transition plan [it] has”.
ESRS E1 Climate Change includes specific requirements related to climate-related targets and transition plans.
ESRS E1 also states that its requirements should be applied in conjunction with certain disclosures required by ESRS 2 General Disclosures, a cross-cutting standard that applies to all sustainability topics.
CSRD does not require organisations to implement a transition plan if they do not already have one, but does require disclosure under ESRS E1 if they already have one at the time of their disclosures.
Registrants that have adopted a climate transition plan as part of its climate-related risk management strategy would be required to disclose a description of the plan under the proposed rule. The proposed SEC requirements do not mandate exactly what should be disclosed about the plan.
GFANZ has delivered a globally consistent approach to (1) financial institutions and (2) real-economy transition planning, identifying the key elements a transition plan needs to be credible and comprehensive, as well as tools to support the development, creation and implementation of a company’s net zero transition plan. It has a focus on financial industry alignment with net zero across all financial sectors.
The GFANZ framework builds on and consolidates across relevant existing transition plan guidance from a range of technical bodies. For example: CDP for data collection, Science Based Targets for a target-setting methodology, and CA100+ / TPI for transition plan assessment, as well as the relevant broader recommendations of the UN High Level Expert Group.