TCFD and IFRS S2: How do they differ and what should companies think about?

In this blog, Nina Kefer explores the differences between TCFD and IFRS S2, highlighting key implications for companies.

What is IFRS S2?

At COP26 in Glasgow, the IFRS Foundation announced the formation of an International Sustainability Standards Board (ISSB) charged with the development of a reporting framework that would set a global baseline for sustainability disclosures focused on the needs of investors and simplify the so-called “alphabet soup” of reporting initiatives. Earlier this year, the ISSB published two disclosure standards:

  • IFRS S1 “General Requirements for Disclosure of Sustainability-related Financial Information”; and
  • IFRS S2 “Climate-related Disclosures”

As their names suggest, IFRS S1 sets out overarching requirements for disclosing sustainability-related risk and opportunities and is broadly based on SASB. IFRS S2 sets out supplementary requirements specifically for disclosing climate-related risks and opportunities and is based on TCFD. Both standards will be effective from January 2024.

How does IFRS S2 differ from TCFD?

IFRS S2 is consistent with TCFD’s four pillars and 11 recommended disclosures, but differs from its guidance in that it generally requires more detailed and, in some cases, additional information. For example, companies will have to report the following:

  • How the Board’s responsibilities for climate-related risks and opportunities are reflected in terms of reference, role descriptions and other related policies
  • SASB-derived, industry-based disclosure topics and metrics relevant to the company’s business model and activities
  • Where in the company’s business model and value chain risks and opportunities are concentrated
  • Data sources used to identify risks and the scope of operations covered
  • The processes used to identify, assess, prioritise and monitor opportunities
  • Separate disclosure of GHG emissions for the consolidated accounting group and associates, joint ventures, unconsolidated subsidiaries or affiliates
  • Any transition plans the company has and how it plans to achieve its climate-related targets, including the use of carbon credits and whether the targets have been validated by a third party
  • If the company has activities in asset management, banking or insurance, additional information about its financed emissions

What should companies think about?

The UK Department for Business and Trade has announced the creation of Sustainability Disclosure Standards for UK incorporated companies which will only diverge from ISSB if absolutely necessary for UK specific matters. These are due to be finalised by July 2024 and the UK government and the FCA will then decide how they apply to UK incorporated and/or LSE listed companies, with IFRS S2 widely expected to replace TCFD. This means that if TCFD reporting is mandatory for you now, you should start preparing for ISSB.

Based on TCFD disclosures to date, some areas in particular will require attention. Firstly, companies are expected to report quantitative and qualitative information to enable investors to understand the effects of climate-related risks and opportunities on their financial position for the reporting period (current financial effects) and on their financial planning over the short, medium and long term (anticipated financial effects). Under ISSB, quantitative information can only be omitted under limited circumstances, in which case the company has to provide qualitative information instead, including specific references to the financial statements.

Secondly, ISSB permits omitting information due to commercial sensitivity only for opportunities, not risks, and only if that information is not already publicly available, if its disclosure would prejudice the economic benefits the company would otherwise be able to realise in pursuing the opportunity and if it is impossible to disclose it in a way that meets ISSB’s requirements without prejudicing these benefits.

Companies might also want to review the structure of their TCFD reporting. While ISSB guides against unnecessary duplication, for example by recommending consolidated Governance and Risk Management sections that cover all sustainability issues a company reports on, it cautions against making disclosures less understandable by cross-referencing and “obscuring” material information by scattering it. If information is included by cross-reference, its location must be clearly identified and the company has to explain how readers can access it. This conflicts with the popular approach of using TCFD index tables to signpost to disclosures in multiple locations, such as specialist reports, data books and the CDP website, particularly if these disclosures aren’t published at the same time as the company’s financial statements or, in the case of some CDP responses, aren’t publicly accessible.

Last but not least, materiality assessments are still not the norm, but ISSB requires companies to reassess their materiality judgements at each reporting date. Additionally, companies with operations in the EU might be in scope of the Corporate Sustainability Reporting Directive (CSRD), which requires a double materiality assessment, combining the ISSB concept of financial materiality with impact materiality. This ties in with the increasing realisation by investors that a company’s impacts on people and the environment today are tomorrow’s impacts on the company and therefore on the value of their investment. Helpfully, ISSB leaves companies free to also consider impact and double materiality as long as this doesn’t conflict with its own standards, so companies should think about which approach is best for them.

Any questions?

Are you considering an ISSB gap analysis or looking to review your reporting suite? Please contact