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TAC Context letter from the Department for Business and Trade
Andrew Death Department for Business and Trade 2nd Floor, Trinity Bridge House 2 Dearmans Place Salford M3 5BS
T 0207 215 3807 E [email protected]
Sally Duckworth Via Financial Reporting Council 8th Floor, 125 London Wall, London, EC2Y 5AS
20 May 2024
Dear Sally,
I am pleased that Kevin Hollinrake MP, Minister for Enterprise, Markets and Small Business, has written to you to confirm that the UK Sustainability Disclosure Technical Advisory Committee (TAC) can commence its work to assess the first two sustainability-related standards from the International Financial Reporting Standards (IFRS) Foundation®, known as IFRS S1 and IFRS S21. I look forward to the TAC holding its first full public meeting on 18 June and I would like to congratulate you again on your appointment to the role of TAC Chair. I am writing to you as Deputy Director for Audit and Corporate Reporting in the Department for Business and Trade, and as Chair of the UK Sustainability Disclosure Policy and Implementation Committee.
Background
As you know, the UK Government has been a longstanding supporter of the work of the IFRS Foundation, in recognition of the role it plays in delivering comparable, consistent and financially-material reporting across jurisdictions. At COP26, the UK Government supported the IFRS Foundation's announcement to establish the International Sustainability Standards Board, which the UK Government views as a central driver for delivering a global baseline for sustainability reporting.
Accordingly, in Mobilising green investment: 2023 green finance strategy, the Government committed to conduct an assessment exercise, with a view to determining whether IFRS S1 and IFRS S2 are suitable for use in the UK. The TAC will play a vital role in this exercise, providing technical advice to the Secretary of State, who will make a final decision once she has considered the TAC's views.
The role of the Technical Advisory Committee
To assist the TAC in its work, the Government has published the Framework and Terms of Reference for the Development of UK Sustainability Reporting Standards (“Framework Document"), which provides parameters for the TAC's work and the factors that the Secretary of State will consider when coming to a conclusion. In particular, the Framework Document sets the TAC the assignment of advising the Secretary of State whether the endorsement of IFRS S1 and IFRS S2 would be conducive to the long-term public good, having considered the factors described in Section B, paragraph 2a-d and, if it wishes, the factors set out in paragraph 3a-b.
I anticipate that this assignment, applied to both IFRS S1 and IFRS S2, will be the immediate focus of the TAC's work over the coming six months, and we would be grateful for the TAC's views on each standard at the end of 2024, to enable the Secretary of State to meet the Government's ambition of reaching an endorsement decision during Q1 2025.
When providing this advice, the Government would also be grateful for the TAC's views on whether guidance is needed to supplement IFRS S1 and/or IFRS S2, and whether or not any amendments to IFRS S1 and/or IFRS S2 may be required, and the extent to which the benefit of those amendments outweigh the desire to deliver consistent and comparable reporting across jurisdictions. Please see Section B, paragraphs 4 and 5 of the Framework Document for further information on the circumstances that give grounds for amendments to the standard/s to be considered.
The role of the Policy and Implementation Committee
The Framework Document also provides the terms of reference for the Policy and Implementation Committee (PIC), which I chair. The PIC's responsibilities are primarily to coordinate any implementation of UK-endorsed versions of IFRS S1 and IFRS S2. It is also a forum for members to share information and updates on matters of mutual interest, including:
- the impact of endorsing IFRS S1 and/or IFRS S2 on a given member organisation's remit.
- relevant information for DBT to advise the Secretary of State, such as whether use of IFRS S1 and/or IFRS S2 is likely to be conducive to the UK's economic growth and international competitiveness, taking into account the costs and benefits of compliance.
Through recent PIC meetings, we have collated this contextual information to put together a list of issues that the TAC may wish to consider – they are issues on which we would appreciate the TAC's view and supporting analysis.
I may write to you to share further information from PIC discussions over the course of the TAC's analysis.
Issues the TAC may wish to consider
To supplement the Framework Document, I have provided below a list of issues and themes that have arisen in the Policy and Implementation Committee's early consideration of IFRS S1 and IFRS S2 which may merit further consideration from the TAC. This list has been discussed and agreed by members of the Policy and Implementation Committee.
I hope this list is a helpful guide to the issues that the TAC may wish to explore, as I am mindful that the TAC will need to prioritise in order to deliver advice in the time available. However, this list is intended as neither prescriptive nor exhaustive and, in your role as TAC Chair, I encourage you to use your discretion, consulting with the TAC membership to determine which of these issues you wish to cover and the level of depth that you believe to be appropriate.
- Definitions – The TAC may wish to consider whether definitions in IFRS S1 and IFRS S2 are sufficiently clear, and whether any significant incompatibilities are identified with those currently used in:
- the Companies Act 2006,
- Listing Rules,
- UK adopted international accounting standards, and
- UK Generally Accepted Accounting Practice.
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Transition reliefs – The TAC may wish to consider whether the existing transition reliefs in IFRS S1 and IFRS S2 should be maintained or extended upon a UK endorsement, including consideration of the level of preparedness of UK companies (in the absence of decisions regarding implementation, we suggest you use public interest entities2 as the relevant scope) to disclose against them.
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Disclosure of Scope 3 emissions – The Department would be interested in the TAC's view on the timescales involved for public interest entities to have the capacity, skills, and systems to be able to produce reliable Scope 3 disclosures, if they do not do so already. The Department would also appreciate the TAC's view on what, if any, further guidance and data infrastructure (which can be relied upon by primary users of general-purpose accounts) would be needed to facilitate Scope 3 emissions reporting. The TAC may also consider the responses to the call for evidence on Scope 3 reporting by the Department for Energy Security and Net Zero when publicly available.
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Conversion factors – The TAC may wish to consider whether the supporting infrastructure for the disclosure of greenhouse gas emissions, including the availability of necessary data, is sufficient for UK companies to meet the disclosure requirements in IFRS S2. This should include a consideration of conversion factors and guidance.
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References to the SASB Standards and Industry-Based Guidance on Implementing IFRS S2 - The Department would value the TAC's view on how, in practice, companies are likely to interpret and act upon elements within IFRS S1 and IFRS S2 that state that companies 'shall refer to and consider' the Industry-Based Guidance on Implementing IFRS S2, which is based on the SASB Standards. How companies interpret these elements is an important consideration for the UK Government, as the Industry-based Guidance is not embedded within the main body of IFRS S2 and could theoretically be changed by the IFRS Foundation without the UK Government giving these changes due consideration. The Department would value the TAC's analysis regarding the advantages and disadvantages of retaining the requirements and invites the TAC to offer its view on whether permanent or temporary amendments may be required.
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Need for additional guidance – The Department would appreciate the TAC's view on whether any a) additional ISSB-issued guidance or b) UK-specific guidance should be issued to assist with specific disclosure requirements in IFRS S1 or IFRS S2.
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Assurability of disclosures Lastly, the TAC may wish to consider the degree to which disclosures against the proposed UK-endorsed IFRS S1 and IFRS S2 are capable of being assured to a reasonable assurance level, and any challenges that might be faced by assurance providers. If the TAC wishes to consider this issue, I anticipate that the TAC would consider any major concerns rather that conduct a line-by-line review from an assurability perspective.
Format of the TAC's final recommendations
Finally, I'd like to make some proposals for the format of TAC's advice to the Secretary of State. As TAC Chair, you will of course wish to use your discretion on the level of detail that you believe to be necessary for the Secretary of State to take an informed view on specific aspects of IFRS S1 and IFRS S2. Given the time available, I would also understand if the TAC would prefer, on specific matters, to explain that it has reached a tentative conclusion based on the best available evidence at the time. However, as a minimum I would expect the TAC to provide:
- Marked-up versions of each of the proposed UK-endorsed IFRS S1 and IFRS S2 that sets out any amendments proposed by the TAC from original versions of IFRS S1 and IFRS S2, and commentary on why these amendments are proposed using the criteria for amendments.
- Reasoning for why the proposed UK-endorsed IFRS S1 and IFRS S2, as a whole, meet or fail to meet the endorsement criteria.
Yours sincerely,
ANDREW DEATH Chair of the Policy and Implementation Committee and Deputy Director for Audit and Corporate Reporting, Company Law and Governance Directorate, Department for Business and Trade
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IFRS S1 covers general sustainability-related risks and opportunities and IFRS S2 covers climate-related risks and opportunities). The standards were developed by the International Sustainability Standards Board (ISSB). ↩
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PIEs are one of the following: a) entities whose transferable securities are admitted to trading on a UK-regulated market, b) credit institutions, or c) insurance undertakings. ↩