The content on this page has been converted from PDF to HTML format using an artificial intelligence (AI) tool as part of our ongoing efforts to improve accessibility and usability of our publications. Note:
- No human verification has been conducted of the converted content.
- While we strive for accuracy errors or omissions may exist.
- This content is provided for informational purposes only and should not be relied upon as a definitive or authoritative source.
- For the official and verified version of the publication, refer to the original PDF document.
If you identify any inaccuracies or have concerns about the content, please contact us at [email protected].
TAC Public Meeting June 2024 Paper 3: Location and timing of sustainability-related disclosures
Executive summary
| Date | 18 June 2024 |
| Paper reference | 2024-TAC-005 |
| Project | Technical assessment of IFRS S1 and IFRS S2 |
| Topic | Location and timing of sustainability-related disclosures |
Objective of the paper
This paper presents an analysis of the requirements in IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) that require entities to disclose sustainability-related information in the same location and at the same time as the general purpose financial reports. The TAC is asked to consider the appropriateness of these requirements in the UK context.
This paper does not provide an analysis of the transition relief in IFRS S1 relating to the timing of disclosure, which will be presented to the TAC at a future meeting.
Decisions for the TAC
The TAC is asked to tentatively decide to maintain the requirements in IFRS S1 relating to the location and timing of disclosure.
A decision on the transition relief in IFRS S1 relating to the timing of disclosure will be presented to the TAC in a future paper.
Appendices
There are no appendices to this paper.
This paper has been prepared by the Secretariat for the UK Sustainability Disclosure Technical Advisory Committee (TAC) to discuss in a public meeting. This paper does not represent the views of the TAC or any individual TAC member.
This publication contains copyright material of the IFRS Foundation®. All rights reserved. Reproduced and distributed by the FRC in its role as the secretariat for the UK Sustainability Disclosure Technical Advisory Committee with the permission of the IFRS Foundation. Reproduction and use rights are strictly limited. For more information about the IFRS Foundation and rights to use its material please visit www.ifrs.org.
Disclaimer: To the extent permitted by applicable law the International Sustainability Standards Board and the IFRS Foundation expressly disclaims all liability howsoever arising from this publication or any translation thereof whether in contract, tort or otherwise (including, but not limited to, liability for any negligent act or omission) to any person in respect of any claims or losses of any nature including direct, indirect, incidental or consequential loss, punitive damages, penalties or costs.
Information contained in this publication does not constitute advice and should not be substituted for the services of an appropriately qualified professional.
The Foundation has trade marks registered around the world (Trade Marks) including 'IAS®', 'IASB®', ISSB™, 'IFRIC®', 'IFRS®', the IFRS® logo, 'IFRS for SMEs®', IFRS for SMEs® logo, ISSB™, the 'Hexagon Device', 'International Accounting Standards®', 'International Financial Reporting Standards®', and 'SIC®'. Further details of the Foundation's Trade Marks are available from the Licensor on request.
Context
1IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) sets out requirements for the appropriate location and timing of sustainability-related financial disclosures. The relevant references to the requirements in IFRS S1 are as follows:
- Paragraphs 60–63, B27, and B45–B47 Location of disclosures
- Paragraphs 64–69 Timing of reporting
2On location of disclosures, IFRS S1 states that entities should provide sustainability-related disclosures as part of their general purpose financial reports. However, the standard does not explicitly prescribe where the sustainability-related disclosures should be made.
3On timing of reporting, IFRS S1 states that entities should report their disclosures at the same time as the financial statements to which they relate and that they should cover the same time period.
4In response to feedback from stakeholders on the Exposure Draft of IFRS S1, the International Sustainability Standards Board (ISSB) introduced a relief for the first year of application which allows entities to publish their sustainability-related financial disclosures after the publication of their annual financial statements—either in their next interim report or within nine months of the end of year reporting date if no interim report is prepared. This temporary relief is only available for the first year that the entity applies the standard. This relief is not assessed in this paper, but will be addressed in a future paper that discusses all reliefs that are available in IFRS S1 and IFRS S2 Climate-related Disclosures (IFRS S2).
Endorsement Criteria
5The endorsement criteria applied in the analysis of this technical area include whether:
- use of the IFRS Sustainability Disclosure Standard is likely to result in an improvement in the international comparability of sustainability-related reporting in the UK;
- companies are likely to be able to provide the disclosures required by the IFRS Sustainability Disclosure Standard within the timeframes that a company normally reports without undue cost or effort;
- use of the IFRS Sustainability Disclosure Standard is likely to improve the quality of corporate reporting within the UK in the long-term; and
- companies are likely to be able to provide the disclosures required by the IFRS Sustainability Disclosure Standard within the timeframes that a company normally reports without undue cost or effort.
Analysis
Location of disclosures
6IFRS S1 requires an entity to provide sustainability-related disclosures as part of its general purpose financial reports. In the UK, general purpose financial reports comprise the annual report (which includes the strategic report) and accounts. However, IFRS S1 does not explicitly prescribe where exactly the sustainability-related financial disclosures should be made—indicating that in the UK they could be included in the strategic report; in a similar report when it forms part of an entity's general purpose financial reports; or by cross-reference to another report published by the entity.
7BC142 of IFRS S1 Basis for Conclusions on General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1 Basis for Conclusions) sets out the reasoning behind the location requirements in IFRS S1 noting that the decision to require publication of an entity's sustainability-related financial disclosures as part of its general purpose financial reports was 'to ensure users of general purpose financial reports are provided with a comprehensive and connected package of reports.' By not prescribing a specific location, the ISSB acknowledges that jurisdictions may wish to specify the exact location in which an entity is required to provide its sustainability-related financial disclosures.
8Management commentary, or the strategic report as it is referred to in the UK, is suggested as a possible location for sustainability-related financial disclosures. The IFRS S1 Basis for Conclusions also notes that most respondents to the IFRS S1 Exposure Draft supported the proposal to permit cross-referencing, commenting on the cost-effectiveness advantages.
9Wherever the disclosures are made, paragraph B27 of IFRS S1 indicates that they should not be obscured in any way. There is also application guidance to ensure that any cross-referencing is done appropriately and maintains the clarity, completeness, reliability and consistency of the disclosures.
10The majority of respondents to the TAC's call for evidence, and attendees at the roundtables where location of disclosures was discussed, were in favour of sustainability-related information being reported in the same location as general purpose financial reports. However, there were different views as to which specific location was most appropriate for the disclosures to be made. Several respondents advocated a hybrid approach, so that the key disclosures could be included in the annual report and other disclosures included elsewhere. Overall, it appears that the flexibility offered by the standard is welcomed by stakeholders as it allows different entities to determine which approach suits them best and facilitates the range of practices currently being followed.
11In terms of the criteria set out in the Framework document for the TAC to consider as part of its assessment, aligning the timing of financial and sustainability reporting may assist with comparability within the UK and internationally. However, the flexibility of location offered in IFRS S1 for sustainability-related disclosures may make comparability within the UK and internationally more challenging. Aligning the timing of financial and sustainability-related reporting may improve the quality of corporate reporting within the UK in the long term as it will allow connectivity between the two sets of disclosures. Aligning the timing may also give rise to additional cost and effort particularly in the early years although this would be expected to improve with time.
Current reporting practice in the UK
12For entities that are already required to make climate-related financial disclosures under UK law, Section 414CB(A1) of the Companies Act 2006 prescribes that climate-related financial disclosures must be included within the 'Non-Financial and Sustainability Information Statement' or cross-referenced to another location within the annual report. Limited liability partnerships (LLPs) in scope must include their disclosures in the 'Energy and Carbon Report' or, if a strategic report is prepared, within that report.
13The Financial Conduct Authority (FCA) allows flexibility for UK premium-listed and standard-listed commercial companies in making their Task Force on Climate-related Financial Disclosures (TCFD) disclosures. The FCA requires companies in scope to include a statement in their annual financial report that sets out where the company has included some, or all, of its disclosures in a document other than their annual financial report, ‘an explanation of why and a reference to where the disclosures can be found.'
14In its 2022 'Review of TCFD-aligned disclosures by premium listed commercial companies' the FCA found that TCFD-aligned disclosures were included by companies in different locations both within and outside of the annual report. As this review looked at the first year of implementation of the FCA climate-related disclosure rule and before the implementation of the climate-related financial disclosure requirements in the Companies Act 2006, practice may have moved on since its publication. However, the results nonetheless provide an interesting insight into the different practices adopted. The FCA review found that 82% of companies made the disclosures inside the annual report, mostly in a self-contained TCFD subsection of the strategic report or in a dedicated TCFD section within the annual report. Some 18% of the disclosures made were outside of the annual report in standalone reports. These standalone reports were typically called the ‘TCFD Report', 'Climate Change Report' or 'Sustainability Report'. IFRS S1 and IFRS S2 are built upon and aligned with the requirements in the TCFD recommendations and therefore considering how entities are currently disclosing TCFD-related information is a helpful starting point.
15PwC's 2023 review of TCFD reporting of the top 50 FTSE 350 companies found that the average length of a strategic report in the sample was 85 pages, and the sustainability section had grown from 29% to 33%. In contrast, information in the strategic report about commercial strategy averaged six pages. This is consistent with the findings from PwC's 2022 review of FTSE 350 reporting practice which also noted the increasing length of strategic reports and concluded that this was due to incremental regulatory requirements—in particular those relating to sustainability. This review concluded that more sustainability-related information is being added to the reports on a yearly basis, but this information is often siloed and its strategic relevance unclear.
Advantages and disadvantages of the requirements in IFRS S1
16There are both advantages and disadvantages to the flexibility offered in IFRS S1 in relation to the location of sustainability-related disclosures which are outlined below.
16.1The requirements in IFRS S1 allow entities to determine for themselves the most appropriate way to present and interconnect their disclosures to 'tell their story.'
16.2The requirements in IFRS S1 also provide an element of 'future-proofing' by allowing more flexibility to incorporate additional sustainability-related disclosures as they develop and/or to capture other jurisdictional requirements that may apply to UK entities.
16.3As entities are likely to take different approaches to the location of their disclosures, it may make it more challenging for the users of general purpose financial reports to know where to find the relevant disclosures for each entity; and to easily make comparisons between entities.
16.4Many UK entities are also required to disclose information using sustainability reporting frameworks in other jurisdictions which prescribe the location of disclosures—for example, the sustainability statement under the EU Corporate Sustainability Reporting Directive (CSRD). These entities may decide to include all their sustainability-related disclosures in the same location. The flexibility in IFRS S1 therefore may be useful in this respect although it may make for very lengthy disclosures in one report or location. However, if the UK and other jurisdictional sustainability-related disclosures are made in different locations, this may present challenges in ensuring clear connectivity and maximising interoperability.
16.5If entities make the decision to include all of their sustainability-related financial disclosures in the annual report, this will add to the length of the annual report which some users already consider to be excessive.
16.6In the UK, the auditing standard ISA (UK) 720 The Auditor's Responsibilities Relating to Other Information requires auditors to review financial or non-financial information (other than financial statements and the auditor's report) included in an entity's annual report (other information). The auditor's objective in reviewing this ‘other information' includes considering whether there is a material inconsistency between the ‘other information' and the financial statements. Whether the sustainability-related disclosures would constitute ‘other information' and be subject to the auditor review in accordance with ISA (UK) 720 may depend on the placement of that material, and/or the integration of that material with other sustainability-related material in the company's annual report. If different levels of assurance apply to different information depending on its location and an entity makes disclosures in more than one location this may make it more difficult for users to understand what additional reports or information is or is not within the scope of any assurance. On the other hand including all of the sustainability-related information in one report may allow for clarity in the level of assurance applied to the report as a whole.
16.7In its corporate reporting review (CRR) work, the Financial Reporting Council (FRC) reviews the strategic reports, directors' reports and annual accounts of different types of entities for compliance with the Companies Act 2006 and other relevant reporting requirements. The FRC may be limited in its ability to monitor sustainability-related disclosures depending on where they are located.
16.8Depending on the approach taken by entities there may be a level of duplication of information across the relevant disclosures in different locations.
16.9As noted in TAC paper 2024-TAC-006, the provisions on the disclosure of commercially sensitive information differs in UK legislation and regulation. In the absence of any other provisions, the location of sustainability-related disclosures may then be affected, depending on the location used.
Timing of reporting
17BC145 of IFRS S1 Basis for Conclusions notes that most respondents to the IFRS S1 Exposure Draft agreed that it makes sense to report sustainability-related financial disclosures at the same time as the financial statements. Respondents noted that simultaneous publication would provide users 'with a coherent, holistic and connected picture of an entity's financial position and performance, and provide users with a comprehensive set of sustainability-related financial disclosures, which would enable them to make more informed capital allocation decisions.' Notwithstanding, many respondents commented that entities would find it challenging to meet the requirement, at least in the near term. The ISSB agreed with respondents about the prospective challenges, including:
- perceptions of an increased reporting burden and higher than usual costs, especially in the first years of application;
- reporting systems that are underdeveloped—meaning collating and aggregating sustainability-related data could be time-consuming;
- calculation of some metrics might be delayed by the need to wait for information from, for example, finalised financial statements or third-party data providers;
- jurisdictional reporting requirements might be inconsistent with the proposed requirement; and
- additional reliance on assumptions and estimates might be necessary to complete the data for the reporting period, which could affect the quality of the data.
18The majority of respondents to the TAC's call for evidence, and attendees at the roundtables where the topic was discussed, supported the reporting of sustainability-related financial disclosures at the same time as related financial statements. However, respondents also flagged the data challenges for certain sustainability-related disclosures which mean that data lags are almost inevitable, particularly in the early years. Those respondents that referred to the relief were in favour of implementing it.
Advantages and disadvantages of the requirements in IFRS S1
19There are advantages to publishing the sustainability-related disclosures at the same time as the related financial statements which are outlined below.
19.1Disclosing information at the same time will more effectively connect qualitative and quantitative disclosures about the anticipated financial effects of sustainability-related risks and opportunities on an entity's financial performance, financial position and cash flows.
19.2If the information is disclosed at the same time, this will facilitate connectivity between the financial statements and sustainability-related disclosures, providing a holistic and integrated view of the entity's position and performance, and future prospects.
19.3By disclosing the information at the same, the sustainability-related disclosures will be more likely to be subject to the same processes as the financial disclosures and integrated into the existing reporting cycle including governance and oversight, thereby likely improving their quality and reliability.
19.4Entities that are already required to make climate-related financial disclosures under UK law¹1, will already be making these disclosures at the same time as their financial statements. The FCA also requires premium listed and standard listed companies to include a statement in their annual report as to whether they have made disclosures consistent with the TCFD recommendations, or to explain why not. The 2021 update to the TCFD Implementing Guidance clarifies that TCFD disclosures should report information for the same period covered by their mainstream financial filings.
20However, there are also potential disadvantages to disclosing sustainability-related information at the same time as the financial statements, which are outlined below.
20.1Compared to financial disclosures, for many entities, the systems, processes, data collection and controls over sustainability-related disclosures are relatively immature and will take time to embed and develop to a similar standard as those in place for financial statements. Similarly, demand for assurance services may also mean delays, particularly in the early years.
20.2In addition to the immaturity of the systems, coordinating the publication of financial statements and sustainability-related reporting at the same time is likely to increase the costs for entities. Resources used in both processes may not be able to do both at the same time, such that new resources would need to be brought in to cover the pressures at reporting period ends.
20.3As entities rely on receiving certain data from third parties there are often delays in receiving that data which is out of the control of the entities. For example, to report Scope 3 greenhouse gas emissions entities must identify the emissions that the entity is indirectly responsible for, up and down its value chain. This includes emissions from suppliers and by companies the entity supplies to, as well as customers that use the end product. This may entail collecting data from up to hundreds or thousands of third parties. In some cases, the third parties may not supply the data, or may do so late; or the data may relate to different reporting periods; and/or the quality of the data may vary greatly. In some cases, the reporting entity must then rely on the use of estimates which increases the likelihood that restatements may be required in future reporting periods should the estimates differ from data subsequently received. Whilst restatements are likely to arise in the early years of implementation of IFRS S1 and IFRS S2 as data and experience improves, it is nonetheless an additional cost to reporting entities.
21It should also be noted that paragraph B19 of IFRS S2 does provide a relief that allows an entity to measure its Scope 3 greenhouse gas emissions using information for reporting periods that are different from its own reporting period when that information arises from entities in its value chain with reporting periods that are different from that of the entity. This relief, alongside all other reliefs in IFRS S1 and IFRS S2 will be discussed in more detail in later TAC papers.
Relief on the timing of reporting
22Paragraph E4 in IFRS S1 provides a temporary (transition) relief which allows entities to publish their sustainability-related disclosures after the publication of their annual financial statements—either in their next interim report or within nine months of the end of year reporting date if no interim report is prepared. This temporary relief is only available for the first year that the entity applies the standard.
23This paper does not analyse the availability of this relief, which will be considered alongside all reliefs in IFRS S1 and IFRS S2 in a future TAC paper. The Secretariat believes that all reliefs in IFRS S1 and IFRS S2 should be assessed together to understand the full package that is available to entities. For example, in the context of all the reliefs that are available, the TAC may decide that the relief on the timing of reporting is not appropriate in the UK.
Endorsement recommendations
Alternative options considered but not recommended
24In considering the TAC's endorsement recommendations on the location and timing of reporting, the Secretariat considered alternative options that have been disregarded. The criteria for amending the standards—notably that changes are considered necessary for the effective application within the UK and failure to amend the standard would be of detriment to the long-term public good—have not been met in this instance.
25The Secretariat considered and disregarded these alternative options, including:
25.1prescribing a specific location for disclosures. This option was not pursued as stakeholders welcomed the flexibility in IFRS S1 and current reporting practice in the UK indicates that there is no single location that is consistently used by entitles when disclosing sustainability-related information. Any considerations about specifying a location for sustainability-related information is an implementation matter that will be decided by DBT and the FCA at a later date.
25.2removing the requirement for entities to report their sustainability-related disclosures at the same time as the financial statements, but maintaining the requirement for the disclosures to cover the same reporting period. Whilst this option might make reporting easier and less costly for entities, it would significantly compromise comparability and connectivity of the sustainability-related information, and not serve the interests of primary users.
Suggested endorsement recommendation
26Considering the stakeholder feedback and analysis, the TAC is asked to tentatively recommend that the requirements on location and timing of reporting in IFRS S1 are maintained. This does not include the transition relief on the timing of reporting. The TAC may also wish to note in its advice to the Secretary of State (SoS) that in relation to location, consideration should be given to the interaction of sustainability-related disclosure requirements and existing provisions in UK legislation and regulation so that there is consistent application, particularly in relation to the level of assurance required and the application of any exemptions for commercial sensitivity.
27These recommendations would align with the views expressed by UK stakeholders; provide a level of flexibility with regard to the location of disclosures; and support comparability by aligning the timing of disclosures with those of the financial statements.
28Aligning the timing of financial and sustainability-related reporting may assist with comparability within the UK and internationally, and may improve the quality of corporate reporting within the UK in the long term as it will allow connectivity between the two sets of disclosures. On the other hand, aligning the timing may also give rise to additional cost and effort for entities particularly in the early years of reporting, although this would be expected to improve with time.
29The flexibility of location offered in IFRS S1 for sustainability-related disclosures may make comparability within the UK and internationally more challenging, especially if entities choose to take different approaches. However, the flexibility offered in the standard allows entities to determine for themselves the most appropriate way to present and interconnect their disclosures.
Questions for the TAC
- Does the TAC agree with the analysis in this paper in relation to the disclosure location and timing provisions in IFRS S1?
- Does the TAC agree to tentatively recommend to maintain the requirements in IFRS S1 paragraphs 60-63, B27 and B45–B47 on location of disclosures?
- Does the TAC agree to tentatively recommend to maintain the requirements in IFRS S1 paragraphs 64-69 on location of disclosures?
Footnotes:
-
Under the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022. ↩