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TAC Public Meeting July 2024: Meeting Summary
PUBLIC MEETING SUMMARY
Date: 15 July 2024
Time: 10:30–16:45
Location: FRC Office, 8th Floor, 125 London Wall, London, EC2Y 5AS
The recording of the meeting and agenda papers are available online.
Attendance
| Name | Designation |
|---|---|
| Sally Duckworth | Chair |
| Craig Mackenzie | Member |
| David Harris | Member |
| Dia Desai | Member |
| Harriet Cullum | Member |
| Hilary Eastman | Member (joined during agenda item 3) |
| Jeremy Osborn | Member |
| Joseph Noss | Member |
| Madeleine Evans | Member |
| Nick Rowbottom | Member |
| Peter Hogarth | Member |
| Scott Barlow | Member |
| Supriya Sobti | Member |
| Jenny Carter | Member appointed by the Financial Reporting Council (FRC) |
| Paul Lee | Member appointed by the UK Endorsement Board (UKEB) |
| Mike Ashby | Observer from the Department for Business and Trade (DBT) |
| Mita Gandhi | Observer from the Bank of England (BoE) |
| Carlos Martin Tornero | Observer from the Financial Conduct Authority (FCA) |
| Sarah-Jayne Dominic | Secretariat |
Private meeting
The TAC held private meetings at 09.30 to 10.15 and at 16.45 to 17.15 to discuss confidential and administrative matters.
1. Welcome and apologies
The Chair welcomed members and observers to the July meeting of the TAC.
The Chair noted that the TAC was quorate and read out the attendees—both in person and online. Hilary Eastman was absent at the beginning of the meeting but joined the meeting during agenda item 3.
The Chair asked the members to declare any interest in the agenda items. No interests were declared in agenda items.
The TAC began by discussing Agenda Paper 6 which lists key updates since the June meeting. This paper was for information only and no decisions were required of the TAC. The TAC had no comments on the paper.
2. Materiality
The TAC considered Agenda Paper 2, which presented an analysis for consideration by the TAC of the materiality provisions in IFRS S1. This paper addressed the definition and application of materiality, interoperability, and how materiality may affect the location of disclosures. The TAC was asked the following questions.
- Does the TAC agree with the analysis in this paper in relation to the materiality provisions in IFRS S1?
- Does the TAC tentatively recommend to maintain the materiality provisions in IFRS S1 without amendment?
- Does the TAC agree with the proposed ways forward as set out in paragraph 35 (of the paper) and that these items should be noted in the TAC's advice to DBT?
The TAC discussions covered the following points.
- Entities reporting information in a consistent location is very helpful to users, but the location of disclosures is also dependent on an entity's materiality assessment which is entity specific. Broadly, all material information should be included in the Strategic Report. Decisions about any specified location is an implementation issue and will be referred to the PIC.
- Consistency in the definition of materiality across IFRS Standards is helpful, but different definitions between the IFRS Standards and ESRS is likely to cause significant challenges to entities reporting under both. A dynamic materiality approach may go some way to easing this challenge but further guidance from the ISSB on what a dynamic materiality workflow may look like would be needed.
- It is important not to be overly prescriptive in defining materiality as there is value in entities assessing and deciding what is material for themselves.
However, to ensure a consistent baseline in reporting, some guidance by sustainability-related matter and by sector is useful. - For some areas of reporting, including risk and governance, the existing TCFD requirements in the UK does not require a materiality assessment. Should a materiality approach narrow reporting on these areas too significantly, this could be seen as a downgrade on existing UK reporting. - The term 'primary users' can be understood broadly to represent many different types of investor based on a range of factors, including the entity and its sector. The interests of primary users will also continue to develop over time. It is important for entities to recognise that different stakeholders will have different information needs and to question assumptions around the identity of primary users and their needs.
The tentative endorsement recommendation in the paper is:
- to maintain the provisions in IFRS S1 relating to materiality; and
- in its role of providing a focal point for UK stakeholders to influence the ISSB, to:
- monitor the development of educational material on materiality by the ISSB;
- support the ISSB's work on interoperability; and
- ensure the views of UK stakeholders regarding materiality are communicated to the ISSB as part of the development of any future IFRS Sustainability Disclosure Standards.
The TAC tentatively approved these recommendations, subject to seeking further guidance from the ISSB regarding dynamic materiality workflows.
The TAC also agreed to refer to the PIC observations about the different approaches to materiality applied in the TCFD requirements—notably that the TCFD requires the disclosure of governance and risk management regardless of an entity's materiality assessment.
The TAC also agreed they would recommend to the ISSB that future topic-specific standards should include materiality considerations for the particular sustainability-related matter, including guidance on what could be considered material for the said matter.
3. Identifying sustainability-related risks and opportunities
The TAC considered Agenda Paper 3 which presented an analysis of the requirements in IFRS S1 relating to identifying sustainability-related risks and opportunities. This paper considered the description of 'sustainability' used in IFRS S1 and identified challenges which entities may face when identifying sustainability-related risks and opportunities. The TAC was asked the following questions.
- Does the TAC agree with the analysis in this paper in relation to identifying sustainability-related risks and opportunities in IFRS S1?
- Does the TAC agree to tentatively recommend to insert a definition or detailed description for 'sustainability-related matters' which is taken from the definition used in UK law?
- Does the TAC agree to encourage the ISSB to consider and address how an entity might assess whether a social-related matter could affect an entity's prospects in its upcoming research on risks and opportunities associated with human capital?
- Does the TAC agree to tentatively recommend to maintain the requirements in IFRS S1 paragraph 30(c) and IFRS S2 paragraph 10(d) that require an entity to explain which time horizons it has applied when identifying sustainability-related risks and opportunities?
- Does the TAC agree to tentatively confirm that the UK Sustainability Reporting Standards should not specify the time horizons an entity is required to use?
The TAC discussions covered the following points.
- The TAC broadly agreed that inserting a definition of 'sustainability-related matters' based on UK law was unnecessary and could impact international comparability. The TAC suggested that the PIC may wish to consider UK-specific guidance on what sustainability-related information an entity is required to disclose in line with existing UK legislation.
- Identifying risks and opportunities and assessing materiality are interrelated processes. Robust materiality assessments should support entities in identifying sustainability-related risks and opportunities.
- The phrase, 'could reasonably be expected to' was raised as a potential issue as it could be interpreted by some stakeholders as requiring input from third parties when identifying sustainability-related risks and opportunities, and therefore may not reflect management's view of what risks and opportunities are most important to the entity. After discussion, TAC members broadly agreed that there were no concerns in the use of this phrase and therefore no amendments were suggested or agreed.
- Members broadly agreed with the recommendation relating to social-related matters but noted that these social-related matters are much broader than human capital. The ISSB's research project on human capital is narrow in scope and doesn't include all social-related matters.
- Social-related matters are more challenging in practice for entities to navigate and data is less well established. The TAC suggested that the ISSB consider guidance about how other sustainability-related risks and opportunities are identified as part of its research and development of future standards.
- The TAC agreed that standards should not be overly prescriptive about the definitions of time horizons, instead allowing entities to define what short, medium, and long term means in regard to their own situation and sector.
The tentative endorsement recommendation in the paper is to:
- insert a definition or detailed description for ‘sustainability-related matters' which is taken from the definition used in UK law;
- encourage the ISSB to consider and address how an entity might assess whether a social-related matter could affect an entity's prospects in its upcoming research on risks and opportunities associated with human capital; and
- maintain the requirements in IFRS S1 that require an entity to explain what time horizons it has applied when identifying sustainability-related risks and opportunities. This will confirm that the UK Sustainability Reporting Standards should not specify the time horizons an entity is required to use.
The TAC rejected the recommendation to insert a definition or detailed description for ‘sustainability-related matters' taken from the definition used in UK law. The TAC suggested that the PIC could develop, as an implementation matter, jurisdictional guidance on what sustainability-related information an entity is required to disclose in line with existing UK legislation.
The TAC tentatively approved the recommendation to encourage the ISSB to consider and address how an entity might assess whether a social-related matter could affect an entity's prospects in its upcoming research on risks and opportunities associated with human capital—noting that 'human capital' does not include all social-related matters. The TAC also agreed they would recommend to the ISSB that future topic-specific standards should include considerations on how to identify sustainability-related risks and opportunities that could affect an entity's prospects, alongside topic-specific guidance on materiality.
The TAC tentatively approved the recommendation to maintain the requirements in IFRS S1 that require an entity to explain what time horizons it has applied when identifying sustainability-related risks and opportunities. This confirms that the UK Sustainability Reporting Standards should not specify the time horizons an entity is required to use.
4. Sources of guidance
The TAC considered Agenda Paper 4 on the sources of guidance referenced in IFRS S1 and IFRS S2. The TAC was asked to consider whether the sources of guidance are appropriate and whether the instruction ‘shall refer to and consider' is clear. Specifically, the TAC was asked the following questions.
- Does the TAC agree with the analysis in this paper in relation to sources of guidance in IFRS S1 and IFRS S2?
- Does the TAC agree to tentatively recommend to amend the instruction 'shall refer to and consider' to 'may refer to and consider' in IFRS S1 and IFRS S2 in relation to the SASB materials?
- Does the TAC agree to tentatively recommend to maintain the references to the other sources of guidance, including the GRI Standards and ESRS?
The TAC discussions covered the following points.
- A range of views were expressed regarding the suggested amendment to 'may refer to and consider'.
- Some members felt the threshold for amendment had been met for IFRS S1 but not IFRS S2 due to the greater level of existing definition around climate-related reporting metrics.
- Some members felt the instruction to ‘consider' already conveys optionality and as such the amendment from 'may' to 'shall' doesn't meaningfully change the standard and so does not meet the threshold for amendment.
- Regarding the achievement of a global baseline, some members felt the SASB Standards provide a useful common starting point to aid comparable reporting, while others felt the SASB Standards are too focused on the US contexts. The TAC understands the ISSB plans to further develop and integrate the SASB Standards, and that as part of the due process their international interoperability will be considered.
- The TAC recognised that the instruction, ‘shall consider', will have implications for assurance. The TAC agreed further guidance from the Financial Reporting Council regarding assurability would be helpful.
- The TAC also noted that it would be helpful for the Department for Business and Trade to provide legal analysis on whether the UK Sustainability Disclosure Standards can refer to a secondary set of standards over which the UK has no proprietary control.
- Entities should approach the SASB Standards as guidance rather than as prescriptive list of material disclosure topics. The TAC noted that it would be useful to flag existing messaging from the ISSB on the use of the SASB materials.
The tentative endorsement recommendation in the paper is to:
- amend the instruction ‘shall refer to and consider' to 'may refer to and consider' in IFRS S1 and IFRS S2 in relation to the SASB materials.
- maintain the references to other sources of guidance, including the GRI Standards and ESRS.
On balance, the TAC agreed to reject the recommendation to amend the instruction 'shall refer to and consider' to 'may refer to and consider', but to acknowledge a split in opinion within their final recommendations to the Secretary of State.
The TAC also agreed attention should be drawn to the ISSB's assertion that the use of SASB Standards should not be treated as mandatory within the implementation process and that entities are not required to use them, for both preparers and auditors and assurers.
The TAC tentatively approved the recommendation to maintain the references to other sources of guidance, including the GRI Standards and ESRS.
5. Value chain
The TAC considered Agenda Paper 5 which considered the requirements in IFRS S1 and IFRS S2 relating to the value chain. This included the definition for 'value chain' and the requirements for how an entity might reassess the scope of its value chain. The TAC was asked to consider the technical challenges associated with collecting data from the value chain and whether the instructions to reassess the scope of sustainability-related risks and opportunities in the value chain is sufficiently clear. The TAC was asked the following questions.
- Does the TAC agree with the analysis in this paper in relation to the value chain in IFRS S1 and IFRS S2?
- Does the TAC agree to tentatively recommend to maintain the requirements in IFRS S1 and IFRS S2 for entities to disclose information about sustainability-related risks and opportunities in the value chain?
- Does the TAC agree to tentatively recommend to maintain the definition for 'value chain', but request that the ISSB provide additional implementation guidance including how an entity might disclose information about other sustainability-related matters in the value chain and how to align value chain reporting with information in the financial statements?
- Does the TAC agree to tentatively recommend to maintain the requirement for entities to reassess the scope of the sustainability-related risks and opportunities in the value chain on the occurrence of a significant event or change in circumstance?
The TAC discussions covered the following points.
- There are significant challenges relating to the quality and collection of data in the value chain. This may cause gaps and inconsistencies in reporting, and challenges around data collection may create potential lags in reporting.
- Entities will need support in establishing value chain reporting. In the US, safe harbours are established around certain disclosures. A member suggested that a similar concept might be utilised in the UK to enable entities to begin reporting in good faith. This is an implementation issue and will be referred to the PIC.
- There is uncertainty around the scope of value chain reporting and a recognition that the scope of reporting will evolve as entities begin to prepare these reports. The GHG Protocol has been used as a proxy by preparers for reporting boundaries beyond greenhouse gas emissions, but as this approach does not align with consolidated financial reporting this creates questions around issues such as leased assets and financed emissions. Further guidance from the ISSB on the boundaries of Scope 3 may therefore be helpful.
- There is uncertainty around the meaning of 'significant event' in regard to when sustainability-related risks and opportunities in the value chain should be reassessed. Transition reliefs would be helpful to entities when establishing approaches to reassessment.
The tentative endorsement recommendation in the paper is to:
- maintain the requirements in IFRS S1 and IFRS S2 for entities to disclose information about sustainability-related risks and opportunities in the value chain.
- maintain the definition for ‘value chain' but request that the ISSB provide additional implementation guidance, including how an entity might disclose information about other sustainability-related matters in the value chain and align value chain reporting with information in the financial statements.
- maintain the requirement for entities to reassess the scope of the sustainability-related risks and opportunities in the value chain on the occurrence of a significant event or change in circumstance.
The TAC tentatively approved these recommendations, and to request that the PIC consider appropriate transitional relief or guidance around value chain disclosures and the potential of establishing ‘safe harbours' or equivalent protections for initial value chain disclosures.
6. Any other business
There was no AOB.
The meeting ended at 16:45.