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TAC Public Meeting October 2024 Paper 7: Transition plans
Executive summary
| Header | Data |
|---|---|
| Date | 08 October 2024 |
| Paper reference | 2024-TAC-019 |
| Project | Technical assessment of IFRS S1 and IFRS S2 |
| Topic | Transition plans |
Objective of the paper
This paper considers the requirements in IFRS S2 Climate-related Disclosures (IFRS S2) relating to the disclosure of transition plans. The TAC is asked to consider whether further guidance is needed to support entities in developing and disclosing their transition plans in light of recent announcements regarding the outputs from the Transition Plan Taskforce.
Decisions for the TAC
The TAC is asked to tentatively decide to maintain the requirements in IFRS S2 for entities to disclose information about climate-related transition plans, only if such a plan exists.
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.
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Context
1IFRS S2 Climate-related Disclosures (IFRS S2) sets out requirements for the disclosure of an entity's transition plan in relation to how an entity has responded to, or plans to respond to, climate-related risks and opportunities. The relevant references to the requirements in IFRS S2 are as follows:
- Paragraph 14 Strategy and decision-making
- Appendix A Definitions
2Stakeholders that responded to the TAC's call for evidence welcomed the requirements in IFRS S2 relating to transition planning, but some requested further application guidance to support entities in disclosing information about transition plans. Other than requesting additional application guidance, stakeholders did not provide significant concerns directly relating to the requirements in IFRS S2 about transition plans. However, when prioritising the TAC's technical workplan the TAC members requested further discussion about transition plans.
Endorsement criteria
3The 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.
- use of the IFRS Sustainability Disclosure Standard is likely to support companies in making disclosures that are understandable, relevant, reliable and comparable.
- use of the IFRS Sustainability Disclosure Standard is likely to improve the quality of corporate reporting within the UK in the long term.
- 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 be conducive to the UK's economic growth and international competitiveness, taking into account the costs and benefits of compliance.
- the IFRS Sustainability Disclosure Standard is likely to be coherent with, and suitable for inclusion in, UK domestic legislation and regulation.
Analysis
4In relation to the requirements relating to transition plans, there are a number of matters for the TAC to discuss, including:
4.1the integration of transition plan disclosures as part of the disclosures on strategy and decision-making. Paragraphs 5–6 discuss the requirements in IFRS S2 which require transition plans to be disclosed in the context of an entity's broader business strategy and business model. The TAC is not asked to make a decision on this matter.
4.2the location and connectivity of transition plan disclosures. Paragraphs 7–9 discuss the requirement for entities to disclose material information in the general purpose financial report, which might include transition plan disclosures. In June 2024, the TAC has already agreed that material information should be located in the general purpose financial report, and any supplementary information could be disclosed in a separate document. The TAC is not asked to make any further decisions on this matter.
4.3the inclusion of material published by the Transition Plan Taskforce (TPT). Paragraphs 10–12 outline the recent announcement by the ISSB that it has assumed the responsibility for the disclosure-specific materials produced by the TPT with an expectation that these will be used and tailored to form education material on transition plans. The TAC is not asked to make a decision on this matter.
4.4the difference or similarities between public policy expectations and primary user needs. Paragraphs 13–16 discuss the nuanced differences between public policy objectives and primary user needs, especially when it relates to prescribing what transition pathway an entity should take. The TAC is not asked to make a decision on this matter.
Incorporation into strategy and decision-making disclosures
5The requirements in IFRS S2 directly relating to transition plans have been included as part of the disclosure requirements relating to strategy and decision making. In particular, an entity is required to disclose any transition plans it has as part of its disclosure on how the entity has, or plans to, respond to climate-related risks and opportunities including how it plans to achieve any climate-related targets. Notably, IFRS S2 does not require the disclosure of transition plans unless the entity has one, nor does IFRS S2 specify that an entity must contribute to the expected transition to a lower-carbon economy. However, as noted in IFRS S2 Basis for Conclusions paragraph BC46, the ISSB recognised that:
‘if an entity has a particular plan or set of plans to respond to the expected transition to a lower-carbon economy, disclosure of that transition plan will help users of general purpose financial reports assess the effects of climate-related risks and opportunities on the entity's cash flows, its access to finance and cost of capital.'
6The placement of this requirement in IFRS S2 is important as it signals the type of information an entity might be expected to disclose. For example, an entity's transition plan should connect to and address the climate-related risks and opportunities that it has identified as part of IFRS S2 paragraph 10, rather than solely focusing on the emissions reduction targets that it has set. As noted in IFRS S2 Basis for Conclusions paragraph BC47, transition plans are going to look substantially different for different entities depending on the individual facts and circumstances of the entities. For example, for some entities (e.g. those from high impact industries) a climate-related transition plan will form part of the wider business strategy, especially if the entity is likely to need to adjust its business model to respond to climate-related risks and opportunities. On the other hand, some entities will only need to focus their transition plan on a narrower part of the business (e.g., a particular product line or business unit). Regardless of the significance of the transition plan on the wider business model and strategy, IFRS S2 requires the entity to disclose its transition plan as part of the disclosures relating to the entity's business-wide strategy and decision making, and not as a separate or disparate disclosure.
Location and connectivity
7IFRS S1 paragraph 60 requires entities to provide disclosures required by IFRS Sustainability Disclosure Standards—including disclosures relating to transition plans—as part of the entity's general purpose financial reports. In the June 2024 meeting, the TAC discussed the requirement in IFRS S1 relating to the location of reporting. In that discussion, the TAC agreed that requiring a consistent approach to the location of disclosures is very helpful to both users and entities, but the location of disclosures will also depend on the application of materiality which will likely be different for different entities. Assuming that an entity has determined that information about transition plans is material, an entity complying with IFRS S1 should provide this information in the general purpose financial report.
8In its 2024 corporate reporting insights, Deloitte have observed that of its sample—the first 50 FTSE 100 corporate reports—34% of entities (up from 20% in 2022) provided their transition plan as a standalone report with a cross-reference from the annual report. The disclosure framework from the Transition Plan Taskforce (TPT) suggests that an entity should disclose a separate standalone document transition plan (outside of the general purpose financial report) as good practice which is updated periodically—either when there is a significant change or at least every three years. The TPT disclosure framework also recommends separating the transition plan from an entity's TCFD disclosure and wider sustainability reporting.
9As noted in paragraph 6, the requirement to disclose a transition plan in IFRS S2 is part of the disclosure requirements about how the entity has responded to, or plans to respond to, the climate-related risks and opportunities it has identified. For some entities, information about a transition plan will be fundamental to the wider business model and strategy. Additionally, IFRS S2 Basis for Conclusions paragraph BC49 notes that the information relating to transition plans could be connected to other disclosures required by IFRS S2. For example, transition plans may include or be connected to information about the current and anticipated financial effects of climate-related risks and opportunities on the entity's financial position, financial performance and cash flows, and information about the scenario analysis conducted to understand the entity's resilience. While IFRS S1 paragraph 63 permits an entity to disclose information required by an IFRS Sustainability Disclosure Standard by cross-reference to another report, to enable connectivity it might not be appropriate for a transition plan to be fully separated into a different document. In the June 2024 meeting, the TAC agreed that material information should be located in the general purpose financial report, and any supplementary information could be disclosed in a separate document to reduce the length of annual reports and to ensure that material information is not obscured by immaterial information.
Transition Plan Taskforce materials
10Whilst welcoming the requirements in IFRS S2 on transition planning, some stakeholders requested further application guidance on reporting on transition plans. Some stakeholders noted the work of the TPT as helpful guidance, especially as it builds on the requirements in IFRS S1 and IFRS S2 and includes good practice examples.
11In April 2022, the TPT was launched with the objective of establishing a standard for the development and disclosure of transition plans. The TPT produced a range of materials, including a disclosure framework, sector guidance, and guidance on the transition planning cycle. In June 2024, the IFRS Foundation announced that it will assume the responsibility for the disclosure-specific materials produced by the TPT with an expectation that these will be used and tailored to form educational material on transition plans—provided that they do not change the requirements in IFRS S2 and are compatible for global application. In the announcement, the ISSB also acknowledged that over time these materials, if relevant, will be used in consideration of enhanced application guidance in IFRS S2.
12Given the announcement by the ISSB to develop educational material, and potentially in the future application guidance, on transition planning, it may not be appropriate for the UK to create its own guidance or directly reference the TPT materials as part of the implementation of IFRS S2. Additionally, in the response to the TAC's call for evidence, some stakeholders requested that the TPT materials are only maintained as non-mandatory guidance as they believe that entities should have the discretion to select from a range of resources to meet these requirements. For example, the Glasgow Financial Alliance for Net Zero (GFANZ) has a work stream focused on transition planning for financial institutions, including having developed its own framework and guidance on sectoral pathways. Additionally, there is expected guidance from the EU—which is expected to be published in 2025—on developing and disclosing transition plans for the purpose of meeting the requirements in the EU Sustainability Reporting Standards.
Public policy expectations
13In response to the TAC's Call for Evidence, one stakeholder suggested that the requirements in IFRS S2 in relation to transition plans should be amended to include reference to the UK's national climate goals. This suggestion was also raised by a few other stakeholders in relation to setting climate-related targets.
14This request from stakeholders introduces the debate about public policy expectation versus primary user needs. IFRS S2 does not offer a view on whether an entity should have emissions reduction targets and whether an entity should contribute to the transition to a lower-carbon economy. Instead, IFRS S2 focuses on information that would be useful to users in making decisions about providing resources to the entity which would include information about a transition plan, if the entity has such a plan. Imposing a requirement that expects entities to have a transition plan and prescribing that plan must align with national climate change goals, is a public policy matter. The difference between public policy expectations and user needs is not always mutually exclusive. For example, some users have indicated that they are interested in understanding whether an entity's transition plan is aligned to the goals of the Paris Agreement, and therefore would welcome more prescribed requirements that require an entity firstly to have a transition plan and to align that plan with the Paris Agreement or the UK's national climate change goals.
15An entity could provide disclosure that complies with IFRS S2 without disclosing a transition plan. IFRS S1 Basis for Conclusions on General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1 Basis for Conclusions) paragraph BC157 clarifies that an entity is not required to implement prescribed strategic goals—including following any specific transition plan—and can still provide a statement of compliance, as long as material information about any transition plan or target it has set is disclosed in accordance with the standards. As noted by some TAC members in previous meetings, users of general purpose financial information are generally interested in an entity's decision-making process, and therefore amending the requirements to prescribe a specific expectation for how an entity should consider transition planning may not always be helpful. For example, the assumptions used by the entity to develop its transition plan will depend on the facts and circumstances of that particular entity, and information about these assumptions is useful to users in understanding how the entity views its climate-related risks and opportunities and how it plans to mitigate, manage or take advantage of these risks and opportunities.
16Requiring an entity to apply specific strategic goals within their business—for example, expecting entities to align targets and transition plans to the UK's national climate change goals—is beyond the objective of IFRS S2 and therefore would be a matter of public policy. As noted in paper 2024-TAC-020 on targets, such an amendment to IFRS S2 would be a decision for the UK Sustainability Disclosure Policy and Implementation Committee (PIC) to discuss in its assessment of IFRS S1 and IFRS S2.
Endorsement recommendations
Alternative options considered but not recommended
17In considering the TAC's endorsement recommendations on the requirements relating to transition plans, 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 that failure to amend the standard would be detrimental to the long-term public good—have not been met in this instance.
18The alternative options that were considered but not recommended included:
18.1amending IFRS S2 by adding a direct reference to the TPT materials. Although some stakeholders have requested further application guidance on reporting transition plans as well as noting the helpful materials produced by the TPT, it may not be appropriate to add a direct reference in IFRS S2 to the TPT materials at this time. Given the announcement by the ISSB that they will utilise the TPT materials to develop their own educational material, and perhaps in the future application guidance, it may not be appropriate for the UK to create its own guidance or directly reference the TPT materials as part of the implementation of IFRS S2. Additionally, some stakeholders requested that the TPT materials are only maintained as non-mandatory guidance as they believe that entities should have the discretion to select from the range of resources that are currently available to the market.
18.2amending IFRS S2 so that the requirements for the creation of transition plans are mandatory. Currently, IFRS S2 only requires the disclosure of a transition plan if such a plan exists. IFRS S2 does not specify that an entity has to have a transition plan to be compliant with the standard. Some stakeholders have suggested that as part of the UK's implementation of the standard, entities should firstly be required to have a transition plan, and secondly to align that plan with the Paris Agreement or the UK's national climate change goals. This is a public policy matter and is therefore for the PIC to discuss in its assessment of IFRS S1 and IFRS S2
Suggested endorsement recommendation
19On balance, and based on the analysis provided in this paper, the TAC is asked to tentatively recommend:
19.1to maintain the requirements in IFRS S2 for entities to disclose information about climate-related transition plans, only if such a plan exists. Other than requesting additional application guidance on reporting transition plans, stakeholders did not provide significant concerns directly relating to the requirements in IFRS S2. Additionally, the analysis provided in this paper did not observe any direct concerns relating to the requirements in IFRS S2 but did highlight areas that might require further consideration as practice develops.
Questions for the TAC
- Does the TAC agree with the analysis in this paper in relation to transition plans in IFRS S2?
- Does the TAC agree to tentatively recommend to maintain the requirements in IFRS S2 for entities to disclose information about climate-related transition plans, only if such a plan exists?