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TAC Public Meeting October 2024 Paper 6: Targets
Executive summary
| Date | 08 October 2024 |
|---|---|
| Paper reference | 2024-TAC-020 |
| Project | Technical assessment of IFRS S1 and IFRS S2 |
| Topic | Targets |
Objective of the paper
This paper considers the requirements in IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2) relating to targets. This includes the requirements to disclose targets relating to sustainability-related risks and opportunities, in addition to the specific requirements relating to emissions reduction targets. The TAC is asked to consider whether the requirements relating to targets are sufficient and whether these requirements are expected to improve the quality of disclosure.
Decisions for the TAC
The TAC is asked to tentatively decide to:
- maintain the requirements in IFRS S2 without amendment for entities to disclose information about targets;
- recommend that the ISSB considers how an entity might identify and disclose targets related to sustainability-related risks and opportunities as part of its research on topic-specific standards; and
- observe the application of the requirements relating to targets—notably relating to the use of carbon credits and connectivity with identified risks and opportunities—and providing feedback to the ISSB during its post-implementation review of IFRS S1 and IFRS S2.
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 S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2) set out requirements for the disclosure of sustainability-related targets. IFRS S1 includes general requirements for the disclosure of information that enables users to understand an entity's performance in relation to its sustainability-related risks and opportunities. IFRS S2 supplements the general requirements in IFRS S1 with additional climate-related requirements. The relevant references to the requirements in IFRS S1 and IFRS S2 are as follows:
- IFRS S1 paragraphs 45, 51–53 and B52
- IFRS S2 paragraphs 27, 33–37, B66–B71 and Appendix A
2Stakeholders that responded to the TAC's call for evidence did not provide any significant concerns relating to the requirements about targets. However, when prioritising the TAC's technical workplan the TAC members requested further discussion about targets, especially relating to gaps in current reporting practice. Some members highlighted concerns that current disclosures relating to targets are problematic because there are inconsistencies in how entities present targets, including inconsistencies in disclosures regarding the base year, the time period over which a target relates, the scope of the targets, and whether they are absolute or intensity targets.
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 targets, there are a number of matters for the TAC to discuss, including:
4.1the requirements in IFRS S1 to disclose targets for sustainability-related risks and opportunities. In the absence of topic-specific standards, IFRS S1 includes general requirements for the disclosure of targets. However, it might be unclear as to what types of targets will be relevant to understand an entity's performance in relation to sustainability-related risks and opportunities that that could reasonably be expected to affect the entity's cash flows, its access to finance or cost of capital over the short, medium or long term. Paragraphs 5–8 discuss the requirements in IFRS S1, including the use of the SASB Standards and the expectations for connectivity across disclosures. The TAC is asked to consider whether any further guidance may be necessary to understand what information entities are expected to disclose.
4.2the various requirements in IFRS S2 specifically relating to climate-related targets. This includes discussion about gaps in current practice in relation to broader climate-related targets, and more specifically in relation to emissions reduction targets. Paragraphs 9–25 discuss the climate-related requirements including the requirements to align with the latest international agreement on climate change, and the use of carbon credits to set emissions reduction targets. The TAC is asked to consider whether any further guidance may be necessary to support improved disclosure.
Targets for sustainability-related risks and opportunities
5As an overarching standard for all sustainability-related risks and opportunities, IFRS S1 includes general requirements for the disclosure of targets rather than specific disclosures relating to sustainability-related matters. For example, IFRS S1 paragraph 51(a)–(g) lists general disclosures that an entity should disclose relating to targets. It is expected that future IFRS Sustainability Disclosure Standards will specify any cross-industry metrics that are applicable to a specific sustainability-related matter, and therefore may include more specific requirements relating to targets. Without the specificity of a topic-specific standard, it is unclear what targets entities may disclose in relation to non-climate sustainability-related risk and opportunities, especially for social-related matters. In the July 2024 meeting, the TAC agreed that it is more challenging in practice for entities to identify risks and opportunities that could reasonably be expected to affect the entity's cash flows, its access to finance or cost of capital over the short, medium or long term relating to social-related matters. Given the challenges associated with identifying social-related risks and opportunities relevant to an entity's prospects, it is also likely that entities will find it difficult to disclose targets that relate to these risks and opportunities. For example, it is unclear as to whether a target relating to diversity and inclusion could be considered a target relating to sustainability-related risks and opportunities that could reasonably be expected to affect an entity's prospects1. The TAC agreed that 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 reasonably be expected to affect an entity's prospects, alongside topic-specific guidance on materiality. The TAC may consider also recommending that the ISSB consider how an entity might identify and disclose targets related to sustainability-related risks and opportunities as part of its research on topic-specific standards.
6In the July 2024 meeting, the TAC agreed that the SASB Standards—which entities are required to 'refer to and consider’—could be a helpful starting point for entities to understand what information to disclose in relation to IFRS S1. However, as noted in IFRS paragraph 51, an entity is required to disclose 'information about the targets it has set to monitor progress towards achieving its strategic goals, and any targets it is required to meet by law or regulation'. This suggests that the metrics included in the SASB Standards are only useful—in relation to the requirements about targets—if the information provides insight into the targets the entity has set to monitor progress towards achieving its strategic goals. Therefore, it is assumed that an entity can choose to not include the metrics in the SASB Standards if they do not provide information about how the entity is monitoring progress towards achieving its strategic goals.
7The information about an entity's targets is also expected to connect with information provided as part of the strategy disclosures—not just an entity's sustainability strategy, but also the wider business strategy. For example, if an entity has a target to increase R&D expenditure to develop sustainable products and services, then users may expect to see this target reflected in the broader business strategy.
8In response to the TAC's call for evidence, some stakeholders suggested that the UK could introduce safe harbour or liability provisions to support entities in disclosing certain parts of the standards. In particular, a few stakeholders suggested that the UK could extend liability coverage to the metrics and targets requirements. There are existing safe harbour provisions in the Companies Act for disclosures in the strategic report or directors' report. If the information for IFRS S1 and IFRS S2 are required to be disclosed in these reports, these safe harbour provisions will apply to IFRS S1 and IFRS S2. The introduction or extension of safe harbour or liability provisions are implementation issues that may be considered by the UK Sustainability Disclosure Policy and Implementation Committee (PIC) in its assessment of IFRS S1 and IFRS S2.
Climate-related targets
9IFRS S2 repeats the general requirements relating to targets from IFRS S1, but supplements these with additional climate-specific requirements. IFRS S2 paragraph 36(a)–(iv) includes specific disclosure requirements relating to greenhouse gas emissions. The sections below discuss some of the key areas of practice in the UK in relation to climate-related targets, but also some of the challenges associated with setting emissions reduction targets.
Current practice in the UK
10In paper 2024-TAC-004b, the TAC was presented with a summary of current disclosure practice in the UK based on a literature review. This review found that although many entities reported information about various climate-related targets, these disclosures were often unclear and incomplete. For example, FRC's 2023 thematic review of climate-related metrics and targets found that entities reported various targets covering both greenhouse gas emissions and other climate-related targets. In particular, the review found that most entities had greenhouse gas emissions reduction targets, but the clarity of the target varied across the sample. This finding is consistent with the FRC's 2023 review of corporate governance reporting, which found that the metrics used to track progress were sometimes unclear and explanations of performance were not always provided. This is also consistent with PwC's 2023 review of TCFD reporting which found that 38% of entities in their sample disclosed specific climate-related targets and milestones but without a formal plan, and that 68% of entities in their sample provided discussion on the progress made in the year–52% provided a high-level description whereas 16% provided a detailed description of progress.
11Deloitte's 2023 corporate reporting insights found that 98% of companies in their sample—which increased in their 2024 corporate reporting insights to 100%—disclosed one or more climate-related targets with 88% of companies including some or all of their Scope 3 emissions in the greenhouse gas emissions targets. Additionally, this review found that 44% of companies in the sample disclosed that their targets had been verified by a third party, whereas 28% disclosed their intention to have, or were in the process of having, the targets verified by a third party or had submitted the targets for review. Specifically, the review found that in all but two cases, the third party referenced was the Science Based Target Initiative (SBTi).
12Although current practice in relation to targets is inconsistent, the requirements in both IFRS S1 and IFRS S2, if applied fully, should improve the quality of disclosure. Unlike existing disclosure requirements—for example, in the TCFD recommendations—the requirements in IFRS S1 and IFRS S2 are more granular and require further detail about the targets, which should support entities in providing disclosures that are understandable, relevant, reliable and comparable. The TAC may consider observing the application of the requirements relating to targets and providing feedback to the ISSB during its post-implementation review of IFRS S1 and IFRS S2.
International and national climate change targets
13No significant concerns about climate-related targets were raised by stakeholders during the TAC's call for evidence. However, in response to IFRS S2 Exposure Draft, some UK stakeholders believed that the requirement to compare an entity's targets to the latest international agreement on climate change was too prescriptive, whereas others wanted the standard to go further and specify that the targets should be aligned to the Paris Agreement. In response to feedback, the ISSB amended the proposed requirement in the final standard to require entities to disclose ‘how the latest international agreement on climate change, including jurisdictional commitments that arise from that agreement, has informed the target.' As described in IFRS S2 Basis for Conclusions paragraph BC143, this amendment was designed to prevent a binary response—i.e., to prevent entities simply disclosing that the target 'is aligned to Paris goals' without providing any additional contextual information. Additionally, even though the Paris Agreement is not explicitly referenced in IFRS S2, it is the latest international agreement on climate change so is implied. By not including a direct reference the Paris Agreement, IFRS S2 is future-proofed for any new international agreements when made.
14Few stakeholders have suggested that the UK specify that an entity's climate-related targets are aligned with the UK's net zero targets or its Nationally Determined Contribution (NDC) to the Paris Agreement2. IFRS S2 provides flexibility to allow entities to determine their own targets based on the facts and circumstances of the entity. However, ESRS E1 Climate Change (ESRS E1) specifies that entities are required to demonstrate how their past, current, and future mitigation efforts are compatible with the Paris Agreement's objective of limiting of global warming to 1.5°C, which includes the entity's greenhouse gas emissions reduction targets. This requirement in ESRS E1 is aligned with the EU's climate policies and is therefore connected to EU public policy objectives. To amend IFRS S2 and specify that entities should align any target with the Paris Agreement or the UK's national goals would also be a public policy matter and therefore would not be part of the TAC's remit.
Net zero commitments and carbon credits
15In paper 2024-TAC-004b, the TAC was presented with a summary of current disclosure practice in the UK based on a literature review. In relation to net zero targets, the FCA's high-level review of premium listed companies found that 80% of annual reports that were reviewed included net zero statements. This is consistent with PwC's 2022 review of FTSE 350 reporting practice which found 76% of companies in the sample referred to a net zero commitment, but with only 48% of companies having a specific key performance indicator relating to carbon reduction.
16A few stakeholders noted concerns relating to net zero targets. These concerns focused on the potential risk of greenwashing, but also the impact these requirements might have on amounts disclosed in the financial statements. However, it is important to note that IFRS S2 does not require the disclosure of net targets. Instead, IFRS S2 paragraph 36(c) requires entities to disclose 'whether the target is a gross greenhouse gas emissions target or net greenhouse gas emissions target'. Additionally, IFRS S2 requires entities to separately disclose net and gross targets to ensure that net targets cannot obscure information about gross greenhouse gas emissions targets. IFRS S2 paragraph B69 clarifies that an entity is required to disclose a gross target if it has a net target, meaning that no entities applying IFRS S2 should only disclose net targets which should improve the quality of reporting and reduce the risk of greenwashing. Entities that cannot provide gross targets alongside net targets due to the long-term nature of the target (e.g., a net zero target by 2050) might need to consider whether the terminology used to describe this goal is correct—that is, an entity should differentiate between a measurable target and an ambition.
17Although the use of carbon credits to offset greenhouse gas emissions has grown, it remains a controversial topic with strong views for and against their use. For example, a recent report from SBTi found that different types of carbon credits are used by entities, and many are considered ineffective in delivering their intended mitigation outcomes. The SBTi is currently considering whether to allow entities to use carbon credits to offset indirect emissions as part of the target setting approach, but has been met by strong opposition.
18In IFRS S2, there is no requirement for entities to use carbon credits. Instead, IFRS S2 paragraph 36(e) requires an entity to disclose its 'planned use of carbon credits to offset greenhouse gas emissions to achieve any net greenhouse gas emissions target' including specific disclosures about the type of carbon credits (nature-based or based on technological carbon removals), the extent the target relies upon the carbon credits, the verification of the carbon credits and any other important information about the characteristics of the carbon credits.
19Notably, IFRS S2 only requires the disclosure of carbon credits (if they are used) in relation to targets and not as part of an entity's greenhouse gas emissions disclosure. Therefore, to be in compliance with IFRS S2, an entity would be unable to 'net-off' its greenhouse gas emissions for the reporting period (or previous reporting periods) without also providing information about the absolute gross greenhouse gas emissions. This would reduce the risk of greenwashing and improve the transparency of greenhouse gas emissions disclosures.
20However, there are some notable differences between IFRS S2 and ESRS E1 with regard to the disclosure of carbon credits. The requirements in ESRS E1 are more granular. For example, ESRS E1:
- separates the use of carbon credits arising from within or outside the value chain;
- requires an explanation about the credibility and integrity of the carbon credits;
- only permits the disclosure of carbon credits cancelled in the reporting period (as opposed to previous reporting periods); and
- does not permit entities to use carbon credits to claim achievement of greenhouse gas emissions targets.
21Given the controversies related to the use of carbon credits to offset greenhouse gas emissions, it is appropriate that IFRS S2 does not express a view on an entity's use of carbon credits in setting its greenhouse gas emissions targets. The focus in the standard on transparency is appropriate, and therefore it may not be appropriate to amend IFRS S2 in relation to the use of carbon credits. The disclosure requirements in IFRS S2 are likely to improve the quality of disclosure, but there may be a need for further and more granular disclosure requirements in the future as disclosure practice evolves. Therefore, the TAC may consider observing market practice on the disclosure of carbon credits as it develops to provide feedback to the ISSB during its post-implementation review of IFRS S2.
Connecting to metrics disclosures
22IFRS S1 paragraph 51(a) and IFRS S2 paragraph 33(a) requires an entity to disclose 'the metric used to set the target and to monitor progress towards reaching the target'. IFRS S2 paragraph B66 goes further by requiring entities to describe whether the climate-related target is an absolute or intensity target. Additionally, IFRS S2 paragraph B67 requires entities to consider both the cross-industry metrics and industry-based metrics it is required to disclose in IFRS S2 paragraphs 29 and 32. However, if the entity sets, or is required to set, a greenhouse gas emissions reduction target, it is not required by IFRS S2 to align that target with its gross absolute greenhouse gas emissions reporting in accordance with IFRS S2 paragraph 29.
23Therefore, an entity applying IFRS S2 could disclose an intensity target and the metrics used to measure its performance against the target (in accordance with IFRS S2 paragraph 35), alongside its gross absolute greenhouse gas emissions. When applying IFRS S2, an entity should disclose a target with metrics to measure the performance against that target, even if that metric is not already required by IFRS S2.
Beyond greenhouse gas emissions
24IFRS S2 purposefully separates the requirements for general climate-related targets and greenhouse gas emissions noting that an entity's climate-related targets may go beyond emissions reduction targets. An entity's climate-related targets should include more than just emissions reduction targets if the entity has identified climate-related risks and opportunities beyond those related to greenhouse gas emissions. The objective of the Metrics and Targets section requires the disclosure of information that 'enables users of general purpose financial reports to understand an entity's performance in relation to its climate-related risks and opportunities'. Therefore, an entity should be disclosing information about targets that relate to the climate-related risks and opportunities that it has identified.
25IFRS S1 paragraph 21 requires entities to provide information about the connections '‘across its sustainability-related financial disclosures'. IFRS S1 paragraphs B39–B44 provides examples of connected information. If, according to the objective of the Metrics and Targets section, an entity's targets should relate to the climate-related risks and opportunities it has identified, then it is reasonable to assume that the targets should be connected to the information provided in accordance with the Strategy section. Similar to the assessment and recommendation in paragraph 5 relating to broader sustainability-related risks and opportunities, the TAC may conclude that further guidance may be required from the ISSB to support entities in identifying and disclosing targets related to climate-related risks and opportunities other than greenhouse gas emissions. This guidance may not be a priority and therefore the TAC may consider observing market practice on the disclosure of targets relating to climate-related risks and opportunities as it develops to provide feedback to the ISSB during its post-implementation review of IFRS S2.
Endorsement recommendations
Alternative options considered but not recommended
26In considering the TAC's endorsement recommendations on the requirements relating to targets, 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.
27The alternative options that were considered but not recommended included:
27.1specifying climate targets to align with the Paris Agreement or the UK's national climate targets. To amend IFRS S2 and specify that entities should align any target with the Paris Agreement or the UK's national climate targets is a public policy matter and therefore not part of the TAC's remit. This is a matter for the PIC to discuss in its deliberations of IFRS S2. It may also be helpful to note that IFRS S2 already requires entities to disclose 'how' international agreements have informed the target which might provide the transparency that users are asking for.
27.2remove the requirements relating to the use of carbon credits. Recent reports suggest that the current use of carbon credits does not meet the intended mitigation outcomes they are used for. Additionally, there are strong views on both sides about the appropriate use of carbon credits. While some stakeholders may welcome the removal of the reference to carbon credits from IFRS S2, it is appropriate that IFRS S2 focuses on the transparency of information relating to carbon credits to improve the quality of reporting and reduce the risk of greenwashing.
27.3insert more detailed requirements in relation to the use of carbon credits. Similar to the alternative option in paragraph 27.2, some stakeholders may welcome further and more detailed requirements in relation to the appropriate use of carbon credits to set emissions reduction targets. However, the TAC may conclude that the disclosure requirements are sufficiently broad at this stage to enable market practice to develop. The TAC may consider observing market practice as it develops to ascertain whether more detailed requirements are needed in the future (see paragraph 28.3).
27.4inserting safe harbour or liability provisions in relation to targets. As noted in paragraph 8, some stakeholders suggested that the UK could introduce safe harbour or liability provisions to support entities in disclosing information about metrics and targets. However, any discussion of safe harbour or liability provisions are implementation issues that may be considered by the PIC in its assessment of IFRS S1 and IFRS S2.
Suggested endorsement recommendation
28On balance, and based on the analysis provided in this paper, the TAC is asked to tentatively recommend:
28.1to maintain the requirements in IFRS S2 without amendment for entities to disclose information about targets. Despite recognising that current practice relating to targets is insufficient, it may not be appropriate to amend the requirements at this stage. It is expected that the requirements in both IFRS S1 and IFRS S2, if applied fully, should improve the quality of disclosures as it includes more granular requirements than existing disclosure requirements. If applied fully, the requirements in IFRS S1 and IFRS S2 relating to targets should support entities in providing disclosures that are understandable, relevant, reliable and comparable. However, the TAC may consider observing market practice as it develops to ascertain whether more detailed requirements or guidance is needed in the future (see paragraph 28.3).
28.2to recommend that the ISSB consider how an entity might identify and disclose targets related to (non-climate) sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects as part of its research on topic-specific standards. In its July 2024 meeting, the TAC agreed that it is more challenging in practice for entities to identify risks and opportunities relating to broader sustainability-related matters that could reasonably be expected to affect the entity's cash flows, its access to finance or cost of capital over the short, medium or long term—especially relating to social-related matters. In that meeting, the TAC agreed that 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 reasonably be expected to affect an entity's prospects, alongside topic-specific guidance on materiality. The TAC may consider also recommending that future topic-specific standards provide further guidance as to the expected disclosures relating to broader sustainability-related targets.
28.3to observe the application of the requirements relating to targets—notably relating to the use of carbon credits and connectivity with identified risks and opportunities—and providing feedback to the ISSB during its post-implementation review of IFRS S1 and IFRS S2. ISSB initiates its post-implementation review of IFRS S1 and IFRS S2, the TAC may consider providing feedback depending on how entities have applied the requirements, including providing feedback as to whether further and more granular requirements are necessary.
Questions for the TAC
- Does the TAC agree with the analysis in this paper in relation to the requirements relating to targets in IFRS S1 and IFRS S2?
- Does the TAC agree to tentatively recommend to maintain the requirements in IFRS S2 without amendment for entities to disclose information about targets?
- Does the TAC agree to tentatively recommend that the ISSB consider how an entity might identify and disclose targets related to sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects as part of its research on topic-specific standards?
- Does the TAC agree to tentatively recommend to observe the application of the requirements relating to targets—notably relating to the use of carbon credits and connectivity with identified risks and opportunities—and providing feedback to the ISSB during its post-implementation review of IFRS S1 and IFRS S2?