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TAC Public Meeting November 2024 Paper 4: Follow-up discussion on financed emissions

UK Sustainability Disclosure Technical Advisory Committee logo

Executive summary


Date	05 November 2024
Paper reference	2024-TAC-025
Project	Technical assessment of IFRS S1 and IFRS S2
Topic	Follow-up discussion on financed emissions

Objective of the paper

In the September and October 2024 meetings, the TAC agreed to revisit the tentative decisions on financed emissions relating to a number of specific technical areas. This paper addresses each of the matters and asks the TAC to make final decisions on the recommendations relating to financed emissions, including approving the suggested wording for the amendments.

Decisions for the TAC

The TAC is asked to finalise its recommendations relating to financed emissions, including: * to amend IFRS S2 so that entities are not required to use Global Industry Classification Standard (GICS) when disaggregating gross financed emissions but may use GICS or a different classification system they are already using for existing regulatory or financial reporting purposes. * to amend both IFRS S1 and IFRS S2 to clarify that asset managers, commercial banks and insurers should provide information about the reporting period for financed emissions information as it might not be the same as the current reporting period for the financial statements. * to suggest that entities consider using guidance provided by established industry standards on the expected level of coverage of emissions included in financed emissions disclosures, and suggest to the ISSB that this could be an area that is considered as part of the development of ISSB's industry-based standards.

The TAC is also asked to approve the suggested wording for the amendments to the requirements related to financed emissions.

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

1In the September and October 2024 meetings, the TAC agreed to revisit the tentative decisions on financed emissions relating to:

the 19 September 2024 meeting of the ISSB's Transition Implementation Group (TIG) on the scope of financed emissions disclosures, and the disaggregation of financed emissions by undrawn facilities;
the amended wording relating to the reference to the Global Industry Classification Standard (GICS); and
the suggested wording relating to financed emissions and related financial statements.

2This paper addresses each of these matters and asks the TAC to make final decisions on the recommendations relating to financed emissions.

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; and
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.

Follow up from ISSB TIG meetings

4In the September 2024 meeting, TAC paper 2024-TAC-015 on financed emissions noted that two of the matters identified for discussion by the TAC were tabled for discussion at the 19 September 2024 meeting of the ISSB's Transition Implementation Group (TIG). The two matters were:

4.1scope of financed emissions disclosures - the emissions associated with a financial institution's asset management activities are not technically part of an entity's own financed emissions as they are not attributable to loans and investments made by the entity itself, which is the definition of financed emissions set out in IFRS S2. Notwithstanding, IFRS S2 requires disclosure of these emissions, referring to them as the entity's own 'absolute gross financed emissions' even though technically this descriptor is not correct.

4.2disaggregation of financed emissions by undrawn facilities IFRS S2 paragraph B62(c) requires an entity to report the percentage of the entity's gross exposure included in the financed emissions calculation, and as part of that to separately disclose the percentage of its undrawn loan commitments included in the financed emissions calculation. Stakeholders have indicated that many entities currently only calculate financed emissions based on drawn facilities, which is consistent with approaches taken by established industry standards. Furthermore, as there is no standard methodology for calculating financed emissions on undrawn loan facilities the comparability and consistency of these disclosures may be compromised.

5In relation to these matters, the TAC paper noted that these technical areas were expected to be addressed in the September TIG meeting. As the papers had not been published at the time of the TAC meeting it was not clear if, and how, these matters would be addressed. The TAC agreed to follow the September 2024 TIG discussion on financed emissions related to undrawn facilities to determine whether or not a reference to this issue should be made in its advice to DBT. Following the TIG discussion, it was noted that a paper might be brought back to the TAC on this technical area.

6In the September TIG meeting, the two matters (scope of financed emissions disclosures and disaggregation of financed emissions by undrawn facilities) were considered as part of the Staff paper, Agenda reference: 1 Reporting on other questions submitted. These matters were included in a table in an accompanying paper which categorised the issues as 'Questions that can be answered applying the words in IFRS S1 and IFRS S2.' The responses set out in the paper are then intended to address the questions posed by referencing text that is already in IFRS S1 and IFRS S2.

Scope of financed emissions

7The scope of financed emissions was addressed in Question 14 of the paper under the heading 'Scope of value chain for asset management entities.' The intention of the ISSB's response as set out in the TIG paper was to confirm that whether or not something is recognised or consolidated is not determinative of whether it is in the value chain. The normal processes of relevance and materiality should still apply when determining the appropriate disclosures. No further work on this matter was proposed or agreed on as an outcome of the discussion.

8The TAC had previously tentatively agreed to note in its advice to the Secretary of State that, in relation to the financed emissions disclosures of assets under management, whether an entity owns or controls another entity should be aligned with the financial accounting treatment. If an entity is included in the financial consolidation as per IFRS 10 Consolidated Financial Statements, then for sustainability reporting purposes that entity may also be considered to be controlled by the reporting entity. The TAC also noted that consistent with IFRS S1 paragraph B29 and B30 entities should disaggregate their assets under management financed emissions disclosures consistently with the accounting treatment of those assets—that is, distinguishing between assets that are owned and controlled by the entity and by assets that are not owned or controlled by the entity. Based on the ISSB TIG discussion, the TAC Secretariat do not believe that this point needs to be amended.

Calculation of financed emissions for undrawn facilities

9The scope of financed emissions was discussed by the TIG under Question 15 'Scope 3 Category 15 greenhouse gas emissions: loan commitments.' The TIG noted that entities are taking different approaches to the calculation of financed emissions on undrawn facilities. This diversity in practice is to be expected as IFRS S2 does not detail what approach to calculation entities should take. The TIG noted the importance of entities disclosing the methodology and assumptions they have used in their calculations. The TIG suggested that this matter be monitored with a view to considering whether there may be a need for further materials in the future.

10At the September TAC meeting, the TAC tentatively agreed that the TIG discussion on financed emissions related to undrawn facilities should be followed and that the application of the requirement should be monitored. Following the outcome of the TIG meeting, the TAC may consider noting to the Secretary of State that comparability and consistency in the calculation of financed emissions for undrawn facilities is likely to be challenging given the divergent practices and current lack of available guidance. Additionally, the TAC may consider noting the existing transition relief in IFRS S2 that allows entities to start disclosing financed emissions information in the second year of applying the standards. This transition relief might provide entities with additional time to prepare an approach to calculating emissions from undrawn facilities.

Suggested amendments to the financed emissions requirements

Suggested amendment to the reference to GICS

11In the September and October 2024 meetings, the TAC discussed concerns with IFRS S2 paragraphs B62 and B63, which require commercial banks and insurers to use the 'Global Industry Classification Standard (GICS)' when disaggregating gross financed emissions. TAC members noted that there are several alternative industry classification standards being used by UK entities (e.g., Standard Industrial Classification (SIC)) and it might be more appropriate to allow entities to select a classification standard that it is already required to use for other reporting obligations (e.g., Basel Pillar 3).

12As entities are still in the early stages of reporting in this area, the TAC concluded that proposing more flexibility in the standard should not hamper comparability and will enable greater connectivity with other information in the general purpose financial report.

13In October 2024, the TAC confirmed that the criteria for amendment was met and was asked to approve alternative wording. However, the TAC requested suggested wording to amend the standard to focus on the use of alternative classification systems which the entity is likely to already be using for existing reporting obligations. The TAC is asked to consider and approve the alternative wording in paragraph 18 that will amend IFRS S2.

14In the September and October 2024 TAC meetings, the TAC raised concerns about the requirements in IFRS S1 and IFRS S2 noting that it might not be possible for an entity to apply the requirements in IFRS S2 relating to financed emissions due to the requirement in IFRS S1 paragraph 64 that require sustainability-related disclosures to cover the same reporting period as the related financial statements. TAC members acknowledged that financed emissions data often has a 12-month to two-year lag which means that the disclosed information will not relate to the current financial statements. In particular, financial institutions (in particular asset managers, commercial banks and asset managers) need to wait for the closed balance sheet before they are able to start collecting information from the entities they have financed. Financial institutions might need to wait for entities in their value chain to report the necessary information and then aggregators will collect and standardise the data before it can be provided to the financial institution. This data then needs to be checked and modelled, and for some entities this data is then assured. This process means that by the time the financed emissions data is published, it is no longer aligned with the related financial statements and will be published with a 12 month to two-year lag.

15In October 2024, the TAC agreed that an amendment to the requirements were necessary to enable financial institutions—namely those in the asset management, commercial banking and insurance industries—to be able to comply with the standards. The suggested amendment is intended to provide transparency as to which financial statements the financed emissions data relates to. The TAC is asked to consider and approve the alternative wording in paragraph 18 that will amend IFRS S2.

Endorsement recommendations

Suggested endorsement recommendations

16Based on the TAC's discussion on financed emissions in September 2024, and reflecting on the discussions by the TIG, the TAC is asked to finalise its recommendations relating to financed emissions. This includes recommending:

to amend IFRS S2 so that entities are not required to use GICS when disaggregating gross financed emissions but may use GICS or a different classification system they are already using for existing regulatory or financial reporting purposes.
to amend both IFRS S1 and IFRS S2 to clarify that asset managers, commercial banks and insurers should provide information about the reporting period for financed emissions information as it might not be the same as the current reporting period for the financial statements.
to suggest that entities consider using guidance provided by established industry standards on the expected level of coverage of emissions included in financed emissions disclosures, and suggest to the ISSB that this could be an area that is considered as part of the development of ISSB's industry-based standards.

17The TAC also agreed to note in its advice:

that consistent with IFRS S1 paragraph B29 and B30 entities should disaggregate their assets under management financed emissions disclosures consistently with the accounting treatment of those assets, e.g., distinguishing between assets that are owned and controlled by the entity and by assets are not owned or controlled by the entity.
that UK stakeholders have suggested that the development of global frameworks and standards for the calculation of financed emissions for different financial products should be an area for continued monitoring as practice is established.
that in accordance with IFRS S2 paragraph 29(a)(iii) entities should disclose appropriate explanation and context as to why disaggregated financed emissions figures are disclosed.
that comparability and consistency in the calculation of financed emissions for undrawn facilities is likely to be challenging given the divergent practices and current lack of available guidance.

18The TAC is asked to approve the following amendments to IFRS S1 and IFRS S2 relating to the financed emissions requirements.

Suggested amendments to IFRS S1 using wording borrowed from IFRS S1 paragraphs 25 and 70

64An entity shall report its sustainability-related financial disclosures at the same time as its related financial statements. The entity's sustainability-related financial disclosures shall cover the same reporting period as the related financial statements, unless another IFRS Sustainability Disclosure Standard permits otherwise in specified circumstances.

Suggested amendments to IFRS S2

B59Paragraph 29 (a)(i)(3) requires an entity to disclose its absolute gross Scope 3 greenhouse gas emissions generated during the reporting period, including upstream and downstream emissions. An entity that participates in one or more of the following financial activities is required to disclose additional and specific information about its Category 15 emissions or those emissions associated with its investments which is also known as 'financed emissions':

asset management (see paragraph B61);
commercial banking (see paragraph B62); and
insurance (see paragraph B63).

For these entities, if using financial statements different from the current period to calculate the entity's financed emissions (up to a maximum of two years difference), the entity shall disclose which financial reporting period the financed emissions information relates to.

B60An entity shall apply the requirements for disclosing greenhouse gas emissions in accordance with paragraph 29(a) when disclosing information about its financed emissions.

Asset management

B61An entity that participates in asset management activities shall disclose:

its absolute gross financed emissions, disaggregated by Scope 1, Scope 2 and Scope 3 greenhouse gas emissions.
for each of the disaggregated items in paragraph B61(a), the total amount of assets under management (AUM) that is included in the financed emissions disclosure, expressed in the presentation currency of the entity's financial statements.
the percentage of the entity's total AUM included in the financed emissions calculation. If the percentage is less than 100%, the entity shall disclose information that explains the exclusions, including types of assets and associated amount of AUM.
the methodology used to calculate the financed emissions, including the method of allocation the entity used to attribute its share of emissions in relation to the size of investments.

Commercial banking

B62An entity that participates in commercial banking activities shall disclose:

its absolute gross financed emissions, disaggregated by Scope 1, Scope 2 and Scope 3 greenhouse gas emissions for each industry by asset class. When disaggregating by:
1. industry—the entity shall use an internationally recognised industry classification system (for example, a classification system that the entity already uses for other regulatory or financial reporting purposes). the Global Industry Classification Standard (GICS) 6-digit industry-level code for classifying counterparties, reflecting the latest version of the classification system available at the reporting date.
2. asset class—the disclosure shall include loans, project finance, bonds, equity investments and undrawn loan commitments. If the entity calculates and discloses financed emissions for other asset classes, it shall include an explanation of why the inclusion of those additional asset classes provides relevant information to users of general purpose financial reports.
its gross exposure to each industry by asset class, expressed in the presentation currency of the entity's financial statements. For:
1. funded amounts—gross exposure shall be calculated as the funded carrying amounts (before subtracting the loss allowance, when applicable), whether prepared in accordance with IFRS Accounting Standards or other GAAP.
2. undrawn loan commitments—the entity shall disclose the full amount of the commitment separately from the drawn portion of loan commitments.
the percentage of the entity's gross exposure included in the financed emissions calculation. The entity shall:
1. if the percentage of the entity's gross exposure included in the financed emissions calculation is less than 100%, disclose information that explains the exclusions, including type of assets excluded.
2. for funded amounts, exclude from gross exposure all impacts of risk mitigants, if applicable.
3. disclose separately the percentage of its undrawn loan commitments included in the financed emissions calculation.
the methodology the entity used to calculate its financed emissions, including the method of allocation the entity used to attribute its share of emissions in relation to the size of its gross exposure.

Insurance

B63An entity that participates in financial activities associated with the insurance industry shall disclose:

its absolute gross financed emissions, disaggregated by Scope 1, Scope 2 and Scope 3 greenhouse gas emissions for each industry by asset class. When disaggregating by:
1. industry—the entity shall use an internationally recognised industry classification system (for example, a classification system that the entity already uses for other regulatory or financial reporting purposes). the Global Industry Classification Standard (GICS) 6-digit industry level code for classifying counterparties, reflecting the latest version of the classification system available at the reporting date.
2. asset class—the disclosure shall include loans, bonds and equity investments, as well as undrawn loan commitments. If the entity calculates and discloses financed emissions for other asset classes, it shall include an explanation of why the inclusion of those additional asset classes provides relevant information to users of general purpose financial reports.
the gross exposure for each industry by asset class, expressed in the presentation currency of the entity's financial statements. For:
1. funded amounts—gross exposure shall be calculated as the funded carrying amounts (before subtracting the loss allowance, when applicable), whether prepared in accordance with IFRS Accounting Standards or other GAAP.
2. undrawn loan commitments—the entity shall disclose the full amount of the commitment separately from the drawn portion of loan commitments.
the percentage of the entity's gross exposure included in the financed emissions calculation. The entity shall:
1. if the percentage of the entity's gross exposure included in the financed emissions calculation is less than 100%, disclose information that explains the exclusions, including type of assets excluded.
2. disclose separately the percentage of its undrawn loan commitments included in the financed emissions calculation.
the methodology the entity used to calculate its financed emissions, including the method of allocation the entity used to attribute its share of emissions in relation to the size of its gross exposure.

Questions for the TAC

Does the TAC agree with the analysis in this paper in relation to the TIG discussions on financed emissions?
Does the TAC agree to the summary of recommendations and areas to note in its advice relating to financed emissions as outlined in paragraphs 16–17?
Does the TAC agree to recommend the suggested amendments in paragraph 18 relating to financed emissions?

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