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TAC Public Meeting November 2024 Paper 3: Interoperability
Executive summary
| Date | 05 November 2024 |
| Paper reference | 2024-TAC-024 |
| Project | Technical assessment of IFRS S1 and IFRS S2 |
| Topic | Interoperability |
Objective of the paper
This paper addresses interoperability considerations that the UK Sustainability Disclosure Technical Advisory Committee (TAC) may wish to consider as part of its technical assessment of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2).
Decisions for the TAC
The TAC is asked to decide whether to provide a statement in the final advice to the Secretary of State that supports interoperability and cross refers to the decisions the TAC has already made on this technical area.
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.
Context
1As set out in the Terms of Reference, the TAC's analysis 'should be used to provide a recommendation to the Secretary of State on whether the endorsement of an IFRS Sustainability Disclosure Standard would be conducive to the long-term public good in the UK, including 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.' International comparability relates to how disclosures provided by UK entities compare to, and relate to, disclosures provided by entities in other jurisdictions. International comparability can be considered from the entity perspective—i.e., in the preparation of the required information—but also from the primary user perspective—i.e., in using the reported information to assess the performance of different entities.
2In May 2024, the TAC discussed the assessment approach to be used to assess IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2). As noted in this discussion, the TAC is not expected to conduct a detailed comparative analysis of the use of IFRS Sustainability Disclosure Standards in other jurisdictions, or of any other jurisdictional sustainability reporting requirements. Instead, the TAC should be aware of other jurisdictional developments and may observe specific matters outside the UK that might impact international comparability. The TAC is also not expected to review every possible jurisdictional requirement and will prioritise certain jurisdictions to monitor. These matters should be considered by the TAC when they may have a significant effect on international comparability.
3The term 'interoperability' is often used in relation to the comparability of sustainability-related reporting. For the purposes of the TAC's work, interoperability refers to the way in which the ISSB standards interact and align to other sustainability reporting standards and frameworks with the aim of minimising the reporting burden for entities. Interoperability is not strictly limited to overseas reporting frameworks, as UK entities may be reporting using other sustainability reporting frameworks e.g., Global Reporting Initiative (GRI).
Endorsement criteria
4The 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;
- 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.
Analysis
5In relation to the interoperability, there are a number of matters for the TAC to discuss, including:
- general views on interoperability, including stakeholder views on the importance of interoperability. Paragraphs 6–11 provide a summary of stakeholder views.
- decisions already made by the TAC relating to interoperability which are outlined in paragraph 12.
General views on interoperability
6The IFRS Sustainability Disclosure Standards have been developed as a 'global baseline' to establish international comparability. As explained in IFRS S1 Basis for Conclusions paragraph BC27:
‘[t]he global baseline is intended to serve as a comprehensive foundation of disclosure requirements, resulting in comparable, cost-effective and decision-useful sustainability-related financial disclosures that are designed to meet the needs of users. Jurisdictions will be able to build any necessary incremental disclosure requirements on this common baseline.'
However, despite creating this 'global baseline', stakeholders have indicated that they are concerned about the proliferation of mandatory requirements in other jurisdictions and have highlighted the importance of 'interoperability'.
7In response to the TAC's call for evidence—including in the associated roundtables that were held with various stakeholders—the most commonly raised issue by UK stakeholders related to interoperability. Many stakeholders highlighted the importance of interoperability with reporting frameworks in other jurisdictions, notably with the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS)—although the pending climate disclosure requirements from the US Securities and Exchange Commission (SEC) were also mentioned. In particular, entities that prepare sustainability-related disclosures were concerned about the increased cost and burden of having to comply with multiple jurisdictional requirements. Users were concerned that different jurisdictional requirements could compromise comparability and lead to longer and more complex disclosures that are difficult to navigate.
8Several stakeholders also requested 'equivalence' between the IFRS Sustainability Disclosure Standards and other reporting frameworks to support entities that are required to report sustainability-related information in accordance with jurisdictional requirements. 'Equivalence' in this context is where a home jurisdiction assesses that the standards required by an overseas jurisdiction are deemed to be 'equivalent' to those in the home jurisdiction. This can provide advantages to entities in the overseas jurisdiction who undertake activities in the home jurisdiction, including potential exemption from some or all of the requirements to report under the home jurisdiction's reporting framework. In many cases, 'equivalence' is a formal mechanism that requires a full assessment of the requirements in both jurisdictions and negotiations with the jurisdictional bodies involved. As of 29 October 2024, there have been no announcements relating to equivalence decisions relating to IFRS Sustainability Disclosure Standards. Decisions about equivalence are a policy and implementation matter and are therefore within the remit of the UK Sustainability Disclosure Policy and Implementation Committee (PIC).
9It is important to acknowledge the difference between 'interoperability' and 'equivalence' as the terms are sometimes used interchangeably. ‘Interoperability' refers to the way in which standards interact and align to other sustainability reporting standards with the aim of minimising the reporting burden for entities. Interoperability does not mean that the requirements of the standards are the same and that an entity need only apply one standard above the other. For example, an entity that is captured by mandatory reporting of both IFRS Sustainability Disclosure Standards and ESRS in different jurisdictions will still need to comply with both standards. The high level of interoperability between the standards means that an entity might be able to disclose certain information once and be compliant with both standards. However, not all elements of the two standards are interoperable, and the entity would need to ascertain whether they have fulfilled both requirements. The ISSB and EFRAG have introduced ESRS–ISSB Standards Interoperability Guidance which maps climate-related disclosure requirements in ESRS and IFRS S2 and provides insight into where the requirements are the same and where there are differences. This guidance also provides points for entities to consider when applying both standards. Notably, this guidance—and the statement that the standards have a ‘high level of interoperability'—is only applicable to the climate-related disclosure requirements. It is expected that EFRAG and ISSB will continue to work towards interoperability for other sustainability matters.
10A few stakeholders also raised concerns about the proliferation of requirements beyond the EU and US. Many jurisdictions around the world are introducing mandatory sustainability-related disclosure requirements at similar times, which means that entities must monitor what the requirements are, when they are likely to be mandated, and which entities will be in scope. This creates a lot of uncertainty but also concerns about having to disclose slightly different information to comply with multiple jurisdictional requirements.
11Although stakeholders are mostly concerned with mandatory reporting requirements, some stakeholders have also welcomed interoperability with voluntary requirements, namely with the Global Reporting Initiative (GRI) Standards, which are the most widely used global sustainability reporting standards. The IFRS Foundation and GRI have signed a Memorandum of Understanding to enable coordinated work programmes—including standard setting activities—that focus on interoperability.
TAC decisions on interoperability
12The TAC has previously indicated support for interoperability efforts, recognising the importance of interoperability for entities that will be in scope for reporting requirements in other jurisdictions. The TAC has already discussed interoperability in relation to other technical areas. In particular, the TAC has discussed and decided upon the following matters.
12.1 Materiality
– in July 2024, the TAC agreed to support the ISSB's work on interoperability to ensure it focuses on the key challenges for UK entities that will report under both UK Sustainability Reporting Standards and other jurisdictional sustainability reporting frameworks. The focus of this tentative recommendation was in relation to the application of materiality, noting that ESRS includes requirements relating to the concept of 'double materiality'.
12.2 Identifying sustainability-related risks and opportunities
– in July 2024, the TAC decided to maintain the requirements in IFRS S1 relating to the identification of sustainability-related risks and opportunities. The TAC discussed the definition of 'sustainability-related matters' in the EU which underpin the ESRS, noting that entities might use this definition and the requirements in ESRS in the absence of other topic specific IFRS Sustainability Disclosure Standards. The TAC also discussed the prescribed time horizons in ESRS, noting that although flexibility in the definition of the time horizons in IFRS Sustainability Disclosures Standards is welcomed, UK entities applying ESRS will be required to apply those prescribed time horizons.
12.3 Location of disclosures
– in June 2024, the TAC decided to maintain the requirements in IFRS S1 that require the disclosure of sustainability-related information as part of the general purpose financial reports. However, the TAC also acknowledged that UK entities that are required to comply with the CSRD will be required to disclose their sustainability-related disclosures in in a sustainability statement within the entity's management report, and therefore flexibility in IFRS S1 allows entities to meet both requirements. The TAC also discussed location in relation to transition plans and acknowledged that other jurisdictional regimes might prevent entities from disclosing information as part of the general purpose financial report.
12.4 Sources of guidance
in July 2024, the TAC decided to maintain the requirements in IFRS S1 and IFRS S2 relating to the sources of guidance. The TAC noted that IFRS S1 paragraphs 58(c) and C1–C3 permit entities to use the Global Reporting Initiative (GRI) Standards and ESRS to identify disclosure requirements only if these sources do not conflict with the objective of IFRS S1.
12.5 Reporting entity boundaries
– in June, July and September 2024, the TAC discussed reporting entity boundaries including in relation to value chain requirements and the requirements to use the GHG Protocol Corporate Accounting and Reporting Standard (GHG Protocol Corporate Standard) to measure greenhouse gas emissions. The TAC decided to maintain the requirements in IFRS S1 for an entity to use the same entity boundary as used for financial reporting. The TAC noted that different requirements in different jurisdictions could lead to unclear reporting if an entity is required to use different reporting entity boundaries. For example, some jurisdictions require subsidiary-level reporting and others do not, which could also impact international comparability with other jurisdictions. The TAC suggested that the PIC consider the introduction of an exemption for certain subsidiaries where the parent company is reporting on an equivalent basis for the consolidated group, noting that international subsidiaries might also have local reporting requirements and the absence of an exemption could cause additional complexity.
12.6 Greenhouse gas emissions
– in September 2024, the TAC decided to maintain the requirements relating to greenhouse gas emissions in IFRS S2. The TAC also agreed it would request further clarification and guidance from the ISSB on the requirement to disaggregate Scope 1 and Scope 2 emissions by consolidated accounting group and other investees, noting that the ISSB should engage with EFRAG regarding discrepancies between the two climate change standards on this requirement.
Endorsement recommendations
Suggested endorsement recommendation
13The TAC has already made a number of recommendations relating to interoperability as outlined in paragraph 12. However, the TAC may also consider providing the following statement in its advice to the Secretary of State.
13.1 The TAC supports continued efforts towards interoperability of the IFRS Sustainability Disclosure Standards with requirements in other jurisdictions.
With the range of requirements required by other jurisdictions (some ISSB based, but others using different reporting frameworks or standards), there is a risk that international comparability is compromised and the quality of decision-useful information decreases. Both reporting entities and users of general purpose financial reports will benefit from increased interoperability, and therefore the TAC supports the global baseline and greater alignment between IFRS Sustainability Disclosure Standards and jurisdictional reporting requirements around the world. The TAC also supports efforts towards greater alignment and interoperability with voluntary sustainability reporting frameworks, for example with GRI.
The TAC has made specific recommendations relating to interoperability which are included as part of the technical assessment of other technical areas.
Questions for the TAC
- Does the TAC agree with the analysis in this paper in relation to interoperability?
- Does the TAC agree to include in its advice the statement in paragraph 13.1 that demonstrates support for interoperability?