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TAC Public Meeting November 2024 Paper 2: Connectivity and integration
Executive summary
| Field | Value |
|---|---|
| Date | 05 November 2024 |
| Paper reference | 2024-TAC-023 |
| Project | Technical assessment of IFRS S1 and IFRS S2 |
| Topic | Connectivity and integration |
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 the connectivity and integration of disclosures. The TAC has already discussed connectivity and integration during previous meetings with regard to a number of technical areas. This paper draws together the discussions and decisions made by the TAC.
Decisions for the TAC
The TAC is asked to decide whether to: * maintain the requirements in IFRS S1 that relate to connected information. * provide a statement in the final advice to the Secretary of State that supports connectivity and integration, 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.
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Context
1IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) set out requirements for the disclosure of connected information. The relevant references to the requirements in IFRS S1 are set out in Appendix 1 and are as follows:
- Paragraphs 21–24, B39–B44 Connected information
- Paragraphs D26–D33 Understandability
2The TAC has already discussed connectivity and integration during previous meetings with regard to a number of specific technical areas. This paper draws together the discussions and decisions made by the TAC so far.
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 connectivity and integration, there are a number of matters for the TAC to discuss, including:
4.1 general views on connectivity and integration, including stakeholder views on the importance of connectivity and integration, which is outlined in paragraphs 5–8.
4.2 decisions already made by the TAC relating to connectivity and integration, which are described in paragraphs 9–10.
General views on connectivity and integration
5Connectivity is a concept in IFRS S1 that relates to how information in the sustainability-related disclosures is connected to other information in the general purpose financial report. IFRS S1 paragraph 21 outlines three ways in which information is expected to be connected including between:
- the matters to which the information relates (e.g., the connections between sustainability-related risks and opportunities); and
- the information disclosed by the entity, including:
- between information in the sustainability-related disclosures (e.g., strategy and targets); and
- across the general purpose financial report (e.g., information in the strategic/management report and the financial statements).
6Connectivity is the core concept that underpins the integration of information and integrated reporting. In response to the TAC's call for evidence, many stakeholders noted that an integrated approach to reporting sustainability-related information is ideal—especially in relation to the location of information. IFRS S1 and IFRS S2 use the concept of 'integration' in relation to Governance and Risk Management requirements, asking entities to disclose whether and how processes are integrated with other internal processes. However, there is no overarching requirement that requires entities to 'integrate' information.
7Most stakeholders supported the principle of connectivity, noting the importance of sustainability-related information being prepared on a similar basis to how other information in the general purpose financial report is prepared—i.e., following similar principles that underpin the preparation of disclosure. Many stakeholders believe that the sustainability-related information will be most helpful when integrated into the Strategic Report where it will complement and enhance existing disclosures required by the Companies Act 2006 and will give a better and holistic picture of an entity's business, performance and prospects. There are already some requirements in the UK that are expected to interact with the disclosure requirements in IFRS S1 and IFRS S2. For example, section 414C(2)(b) of the Companies Act 2006 requires entities to disclose information about principal risks and uncertainties that the entity is facing. Other examples include disclosure requirements in relation to the section 172(1) statement, the viability statement, corporate governance disclosures and directors' remuneration reports. The TAC has agreed in previous discussions to include in its recommendations that, as part of the policy and implementation discussions, the UK Sustainability Disclosure Policy and Implementation Committee (PIC) should consider the interactions between existing reporting requirements and consider how to encourage connectivity between these disclosures and the expected disclosures from IFRS S1 and IFRS S2.
8Some stakeholders raised concerns about the challenges in connecting sustainability-related information with information in the financial statements. In particular, some stakeholders noted that the time horizons for financial reporting are not primarily geared towards long-term risks and there is a high degree of uncertainty in relation to sustainability-related risks and opportunities. Some stakeholders observed that it will be difficult to tie specific sustainability-related matters with financial information. Additionally, a few stakeholders were concerned that connectivity could lead to repetitiveness across the general purpose financial reports, and that material information in the general purpose financial reports could be obscured by sustainability-related information. Stakeholders also recognised that additional scrutiny will be placed on the financial statements, and therefore entities would need to explain any differences between the sustainability-related information and the information in the financial statements—which is a requirement in IFRS S1. Stakeholders also noted that the connectivity between financial and sustainability information in the annual report is a developing area and is likely to improve over time as practice develops. While some of these matters raised by stakeholders have been discussed by the TAC, as noted in paragraph 10, some of these matters are challenging and will likely require further consideration as practice develops. Additionally, the ISSB and International Accounting Standards Board (IASB) have repeatedly acknowledged the importance of connectivity and continue to work together on connectivity matters that seek to provide a comprehensive package of information for users of general purpose financial reports. Stakeholders requested further guidance on connectivity, particularly as it relates to the financial statements.
TAC decisions on connectivity and integration
9The TAC has already discussed connectivity and integration in relation to other technical areas. These discussions have either been about how information is connected across reporting, but also whether the requirements are aligned with requirements for financial reporting—both international standards issued by the IASB and UK accounting standards issued by the Financial Reporting Council (FRC).
10In particular, the TAC has discussed and decided upon the following matters.
10.1 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. The TAC agreed that material information about sustainability-related risks and opportunities should be disclosed as part of the general purpose financial report—and therefore alongside the financial statements—to enable users to understand the full picture. The TAC agreed that any additional or supplementary information could be disclosed in another location as long as it is referenced to in the general purpose financial report. The TAC also discussed the location of disclosures in relation to transition plans, noting that material information should be included in the general purpose financial report, but also acknowledging that other jurisdictional regimes might prevent entities from disclosing information as part of the general purpose financial report.
10.2 Timing of reporting – in June 2024, the TAC decided to maintain the requirements in IFRS S2 that require the sustainability-related information to be disclosed at the same time as the general purpose financial reports. Although the TAC agreed that coterminous reporting with the financial statements is ideal, the TAC also discussed the practical challenges that might make disclosing sustainability-related information at the same time difficult to achieve. The TAC further discussed the challenges with timing of reporting in relation to greenhouse gas emissions in the September 2024 meeting. A summary of the discussion and decision related to financed emissions is provided in paragraph 10.9.
10.3 Materiality – in July 2024, the TAC decided to maintain the requirements in IFRS S1 that relate to materiality. In particular, the TAC welcomed the definition of materiality which is the same as the one used for financial reporting requirements. However, the TAC also recognised that further guidance might be helpful to support entities in applying the concept of materiality for sustainability-related information, especially for sustainability matters other than climate change.
10.4 Judgements, uncertainties and errors – in June 2024, the TAC decided to maintain the requirements in IFRS S1 that relate to judgements, uncertainties and errors, especially as these requirements in IFRS S1 are aligned to requirements in accounting standards. However, the TAC noted that the requirements relating to revising comparatives are different to accounting standards and tentatively agreed to request further guidance from the ISSB.
10.5 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 stressed the value of consistency between sustainability-related reporting and financial reporting and commented that entities should be strongly encouraged to consider the financial view of control. The TAC emphasised the importance of using the same boundary as used for other disclosures in the general purpose financial report, noting that many entities are currently using an operational boundary approach which is not aligned with financial reporting. The TAC decided to recommend that the ISSB considers how to support entities in moving towards a financial control approach to reporting boundaries.
10.6 Current and anticipated financial effects – in October 2024, the TAC decided to maintain the requirements in IFRS S1 and IFRS S2 relating to the disclosure of current and anticipated financial effects. Members recognised the importance of connectivity between these disclosures with information in the financial statements but noted that this connectivity can be achieved by cross-referencing to the financial statements rather than duplicating disclosures. The TAC also noted that different time horizons are used for financial reporting, and further guidance may be required to help entities apply these requirements and ensure connectivity with financial information.
10.7 Cross-industry metrics in IFRS S2 – in September 2024, the TAC decided to maintain the requirements relating to cross-industry metric categories in IFRS S2. However, the TAC also noted that these disclosures could be potentially inconsistent with information in the financial statements, noting that it is understandable that sustainability-related reporting might use a range of estimates in some cases, whereas reporting of recognised amounts in the primary financial statements requires the disclosure of a single point estimate. The TAC has observed that IFRS S1 already requires entities to disclose when there are differences between sustainability-related information and information in the financial statements, but that the ISSB could provide guidance around how entities deal with these discrepancies that are inevitable.
10.8 Greenhouse gas emissions – in September 2024, the TAC decided to maintain the requirements relating to greenhouse gas emissions in IFRS S2. The TAC discussed the importance of using the same reporting entity boundary and noted that the ISSB and GHG Protocol should be encouraged to align boundary approaches with financial reporting and with the concepts in IFRS S1. The TAC also discussed the connections between the metrics and targets requirements, noting that the metrics used by an entity should be aligned with the targets that it has set for measuring its performance relating to greenhouse gas emissions.
10.9 Financed emissions – in September and October 2024, the TAC decided to amend the requirements relating to financed emissions. Specifically, the TAC decided to remove the reference to the Global Industry Classification Standard (GICS) to enable entities to use a classification standard that it uses for other regulatory purposes and to align with financial reporting. The TAC also agreed to insert additional wording that recognises that an entity's financed emissions often relate to a previous balance sheet.
10.10 Targets – in October 2024, the TAC decided to maintain the requirements in IFRS S1 and IFRS S2 relating to targets. The TAC noted that the sustainability-related targets that are often disclosed by entities—notably net zero targets—are not necessarily connected to the risk management objectives.
10.11 Transition plans – in October 2024, the TAC decided to maintain the requirements in IFRS S2 relating to transition plans. The TAC agreed with the analysis in the paper that observed that for some entities information about the transition plan should connect to the wider business strategy and business model.
Endorsement recommendations
Suggested endorsement recommendation
11The TAC has already made a number of recommendations relating to connectivity and integration as outlined in paragraph 10. However, the TAC may also consider providing the following recommendations in its advice to the Secretary of State.
11.1 The TAC recommends that the requirements in IFRS S1 that relate to connected information are maintained without amendment.
11.2 The TAC welcomes the use of the concept of 'connectivity' in IFRS Sustainability Disclosure Standards but recommends that the ISSB provides further support as to how this concept is applied in practice. The TAC welcomes continued efforts by the ISSB and IASB to work together on connectivity matters that seek to provide a comprehensive package of information for users of general purpose financial reports. The TAC has made specific recommendations relating to connectivity 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 connectivity and integration?
- Does the TAC agree to recommend to maintain the requirements in IFRS S1 that relate to connected information?
- Does the TAC agree to include in its advice the statement in paragraph 11.2 that welcomes the use of the concept of 'connectivity'?