Comparing Global Climate-Related Corporate Disclosure Standards: IFRS, EU CSRD and SEC
Comparing Global Climate-Related Corporate Disclosure Standards: IFRS, EU CSRD, and SEC
Introduction
As the push for greater transparency and accountability in corporate climate-related disclosures grows, regulatory bodies and standard-setters worldwide are stepping up to provide clear, consistent frameworks. This blog post will compare three leading frameworks: the International Financial Reporting Standards (IFRS) developed by the IFRS Foundation, the European Financial Reporting Advisory Group's (EFRAG) European Sustainability Reporting Standards under the EU's Corporate Sustainability Reporting Directive (CSRD), and the climate-related disclosure rules recently adopted by the United States Securities and Exchange Commission (SEC). By examining key aspects like scope, materiality, and alignment with the Task Force on Climate-Related Financial Disclosures (TCFD), we aim to provide insights into the evolving landscape of mandatory climate reporting.
The SEC has established its regulations for obligatory climate-related corporate disclosures. Here's a comparison with the standards set by the IFRS and CSRD.
SEC Adopts Final Climate Disclosure Rules
On March 6, 2024, the SEC adopted final rules to enhance and standardize climate-related disclosures by public companies and in public offerings. These rules reflect the Commission's efforts to respond to investors' demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant's operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.
The final rules require registrants to disclose a wide range of climate-related information, including climate-related risks, actual and potential material impacts, mitigation and adaptation activities, board and management oversight, processes for identifying and managing risks, climate-related targets or goals, Scope 1 and Scope 2 emissions (for large accelerated filers and accelerated filers), and financial impacts of severe weather events and other natural conditions.
SEC Adopts Final Climate Disclosure Rules:
On March 6, 2024, the SEC adopted final rules to enhance and standardize climate-related disclosures by public companies and in public offerings. These rules reflect the Commission's efforts to respond to investors' demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant's operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.
The final rules require registrants to disclose a wide range of climate-related information, including:
Climate-related risks that have had or are reasonably likely to have a material impact on the registrant's business, strategy, results of operations, or financial condition;
Actual and potential material impacts of identified climate-related risks on the registrant's strategy, business model, and outlook;
Mitigation and adaptation activities, including the use of transition plans, scenario analysis, or internal carbon prices;
Board and management oversight of climate-related risks;
Processes for identifying, assessing, and managing material climate-related risks;
Climate-related targets or goals and their impact on the registrant's business;
Scope 1 and Scope 2 emissions for large accelerated filers and accelerated filers, with assurance requirements;
Financial impacts of severe weather events and other natural conditions; and
Impacts of climate-related risks and uncertainties on estimates and assumptions used in the financial statements.
The SEC’s adoption of these final rules marks a significant milestone in the evolution of mandatory climate reporting in the United States, bringing it more in line with international standards like the IFRS and EU CSRD.
However, the SEC's final rules are notably milder than those proposed in March 2022, following extensive lobbying from industry groups. A significant alteration involves the SEC's decision not to compel companies to quantify pollution from their supply chains or customers, commonly called Scope 3 emissions. Furthermore, the regulations now set a higher threshold for when companies are obligated to disclose more direct carbon footprints in their regulatory filings, known as Scope 1 and Scope 2 emissions.
While the SEC's regulations aim to create a uniform approach to discussing business risks and opportunities related to climate change, they need to meet the stringent standards of California and the European Union. California's emissions disclosure law, for instance, mandates large companies to publicly disclose various emissions categories annually, starting in 2026. In contrast, the SEC's rules focus on material impacts, potentially limiting disclosures to what is deemed essential for decision-making by a reasonable investor.
Scope and Coverage
Understanding the scope of each framework is crucial for companies to determine their reporting obligations. The IFRS S1 (climate-related disclosures) and S2 (climate-specific disclosures) standards, expected to be issued by the IFRS Foundation's International Sustainability Standards Board (ISSB) in 2023, will apply to entities within jurisdictions that mandate or permit their use. The EU's CSRD has a broader scope, covering environmental, social, and governance (E, S & G) topics for all large companies and listed SMEs operating in the EU. The SEC's final climate disclosure rules focus on climate-related information and apply to US-registered companies, including foreign private issuers.
One notable difference is that while the IFRS and EU CSRD frameworks encompass a wide range of sustainability topics, the SEC rules specifically address climate change. This narrower focus allows for more detailed climate-related disclosures but may not provide investors with a comprehensive view of a company's overall sustainability performance.
Materiality and Reporting Thresholds
Materiality is a key concept in determining what information companies must disclose. The IFRS and EU CSRD both adopt a double materiality approach, requiring disclosure of information that is financially material to the reporting entity and information about the entity's impact on sustainability matters. This means companies must consider how climate-related issues affect their financial performance and how their activities impact the environment and society.
The SEC rules rely on a single financial materiality threshold, focusing on information material for investors' decision-making. This approach is more closely aligned with the traditional understanding of materiality in financial reporting.
Another difference lies in the reporting thresholds for each framework. The EU CSRD applies to all large companies and listed SMEs, while the SEC rules cover a broader range of filers, including large accelerated filers and some smaller companies phased in over time. The adoption of the IFRS standards will depend on individual jurisdictions but is expected to have a wide global reach.
TCFD Alignment
The Task Force on Climate-Related Financial Disclosures (TCFD) has emerged as a widely accepted framework for climate-related disclosures, and all three frameworks discussed here have taken steps to align with its recommendations. The IFRS S2 standard is intended to replace TCFD, ensuring a high level of compatibility. The EU CSRD also incorporates TCFD recommendations, although it goes beyond them in some areas, such as double materiality and a broader range of sustainability topics. The SEC rules are broadly aligned with the TCFD pillars, requiring disclosures on governance, strategy, risk management, metrics and targets related to climate risks.
Scenario Analysis
Scenario analysis is a crucial tool for assessing a company's strategy's resilience under different climate-related scenarios. Both the IFRS and EU CSRD require companies to evaluate their business strategy's resilience, making scenario analysis a necessary component of their reporting. The SEC rules require specified disclosures regarding a registrant's activities, if any, to mitigate or adapt to a material climate-related risk, including scenario analysis.
Greenhouse Gas (GHG) Emissions Reporting
Measuring and reporting GHG emissions is a core element of climate-related disclosures, and all three frameworks address this issue. The IFRS and EU CSRD require companies to report on Scope 1, 2, and 3 emissions, covering direct emissions from owned or controlled sources, indirect emissions from purchased energy, and all other indirect emissions in a company's value chain. The SEC rules mandate Scope 1 and 2 emissions disclosure for large accelerated and accelerated filers, with assurance requirements. Scope 3 emissions are not required under the SEC rules, but companies must disclose if they have set emissions reduction targets, including Scope 3.
Assurance and Verification
All three frameworks emphasise the importance of assurance and verification to ensure the reliability and credibility of climate-related disclosures. The EU CSRD mandates limited assurance for all reported sustainability information, with a phased approach to reasonable assurance over time. The SEC rules require an assurance report at the limited assurance level for Scope 1 and 2 emissions disclosures by large accelerated filers and accelerated filers, with large accelerated filers necessary to obtain reasonable assurance after an additional transition period. The IFRS standards do not directly address assurance, as this is expected to be covered by separate standards developed by the International Auditing and Assurance Standards Board (IAASB).
Conclusion
As the IFRS, EU CSRD, and SEC climate-related disclosure frameworks continue to evolve, companies must stay informed about their reporting obligations and start preparing for the new requirements. The SEC's adoption of final climate disclosure rules marks a significant milestone in the United States, bringing it more in line with international standards and increasing the pressure on companies to provide comprehensive, reliable climate-related information to investors. However, the SEC's rules are notably milder than those proposed initially and fall short of the stringent standards set by California and the European Union.
While the three frameworks differ in scope, materiality, and specific reporting elements, they share a common goal of improving the quality, consistency, and comparability of climate-related disclosures. Aligning with these frameworks will require significant effort and resources. Still, the benefits of enhanced transparency and accountability extend beyond compliance, as companies that effectively manage and communicate their climate risks and opportunities may gain a competitive advantage in an increasingly sustainability-conscious market.
As the global landscape of climate-related disclosures continues to evolve, it is crucial for companies to stay engaged with standard-setters, regulators, and other stakeholders to ensure their reporting practices meet the needs of investors and society as a whole. By embracing these new frameworks and committing to meaningful climate action, companies can contribute to the urgent global effort to address the climate crisis and build a more sustainable future.
