8 Technical Advisory Committee Update

28 June 2024 Agenda Paper 8

Executive Summary

Purpose of the paper

This paper provides an update on the UK Sustainability Disclosure Technical Advisory Committee (TAC) meetings held in May and June 2024.

Summary of the Issue

This paper includes a summary of the papers and discussions from the May and June 2024 TAC meetings.

The TAC has been tasked by the Department for Business and Trade¹ (DBT) to assess the IFRS Sustainability Disclosure Standards from a technical perspective and provide advice² to the Secretary of State on whether their endorsement would be conducive to the long-term public good in the UK.

The TAC consists of 15 members, including the Chair. UKEB Member, Paul Lee, has been appointed as a member of the TAC. The UKEB seat on the TAC is to reflect the connectivity between UK-adopted international accounting standards and UK Sustainability Reporting Standards.

Both TAC meetings were held before the June 2024 UKEB meeting. Papers for the July 2024 TAC meeting were not available at the time of writing. The publication of those papers, and others for future TAC meetings, will be flagged to UKEB members. Relevant topics will be brought for the Board's consideration and discussion, as soon as the timing of meetings and the publication of papers allow.

Question for the Board

Does the Board have any comments on the TAC update?

Recommendation

N/A

Appendices

Appendix A: UK Sustainability Disclosure TAC meeting schedule

TAC meeting – May 2024

1This section sets out the main discussion points and tentative decisions from the May 2024 TAC meeting³.

Assessment approach

2The TAC discussed the proposed scope and process for the technical assessment of current and future IFRS Sustainability Disclosure Standards and the development of endorsement recommendations⁴. The TAC was asked to approve the assessment approach and highlight whether any further considerations should be made.

Contributions from the UKEB Member:

3The reference to timeframes (Paper 2 – para 5(d)) should refer to general timeframes, rather than whether any individual entity will experience reporting delays. This position was supported.

4The list of issues for the TAC to consider should include the application of 'limited' as well as 'reasonable' assurance⁵ as requested by DBT. The TAC Secretariat advised that the FRC's audit technical team would be providing input on this area and that a key issue would be whether the information was able to be verified.

5The UKEB member highlighted that the proposed TAC endorsement criteria were similar to the statutory criteria applied by the UK Endorsement Board (UKEB) during the adoption process for IASB standards and amendments, and that following the UKEB model might be helpful for the TAC.

6The TAC approved the assessment approach, subject to addressing the comments raised during the meeting and approval by the Chair.

Work plan for technical assessment of IFRS S1 and IFRS S2

7The TAC discussed the proposed technical work plan to assess IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2) for prospective endorsement for use in the UK. The work plan was based on the proposed assessment approach and included priority technical areas. The TAC was asked to approve the proposed work plan and technical areas identified.

Contributions from the UKEB Member:

8During a discussion regarding obtaining updated stakeholder feedback, from the Call for Evidence conducted in 2023, the UKEB member recommended obtaining additional insight and understanding from the corporate world on preparedness for the ISSB Standards.

9The UKEB member also recommended that the wording describing connectivity in the appendix should be amended to clearly articulate that the TAC will be considering connectivity with the financial statements.

10A member queried whether ‘reliable' should be removed from the criteria as it has been removed from FRS 102 Financial Reporting Standard applicable in the UK and Republic of Ireland. The UKEB member confirmed that the word 'reliable', which came from DBT, was consistent with the statutory criteria applied by the UKEB.

11The TAC approved the work plan and technical areas identified, subject to transition plans, targets, and cross-industry metrics (apart from greenhouse gas emissions) being moved to the priority list for future discussion and to the appendix being amended.

Project plan and target timeline

12The TAC considered a proposed project plan and target timeline in the context of key assumptions, constraints, and risks for the technical assessment of IFRS S1 and IFRS S2 for prospective use in the UK⁷.

13Key constraints were noted as: the capacity of the TAC members and TAC Secretariat; any communication restrictions during the pre-general election period; that DBT may add additional scope; and the possible need to consider amendments to the standards.

14DBT had advised that they intended to make an endorsement decision on the first ISSB standards during Q1 2025. This would require the TAC to publish final endorsement recommendations by the end of Q4 2024. The TAC will meet monthly, with two meetings in November and aim to vote on the final recommendations at the December 2024 meeting.

Contributions from the UKEB Member:

15The UKEB member noted that given the ambitious timeline, it would be helpful for both the TAC members and stakeholders to have a timetable of which items are intended to be discussed at each meeting. Not least, this would help provide an early indication of whether the TAC was on track.

16The TAC approved the project plan, including the target timeline, subject to addressing the comments raised during the meeting.

TAC June 2024 meeting

17The summary below sets out the main discussion points and tentative decisions from the June 2024 TAC meeting⁸.

Current reporting in the UK

18The TAC was provided with an overview of current sustainability related reporting requirements in the UK (TAC, June 2024, paper 2A⁹ ) which considered overlaps between IFRS S1 and IFRS S2, and the existing UK reporting framework. The paper noted (paragraph 12, page 8) that when considering connectivity, the members should be aware of how company law and accounting standards interacted with ISSB Disclosure Standards. The role and remit of the UKEB was noted (paragraph 13, page 8). The paper was provided to members for information only and no decisions were required.

19Paper 2B¹⁰ summarised the findings from a literature review by the TAC Secretariat of corporate reporting reviews conducted over the last two years. The paper was provided for information only and no decisions were required.

The location and timing of sustainability-related disclosures

20IFRS S1 requires entities to disclose sustainability-related information in the same location and at the same time as the general-purpose financial reports. The TAC paper (TAC, June 2024, Paper 3)¹¹ requested the TAC members consider the appropriateness of these requirements in the UK context and tentatively decide to maintain the requirements in IFRS S1. Transition reliefs relating to the timing of these disclosures were excluded from the paper and will be discussed at a future TAC meeting.

Contributions from the UKEB Member

21The UKEB member noted that the requirements of IFRS S1, paragraph 64¹³ would be challenging for many preparers to achieve.

22During a discussion on the location of information the UKEB member observed that capability to electronically tag sustainability data would not reduce the importance of where it was located. He noted that once users had identified a population of companies to analyse, they then relied on the disclosures in the annual reports and accounts to make investment decisions.

23The UKEB member also noted that IFRS S1, paragraph 25¹⁴ did not comment on either location or timing of reporting. He supported further guidance from the ISSB to clarify if current or future topical sustainability standards may supersede IFRS S1.

Outcomes from the discussion

24The TAC Chair noted that the TAC tentatively accepted the Secretariat's recommendations on both location and timing of information, subject to further consideration of the following areas:

1. Due to the significant scale of the reporting change proposed, preparers may require a transition phase. Transitions reliefs will be discussed at a future TAC meeting.
2. Where the availability of the data was dependent a third party, preparers may be unable, even after transition reliefs, to align the time periods covered by sustainability and financial statement reporting. This is likely to be the case for financed emissions, for example.
3. Clarification was required to determine if the detailed requirements in a topical standard superseded the more general requirements in IFRS S1. The issue with paragraph 64 is unlikely to be the sole example. The TAC may request further guidance on this from the ISSB.
4. The TAC may consider case studies to assist in making the final recommendations.

Commercially sensitive information

25IFRS S1 provides an exemption that allows entities to omit commercially sensitive information about sustainability related opportunities from their disclosures in specific and limited circumstances.

26The TAC staff paper¹⁵ asked the TAC members to consider whether this exemption and the requirements were appropriate and whether there were any issues with their compatibility with existing UK legislation and regulations.

27The TAC was asked to tentatively decide to maintain the exemption and requirements and advise DBT that while there are inconsistencies in UK legislation that this should not impact the ability to apply IFRS S1 in the UK.

Contributions from the UKEB Member:

28The UKEB member noted that the proposed approach was inconsistent with the approach adopted in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. He advised that the area required careful consideration to avoid unintended consequences where a sustainability disclosure may prejudice a company's negotiations to the detriment of shareholders. The category of items that would seriously prejudice a reporter's position is clearly a narrower category than commercial sensitivity.

29In relation to recommendations to DBT, the UKEB member suggested that it may be more expedient to suggest that DBT consider interim guidance pending a broader decision by the ISSB.

Outcomes from the discussion

30The Chair noted that the TAC tentatively accepted the Secretariat's recommendations, to allow the omission of commercially sensitive information about sustainability-related opportunities in specific and limited circumstances, subject to further consideration of the following areas:

1. Seeking feedback from the ISSB for further guidance regarding how 'commercially sensitive' is defined and the level of disclosure required.
2. Suggesting that DBT reflect on a potentially broader exemption, particularly to encompass sustainability-related risks as well as opportunities, but in very narrow circumstances.

Judgements, uncertainties, and errors, including revising comparatives

31The TAC paper¹⁷ noted that IFRS S1 required entities to disclose information about the judgements, assumptions and uncertainties used in the preparation and presentation of sustainability-related disclosures. In addition, IFRS S1 requires entities to restate comparative amounts to correct material errors, and to revise comparative amounts due to changes in estimates. The TAC was asked to consider whether these requirements were appropriate and if any further guidance was required.

32The TAC was asked to tentatively decide to maintain these requirements in IFRS S1 but to provide feedback to the International Sustainability Standards Board (ISSB) that further clarification and guidance on the application of the requirements was required.

Contributions from the UKEB Member

33The UKEB noted that regulators may need to help frame the evolution of disclosures to ensure investors are aware of the context, not surprised when revisions and corrections are made, and are therefore well placed to encourage reporting improvements over time.

Outcomes from the discussion

34The Chair noted that the TAC had tentatively accepted the Secretariat's recommendation to retain the disclosure requirements regarding judgements, assumptions and uncertainties and the restatement of comparative amounts to correct material errors, and to revise comparative amounts due to changes in estimates. However, this was subject to:

1. Additional guidance from ISSB to clarify the type of circumstances when disclosure may be required. For example, consideration of error tolerances or materiality thresholds.
2. Recommend for DBT to review the SECR in relation to requirements for comparative information as they may differ from IFRS S1 requirements.
3. Framing these requirements as an evolutionary process for preparers which would evolve and become more reliable over time.

Reporting entity boundary and consolidated reporting

35The TAC was provided with an analysis of the reporting entity boundary and consolidated reporting issues raised by stakeholders¹⁸ and was asked to consider whether the requirements of IFRS S1 and IFRS S2 were appropriate and whether any further guidance may be required.

36The analysis considered the advantages and disadvantages of including subsidiary level sustainability reporting and noted that stakeholders had provided feedback that there should be an exemption when the parent prepares these disclosures at a consolidated level. An advantage of including subsidiaries in scope was noted as supporting connectivity 'by enabling users to view the financial and sustainability-related data together for a ‘whole-of entity'...' (para 7.1, page 4).

37A potential implementation risk was noted where a UK intermediate parent could be exempt under section 401 of the Companies Act but could still be required to report consolidated sustainability-related disclosures. It was suggested in the paper that DBT may need to consider the interaction with existing provisions in the Companies Act to avoid, potentially, disconnected information for users (paragraph 8, page 5).

38Differences in defining reporting boundaries (paragraph 9, page 5) noted potential challenges with the interaction with financial accounting definitions and with the Greenhouse Gas Protocol (GHG Protocol). Stakeholders' feedback highlighted that IFRS 10 Consolidated Financial Statements used a financial concept for control to determine scope of consolidation, while the ISSB standards used operational control. In addition, the GHG Protocol allowed for consolidation based on either financial or operational control or the entity's equity share, which may not align with the entity's financial reporting boundary. These situations could result in misaligned reporting boundaries, leading to divergent reporting and inconsistent information for users.

39The TAC was asked to tentatively decide to maintain the requirements in IFRS S1 but to communicate any issues noted to DBT.

Contributions from the UKEB Member

40In relation to the differing views of control between ISSB, GHG Protocol and IASB standards, the UKEB member noted that a consistent approach was required. He suggested that as financial control was used for the purposes of financial consolidation it would be appropriate to consider this approach. Consolidation on a financial control-based approach was supported by the members but some noted it would be a significant change for preparers and so was likely to require time for transition.

41In relation to groups being able to net off sustainability-related risks and opportunities from separate subsidiaries the UKEB Member suggested that this could be barred under the new requirements, when material.

Outcomes from the discussion

42The Chair noted that the TAC had tentatively accepted to maintain the requirements in IFRS S1 and to communicate potential legislative issues to DBT. This may include aligning reviewing reporting exemptions in the Companies Act 2006, considering adopting the concept of financial control for consolidation purposes and reviewing the content of the Strategic and Director Reports and Sustainability Statements.

43It was also noted that further disclosure guidance may be required for conglomerates and other complex entities. No position was taken on subsidiaries, though there was a general view that a universal exemption from reporting for subsidiaries was unlikely to be appropriate.

General Reporting Update

44The paper¹⁹ was for information only and included the main updates since IFRS S1 and IFRS S2 since issued by the ISSB in June 2023, a summary of the ISSB meetings and jurisdictional developments in relation to the adoption of the standards.

Question for the Board

1Does the Board have any comments on the TAC update?

Appendix A: UK Sustainability Disclosure TAC meeting schedule

UK Sustainability Disclosure TAC meetings

A1The table below compares the scheduled of TAC and UKEB meetings. As the meeting dates do not always align, the UKEB updates will either include topics for discussion (when the UKEB meets prior to the TAC) or for information (when the UKEB meets after the TAC).

A2The May²⁰ and June TAC meetings have now been held. The public meeting agenda, technical papers and summary minutes from the TAC meetings can be found on the UK Sustainability Disclosure Technical Advisory Committee website²¹.

TAC work plan for technical assessment of IFRS S1 and IFRS S2

A3The table below summarises areas that the TAC Secretariat has concluded²² requires further assessment as well as the topics discussed in TAC meeting to date.