Climate Related Disclosures: A Comparative Analysis of SEC, IFRS, and CSRD Standards

by | Mar 9, 2024 | Sustainability

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Climate-related disclosures have become increasingly important for investors as investors, firms, and markets have recognised that climate-related risks can impact a company’s business and its present and long-term financial performance and position. Over the last 90 years, the Commission has revised its disclosure rules numerous times, determining that the essential information is critical to investment and voting decisions. For the past 50 years, the Commission has required disclosure of various environmental problems. More recently, the Commission issued the 2010 Guidance, which explains how the Commission’s existing disclosure standards may require a registrant to disclose the effects of climate change on its business or financial position. The final rules continue the Commission’s efforts to provide investors with consistent, comparable, and reliable information on the financial impact of climate-related risks on registrants’ businesses and how they manage those risks.

In a historic step, the Securities and Exchange Commission (SEC) recently established sweeping rules requiring climate-related company disclosures. This crucial step demonstrates the growing awareness of climate change’s impact on businesses and the global economy. As the SEC joins the international community in addressing environmental concerns, it is critical to understand how its regulations relate to existing global standards, particularly the International Financial Reporting Standards (IFRS) and the Corporate Sustainability Reporting Directive (CSRD) in Europe.

SEC’s Climate Disclosure Rules

The SEC’s new guidelines represent a fundamental shift in corporations’ reporting on climate-related risks and opportunities. With a focus on materiality, the SEC requires public corporations to disclose the impact of climate change on their operations, such as governance, strategy, risk management, and metrics. This comprehensive strategy seeks to offer investors the knowledge they need to make informed judgements about the long-term viability of their investments.

Climate Related Disclosures: A Comparative Analysis of SEC, IFRS, and CSRD Standards

The SEC’s rules incorporate the TCFD (Task Force on Climate-related Financial Disclosures) framework, which is widely adopted globally and encourages companies to disclose Climate related disclosures consistently and comparably. By aligning with TCFD, the SEC hopes to improve the transparency and consistency of climate related disclosures across industries, allowing investors and stakeholders to make better decisions.

The SEC has finally finalised its rules requiring climate-related disclosures, nearly two years after they were suggested. Companies must provide this information in their SEC registration statements and 10-K annual reports.

This will come into effect over the following few years.

  • 2025: Accelerated Filers with a public float of $700 million or more.
  • 2026: Accelerated Filers with a public float of $75 million to $700 million.
  • 2027: Non-accelerated filers (usually new IPOs), Smaller Reporting Companies (under $250 million public float and/or under $100 million annual revenue), and Emerging Growth Companies (less than $1.07 billion in revenue and no public float).

Companies must disclose the following in addition to Scope 1 and 2 reporting:

  • How they identify and manage material climate-related risks, including board oversight.
  • Specific mitigation or adaptation activities, such as scenario analyses or transition plans.
  • The “actual and potential” impact of climate-related risks on the company’s strategy and business.
International Financial Reporting Standards Foundation (IFRS) European Financial Reporting Advisory Group (EFRAG) United States Securities and Exchange Commission
Region Worldwide (adoption depends on individual jurisdiction) EU Operations/ Revenue US registered companies
Scope E, S&G E, S&G E- focus, some G
Topics Financial materiality covered in IFRS S1, climate-specific disclosures in IFRS S2 Two general reporting standards and ten issue-specific reporting standards (E:5, S:4 & G:1) Single climate standard
For Whom Public & private sector business entities, with their adoption subject to local jurisdiction regulations All entities falling under its regulatory scope, which includes most EU-based organisations and a select non-entities Starting with large accelerated filers, with smaller companies phased in between 2026-2028.
Materiality disclosure Single financial materiality Double materiality-specific disclosures are required based on materiality Single financial materiality
Scope Emissions Scope 1,2&3 Scope 1,2&3 Scope 1&2
TCFD Alignment Fully aligned. IFRS S2 is the replacement for TCFD E1 (Climate Change) is particularly aligned, although recommendations are structured differently Broadly aligned to the pillars of TCFD with recommendations structured differently
# of Filers Based on local jurisdictional adoption >50,000 <10,000 (based on Large Accelerated Filers)
Scenario Analysis Necessary to evaluate the resilience of the business strategy Necessary to evaluate the resilience of the business strategy Only on topics deemed material

Comparative Analysis with IFRS

The International Accounting Standards Board (IASB) formed the IFRS to provide global accounting standards that promote financial reporting consistency and comparability. While IFRS does not include precise standards for climate-related disclosures, it does provide a conceptual framework within which firms can include relevant information in their financial statements. However, the need for defined criteria has resulted in differences in the quality and consistency of climate-related disclosures among IFRS-compliant corporations.

In contrast, the SEC’s new requirements are more rigid and explicit about climate-related disclosures. By requiring corporations to follow the TCFD framework, the SEC creates a standardised approach that allows investors to examine and compare climate related disclosures across entities. This move positions the SEC at the vanguard of worldwide efforts to improve Climate related disclosures requirements, with the potential to influence future international norms, including those governed by IFRS.

Given the worldwide character of financial markets, the convergence of SEC and IFRS standards may enhance consistency in reporting methods, benefiting investors and stakeholders. However, difficulties may occur in harmonising the differences in regulatory approach and culture between the United States and the worldwide community.

Also Read: BRSR Reporting: All You Need To Know

Corporate Sustainability Reporting Directive (CSRD) in Europe

While the IFRS framework serves as a platform for financial reporting worldwide, Europe has made a big move towards harmonising sustainability reporting through the CSRD. This regulation complements the existing Non-Financial Reporting regulation (NFRD) by broadening the scope of mandatory sustainability reporting for enterprises operating in the European Union.

The CSRD establishes a complete framework for sustainability reporting that considers environmental, social, and governance (ESG) aspects. This includes climate related disclosures, which align with the global trend towards more transparency in corporate reporting. The CSRD emphasises the significance of reporting non-financial information as rigorously as financial information, recognising the interdependence between financial and sustainability performance.

CSRD compliance is introduced in a phased manner spanning from 2024 to 2029, primarily determined by NFRD legacy or company size.

  • Commencing from the financial year 2024 (with reporting in 2025): Compliance is obligatory for organizations (referred to as “entities”) already required to adhere to the NFRD. This encompasses all entities listed in an EU-regulated market with 500 or more employees.
  • Commencing from the financial year 2025 (reporting in 2026): Compliance is mandatory for large listed undertakings not previously mandated to comply with the NFRD.
  • Commencing from the financial year 2026 (reporting in 2027): Compliance is mandated for small and medium-sized undertakings (also known as small- and medium-sized entities)—companies listed on an EU-regulated market that meet at least two or three of the following criteria:
    1. At least EUR 4 (EUR 5*) million in total assets.
    2. At least EUR 8 (EUR 10*) million in net turnover.
    3. At least 50 employees on average throughout the year.
  • Commencing from the financial year 2028 (reporting in 2029): Compliance is required for third-country undertakings.

Comparing SEC, IFRS, and CSRD

The SEC’s guidelines prioritise materiality, requiring corporations to disclose facts that may influence investors’ decisions. This approach seeks to minimise unnecessary business costs while ensuring that pertinent information is supplied. Conversely, IFRS provides a broader framework that allows corporations to use their discretion in assessing whether information is material. The CSRD follows a similar strategy, emphasising materiality but in the context of sustainability reporting.

  • TCFD Integration: The SEC’s acceptance of the TCFD framework accords with international best practices, ensuring consistency in climate-related disclosures. While the IFRS does not include precise rules for TCFD, the CSRD does, demonstrating a convergence of worldwide standards in sustainable reporting.
  • Regulatory Approach: The SEC’s prescriptive approach differs from IFRS’s principles-based approach, providing corporations greater reporting freedom. The CSRD takes a hybrid approach, combining principles-based reporting and particular disclosure obligations. The discrepancies in regulatory philosophies reflect variances in the legal and cultural environments in which these standards are implemented.
  • Regional Implications: The SEC’s requirements primarily affect US-listed corporations, shaping the corporate reporting landscape in the world’s largest capital market. Companies in various jurisdictions, including Europe, Asia, and Africa, have adopted IFRS, a worldwide accounting standard. The CSRD directly impacts enterprises operating in the EU, establishing a regional standard that may influence global reporting standards.

Conclusion

The SEC’s acceptance of required climate-related disclosures marks a significant step towards increasing business openness and responsibility. By harmonising with the TCFD framework, the SEC hopes to establish a global standard for climate-related disclosures, thereby influencing international reporting standards. The comparison with IFRS and CSRD demonstrates similarities and contrasts in regulatory procedures. While the SEC’s standards provide a more prescriptive framework, IFRS and CSRD are more adaptable, reflecting varied cultural and legal settings. The convergence of these standards can create a more consistent and comparable worldwide reporting landscape that benefits investors, stakeholders, and the environment.

As the globe faces climate change issues, the harmonisation of reporting standards becomes increasingly important. The path to a sustainable and transparent future necessitates global collaboration among regulators, standard-setting organisations, and enterprises. The SEC’s adoption of climate disclosure standards is a step in the right direction, showing a commitment to solving the pressing environmental concerns that affect everyone.

Also Read: ESG Reporting: All You Need To Know

 

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