Task Force on Climate-Related Financial Disclosures

Frequently Asked Questions about Task Force on Climate-Related Financial Disclosures

Whilst we have provided definitions within the TCFD Product Reports relating to the technical terms and explanations of the metrics used to measure carbon emissions, we are aware that you may have further questions. To assist you we have compiled some additional questions, with answers, which is intended to offer further support.

General FAQ’s

The Task Force on Climate-Related Financial Disclosures (TCFD) is a global organisation formed in 2015 by the Switzerland-based Financial Stability Board (FSB). In 2017 they issued a report articulating 11 recommendations for climate-related disclosures, known as the TCFD framework. 

The purpose of these recommendations is to encourage and help companies across the world to encapsulate climate risks and opportunities into four aspects of the day-to-day running of their business, which are (1) governance (2) strategy (3) risk management and (4) metrics and targets.

The aim of the TCFD recommended disclosures is to give transparency to the company’s management of climate change risks and opportunities and their carbon emissions, encouraging companies to operate in a way that considers the impacts of their business on the climate.

The UK government has committed to work towards mandatory TCFD-aligned disclosure obligations across the UK economy by 2025 which has led to the Financial Conduct Authority (FCA) developing new rules to implement TCFD recommended disclosures for large listed companies and other regulated firms. 

The FCA has introduced new mandatory disclosures in line with TCFD recommendations for Asset Managers and Asset Owners whose assets under management are over £50 billion and £25 billion respectively. This captures M&G Investment Management (MAGIM) and Prudential Assurance Company (PAC). These entities have to publish their first TCFD entity reports by 30 June 2023.

The TCFD entity report sets out how MAGIM and PAC take climate-related matters into account in managing or administering investments on behalf of customers at an entity level. The disclosures include information about the governance, strategy and risk management that the entities have in place to manage the risks and opportunities of climate change, as well as carbon emission metrics related to the entity’s assets under management. 

Under new FCA rules M&G Investment Management (MAGIM) and Prudential Assurance Company (PAC) have to produce TCFD reports for in-scope funds from 30 June 2023.

The TCFD Product reports consist of a baseline set of consistent, comparable disclosures related directly to the fund. The core set of climate metrics in the TCFD Product reports include carbon emission metrics, an estimate of the projection of a fund’s performance based on various different forward-looking climate scenarios and benchmarking the fund against the Paris Agreement. 

The TCFD entity and product reports will provide customers with important climate-related information about specific M&G entities and their funds. This should increase customer understanding and awareness of climate-related risks and opportunities and help customers make considered choices regarding their investments and savings.

Furthermore, by setting out climate-related financial disclosures as part of regulation, disclosures will become consistent over time and support comparability which in turn should act as an important tool in addressing climate change. 

No. The Taskforce on Climate-related Financial Disclosures requires us to disclose certain information about the investments your fund holds. It does not require us to change the way in which we invest.  

That said, the investments within a fund could have an impact on climate change and equally, climate change could influence the performance of investments in a fund. The climate-related information in the TCFD Product report should help customers understand the extent to which this occurs in relation to the fund(s) they are invested in.

The Paris Agreement is a binding international treaty on climate change, adopted by 196 countries at the UN Climate Change Conference (COP21) in Paris, France, on 12 December 2015.

There is a growing recognition that bringing global greenhouse gas emissions to net-zero by 2050 will give the best chance of limiting the global temperature increase to 1.5 degrees Celsius, the Agreement’s more ambitious pathway, and the pathway needed to avoid the worst physical impacts of the climate crisis.

The TCFD entity and accompanying fund reports will be produced on an annual basis, in line with the M&G Plc Sustainability Report. Generally, the supporting data will be sourced as of 31 December each calendar year.

Metric Description
Scope 1 Direct emissions associated with the business operations e.g. a utility company’s emissions from combusting fuel.
Scope 2 Indirect emissions associated with the business’ heating/power requirements e.g., a software company’s emissions from buying electricity.
Scope 3 Emissions from: purchased goods and services; business travel; employee commuting; waste disposal; use of sold products; transportation and distribution (up and downstream); investments; leased assets; and franchises.
Carbon Footprint Refers to financed carbon emissions divided by the fund’s market value, expressed in tonnes CO2e/£m invested. The larger the number, the more it is contributing to the effects of climate change. CF can be used to compare across different funds.
Weighted Average Carbon Intensity Is the fund’s exposure to carbon-intensive issuers, expressed in tCO2e/£m sales. The larger the number, the more carbon intensive the investments currently are. WACI allows comparison across different funds.
Climate Adjusted Value This metric is the adjustment of the value of assets in the fund as a result of the climate scenario. A negative number denotes that under the scenario, there will be a devaluation for the fund’s underlying assets. This metric is equivalent to value at risk (VaR). Scenario model outputs are expressed as a range of outcomes, reflecting the inherent uncertainty of the underlying assumptions. We have provided the average model output of that range of results.
Orderly Transition This scenario assumes climate policies are introduced early and become gradually more stringent, reaching global net zero CO2 emissions around 2050 and likely limiting global warming to below 1.5 degrees Celsius on pre-industrial averages.
Disorderly Transition This scenario assumes climate policies are delayed or divergent, requiring sharper emissions reductions achieved at a higher cost and with increased physical risks in order to limit temperature rise to below 2 degrees Celsius on pre-industrial averages.
Hot House World Scenario This scenario assumes only currently implemented policies are preserved, current commitments are not met and emissions continue to rise, with high physical risks and severe social and economic disruption and failure to limit temperature rise.
Implied Temperature Rise Implied temperature rise estimates the global temperature increase contribution from a fund’s current greenhouse gas emissions trajectory. It is a simplified tool to assess alignment of business strategies with climate goals like the Paris Agreement target. The Aladdin Climate model used to generate this metric mainly accounts for Scope 1 and 2 emissions. However, it overlooks emissions occurring outside direct operations (Scope 3) and any avoided emissions that could have a positive environmental impact (Scope 4). These exclusions can lead to an over- or underestimation of a fund’s implied temperature rise.

Governments globally have signed up to the Paris Agreement on climate change which is a legally binding treaty. At the core of the Paris Agreement is a commitment to reduce carbon emissions in order to stop the world’s average temperature rising more than 1.5 degrees Celsius.

The ITR estimates the global temperature increase contribution from a fund’s current greenhouse gas emissions trajectory to assess alignment of a fund with the Paris Agreement climate goal.

The use of climate scenario analysis enables customers to assess the potential earnings impairment of companies of different forward looking climate scenarios and how this might translate into investment returns of a fund. Whilst the scenarios considered are ‘future’ estimates of the rate of global warming, pace of technology change, future government policy etc., the value of climate scenarios is to demonstrate that different policies and resultant temperatures changes can affect a fund’s estimated performance projection.

It is important that customers consider the proportion of data coverage of a climate metric in a TCFD fund report, particularly when using the climate metrics to support investment decisions and compare with other funds.

Lower data coverage results in a reduced reliability for a climate metric. For example, a fund invested in an asset type where data availability and methodological issues are relatively challenging, such as infrastructure, may not have complete data coverage across the fund. A TCFD fund report should provide the data coverage ratio and any limitations related to using a specific climate metric.

Furthermore, the data presented in the TCFD entity and fund reports relates to a specific point in time and is likely to change in the future and therefore should not be considered a reliable prediction.

Several data sources have been used for the TCFD entity and fund reports. For some TCFD reports we have also used estimates formulated from in-house climate data tools. While every care has been taken in producing the TCFD reports, neither M&G Investments Management nor Prudential Assurance guarantee the accuracy, adequacy or completeness of the information or make any warranties from its use. 

The forward looking climate scenario model outputs used in TCFD disclosures are uncertain, more so than estimates of historical greenhouse gas emissions. The models are based on simulations that use a number of inputs, including non-historic data, estimates, judgements and forward-looking assumptions. As such, caution should be applied when interpreting the results as these can sometimes appear counter intuitive. For example, a ‘hot house’ climate scenario being less severe than an ‘orderly’ or ‘disorderly’ climate scenario. This is because of the way that the model accounts for different types of climate risk against different investment assets, specifically the emphasis on the impact of physical risk and transition risk across the different scenarios.  

The Taskforce on Climate-Related Financial Disclosures website:- Task Force on Climate-Related Financial Disclosures | TCFD) (fsb-tcfd.org)