The Luxembourg Sustainable Finance Initiative (LSFI), in collaboration with the non-profit think tank 2º Investing Initiative (2DII), has undertaken the first-ever countrywide climate scenario analysis of Luxembourg financial institutions. The analysis, which ran from June 2021 to February 2022, used the Paris Agreement Capital Transition Assessment (PACTA) methodology to assess the alignment of their loan books and investment portfolios with the Paris Agreement objectives.
Altogether, the analysis covered 52 financial institutions representing the investment fund, insurance, and bank industries with a total of approximately USD 4.9 trillion assets under management. Over the past two years, this brings the total number of analyzed portfolios to more than 30,000.
Read the overview here.
The main goals of the exercise were to help participating institutions better understand climate scenario methodologies, raise awareness of climate-related risks, and help them prepare for upcoming regulations. Following the exercise, participants reported a number of benefits, with 25% reporting that upskilling their staff on sustainable finance was the biggest added value, followed by “better understanding the sectors we are contributing to” and “raising awareness within the company about the need to transition” (21% each). 32% of participants also reported that their organization was now considering integrating sustainable finance in its strategy.
This study is the latest in PACTA Coordinated Projects, in which 2DII has worked with over 15 governments, supervisors, and industry associations to assess national financial sector alignment with climate goals. So far, countries across four continents have conducted coordinated climate alignment exercises, covering more than €11 trillion in assets and over 2,600 financial institutions. Learn more here.
LSFI and 2DII hope this is only the first step in efforts by Luxembourg financial institutions to align with the Paris Agreement goals. Building on this analysis, in 2022 the LSFI will launch a Climate Measurement and Reporting Working Group to lead future efforts on this issue. The working group will be mandated with developing new climate-related initiatives for the Luxembourg financial sector.
Meanwhile, 2DII will continue to conduct cutting-edge research on alignment considerations and implement new features and analytics into the open-source PACTA tool. This will help ensure users can better understand their alignment results and take direct action: for instance, by tracking performance over time against their own targets and independent net-zero targets, and linking alignment to real world impact by integrating more information on the tracking of physical fossil assets on the ground over time.
Nicoletta Centofanti, LSFI Sustainability Adviser, said: “Action to combat climate change is urgently needed and it is now clear the financial sector has a pivotal role to play. To act, it is fundamental to understand the level of implication with respect to the Paris Agreement goals, have the know-how and include sustainability at the heart of each organisation. The Luxembourg 2021 Climate Scenario Analysis has been an important step in this direction: PACTA provided an actionable tool to measure the Paris Agreement alignment and upskill the staff.”
Catarina Braga, 2DII Luxembourg Project Leader, said: “The PACTA methodology seeks to help individual financial institutions measure the climate alignment of their portfolios by using a free and open-source climate-scenario analysis tool. However, when it comes to the climate crisis, no financial institution is an island – cooperation among actors in the financial sector and countries is needed. By running a climate scenario analysis at the country level, Luxembourg reaffirms its commitment as a leader in the sustainable finance debate. Jointly with the Luxembourg Sustainable Finance Initiative and the Luxembourgish financial institutions, we are ready to keep working to make finance flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development.”
About our funders: The development of the PACTA methodology and software infrastructure has received funding from the European Union’s Life program under grant agreement LIFE19/NGO/SGA/DE/00040, as well as from the Government of Luxembourg.