In August, the 2° Investing Initiative officially launched the Bank of England climate insurance stress-testing tool on the Paris Agreement Capital Transition Assessment (PACTA) website. The tool uses the breakdown of exposure to different climate-relevant sectors to calculate the effects of climate stress on the portfolio’s value. UK insurance companies, as well as investors outside of the UK interested in understanding their performance under the UK stress test, can now go online to run a free, anonymised stress test. Users will be able to generate the stress test results in combination with a freely available Excel tool and the online PACTA scenario analysis software.
The tool further builds on our “Storm Ahead“ stress test scenario report (January 2019), which provides guidelines for integrating scenario analysis into stress tests of regulated entities.
On June 18th, 2019, the Bank of England Prudential Regulation Authority launched its biennial insurance stress test, asking the biggest regulated life and general insurers to provide information about the impact of a range of stress tests on their business. The stress test also includes an exploratory exercise related to climate change, which looks into potential impacts to firms’ liabilities and investments stemming from physical and transition risks. The 2° Investing Initiative has been supporting the Bank of England with designing the climate-related aspects of the stress test.
More about PACTA
The PACTA climate change scenario analysis tool was launched in September 2018 with support from the UN Principles for Responsible Investment (UNPRI), a UN-backed investor body, and California Insurance Commissioner Dave Jones. The tool builds on a previous version that has been used by more than 250 investors, many of whom are PRI signatories, as well as four regulators, including the Dutch Central Bank, the Swiss financial regulator, and the California Insurance Commission.
The tool analyses exposure to climate-change related risks in equity and fixed-income portfolios over multiple scenarios, producing a customized, confidential output report. It has an interactive feature that allows the user to study the effects of different parameters on alignment, for example by modifying the scenarios and geographies of the analysis. It also uses graphs to help investors to see the gap between their existing portfolio and 2˚ benchmarks.
The tool is housed on TransitionMonitor.com, which includes a number of other tools, all open source and IP rights-free. These include the PACTA methodology for corporate lending portfolios as well as a target-setting module designed to help set science-based targets for financial portfolios (slated for late 2019).
The PACTA project has received funding from the European Union’s Life NGO programme under grant agreement No LIFE16 GIC/FR/00061 PACTA.