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In 2016, the Paris Agreement defined the global objective of making financial flows consistent with the commitment to limit global warming to well below 2°C (Art. 2.1c). However, pilot studies suggest that the behaviour of institutional investors around the globe will lead to global warming of well beyond 4°C, resulting in major environmental upheavals.
The Paris Agreement Capital Transition Assessment (PACTA) project helps address this gap, providing policymakers and financial supervisors with the tools they need to align financial flows with the Paris Agreement’s goals.
Since the launch of our online PACTA tool in September 2018, there has been significant uptake, with more than 800 users testing more than 4,500 portfolios as of mid-2019. However, most interest thus far has been concentrated in the US, UK, and other major developed markets, with relatively less knowledge of the tool in emerging markets. To address this issue, with support from the International Climate Initiative (IKI) of the German Environment Ministry, 2°ii launched the PACTA for Emerging Markets project in July 2018. The goal is to help promote the PACTA tool in emerging economies, providing policymakers, regulators, institutional investors, and banks with an assessment framework to measure the alignment of financial portfolios and markets with climate goals, as well as transition risks.
Partnership with the California Department of Insurance
Insurance companies based in California face two increasingly critical types of climate-related risk. The first stems from their exposure to fossil-fuel investments, which are liable to precipitously lose their value as the world shifts to a low-carbon economy. The second stems from the state’s growing vulnerability to the effects of climate change, with natural disasters such as forest fires on the rise.
To help the state raise awareness of and cope with these risks, 2°ii has collaborated with the California Department of Insurance since 2016 to conduct analysis and provide information on climate change-related risks to insurers’ bond and equity portfolios.
Helping non-state actors set and implement climate change action strategies
Currently, non-state actors (NSAs), particularly companies and financial institutions, have limited ability to assess how their energy- and climate-related commitments will contribute to the goals of the Paris Agreement, and how to set targets that are aligned with these goals. For instance, companies frequently lack visibility on climate strategies and regulations at the sectoral level, which reduces their willingness to invest in low-carbon technologies. Meanwhile, institutional investors lack standard metrics to select companies whose technological mix/emission pathways are best aligned with a 2°C target.
KR Foundation – WWF Asset Owner Project
Empowering retail investors to divest from fossil fuels
Currently, certain aspects of the European Sustainable Finance Action Plan are not being implemented, particularly when it comes to efforts to respond to retail investors’ non-financial investment objectives.
The Climate Finance Product Scanner for retail investors and banks (KliFin-Scanner) is developing a questionnaire on non-financial objectives for retail investors. The questionnaire will enable retail investors to create an investment profile based on their individual extra-financial objectives. This can then be matched to financial products. The questionnaire and matching software will be integrated in a website available to all retail investors in Germany. It will be open-source and available as a white label solution that can be integrated into banks’ infrastructure. The project run-time is from 1 January 2018 to 30 June 2020.
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Insurers are uniquely exposed to climate-change-related risks from multiple angles, both in their underwriting and investing activities. With input from 2° Investing Initiative, BlackRock has performed a climate scenario analysis on US insurers’ portfolios in order to help investors understand climate risks and adapt investment strategies to manage them.
New report shows growth of “climate target-setting” in shareholder resolutions & their potential to cascade investors’ climate pledges to companies
- We analysed over 7,500 resolutions and identified 500 as climate related
- From 2006-2019, over 150 shareholder resolutions involving some form of requirement to set climate target or a related business plan were introduced
- Explicit references to the Paris Agreement are on the rise, with 11 resolutions pushing for consistency with the climate goals of the Paris Agreement
- For the first time, in 2018, 3 companies subsequently adopted these targets. While the analysis does not prove causality, it represents a first step in understanding the potential impact of engagement.
- These figures show the potential of resolutions to turn words into actions, “passing the baton” from investors who committed to aligning their portfolio with Paris goals to their investees
- They illustrate the need to further organize and engage in collective shareholder actions, such as the Climate Action 100+ coalition
- They also reveal the gap: among 500 climate-related resolutions, only 11 resolutions requested consistency with a 2°C pathway or better. Given the recent investor pledges, we expect Paris-aligned resolutions to rise dramatically in the next few years
Please see here for the full report.
According to the OECD, meeting the 2°C scenario will require $6.9 trillion annual investments in infrastructure until 2030, versus $6.3 trillion annual investments in a business-as-usual scenario. These investments require precise alignment among governments, corporates, and investors.
However, several important factors hinder efforts to channel investments towards low carbon pathways. For instance, governments frequently lack the referential frameworks and tools to develop national climate strategies (national determined contributions, or NDCs) that are consistent with the 2°C scenario. Likewise, corporates often lack visibility on public climate strategy at national sectoral level, which weighs on their conﬁdence in investing in low carbon technologies.
To address this market gap, the 2° Investing Initiative and Beyond Ratings, a provider of data and analytics services for the investment industry, have joined forces to develop an innovative methodology and suite of services known as the Climate Tech Compass.
In November 2019, InfluenceMap published a new report, FinanceMap, which examines how the asset management sector performs on portfolios, engagement, and resolutions. We were proud that our Paris Agreement Capital Transition Assessment (PACTA) methodology played a key role in the analysis. Please see the report here and the executive summary below.
This report received support from EIT Climate-KIC and KR Foundation.
Journal of Sustainable Finance & Investment
Jakob Thomä, Clare Murray, Vincent Jerosch-Herold & Janina Magdanz
Despite the political mandate of Article 2.1(c) of the Paris Agreement (United Nations 2015. ‘Adoption of the Paris Agreement.’ 21st Conference of the Parties, Paris, United Nations, 2) to align finance flows ‘with a pathway towards low greenhouse gas emissions and climate-resilient development,’ many investors do not manage
physical and transitional climate risks. The Task Force on Climate Related Financial Disclosures’ 2019 Status Report highlighted this asymmetry. The following paper seeks to evaluate the efficacy of informing investors about the alignment of their portfolios with the Paris Agreement. Based on survey feedback from a 2017 pilot study conducted with Swiss pension funds and insurance companies, the results suggest that after the pilot 40% of respondents implemented a climate strategy or integrated climate criteria into their investment process, showing the potential
impact of climate assessments on portfolio strategy. This fact affirms both the positives of portfolio climate assessments, but also the need to explore alternatives avenues for engaging with investors regarding climate risks.
By Andrés Leonardo Jiménez, Sustainability Professional, Fasecolda; Daniel Guerrero, Analyst, 2° Investing Initiative; and Laura Ramírez, Programme Manager for Emerging Markets, 2° Investing Initiative