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.
Its main objectives are:
- To allow investors to conduct climate scenario analysis of their portfolios;
- To measure the alignment of financial assets, portfolios, domestic financial institutions, and stock markets with the Paris Agreement goals, and to provide options to align financial flows;
- To indicate potential risks associated with the transition to a low-carbon economy.
A number of our flagship projects stem from PACTA, notably the PACTA Transition Monitor tool.
Launch of the PACTA tool on TransitionMonitor.com
Following a three-year road-testing and development phase, in September 2018, 2˚ii officially launched the free, online PACTA tool (available at https://www.transitionmonitor.com/) 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 launch of the tool is another step towards supporting the goals of the Task Force on Climate-Related Financial Disclosures (TCFD), a market-led initiative that is developing recommendations on climate-related financial risk disclosures. The tool aims to help investors comply with these recommendations, as well as related guidelines such as the Article 173 of France’s Law on Energy Transition for Green Growth and upcoming EU disclosure requirements.
In the first four months following the tool’s launch, over 600 users had tested 3,000+ portfolios, reaching more than 800 users and 4,500 portfolios by mid-2019.
PACTA methodology for corporate lending
Banks have a major role to play in the fight against climate change, above all through their financing – the capital they provide to fund their customers’ activities. Yet until now, they have lacked methodologies to measure and potentially steer their financing towards technologies that favour a low-carbon future.
To respond to this issue, in early 2018, 2˚ii partnered with multinational financial services and banking firm ING to extend the PACTA climate scenario analysis methodology to corporate lending portfolios. The methodology, as well as the metrics supporting the analysis, allows banks to study the alignment of their corporate lending portfolios with 2°C benchmarks. It represents a major step forward in climate scenario analysis, by providing banks with insights into the climate impact of their clients’ capital expenditure plans across the seven sectors the methodology covers (oil & gas, coal, power, automotive, cement, steel, and shipping). By closely examining the gaps between their lending portfolios and climate benchmarks, banks can in time also leverage the methodology for other uses, including reporting and steering towards a positive climate impact.
Since the initial launch of the PACTA methodology for climate scenario analysis in September 2018, which we co-developed with ING, in February 2019 we began working with an initial pilot group of 17 international banks who will be road-testing the methodology over the course of one year. The pilot group members are as follows: ABN Amro; Bancolombia; Barclays; BBVA; BNP Paribas; Groupe BPCE; Citi; Credit Suisse; ING; Itaú Unibanco; KBC; Nordea; Santander; Société Générale; Standard Chartered; UBS; and UniCredit.
After the end of the pilot phase in Q1 2020, the IP rights-free, open source software will be released, enabling any bank to carry out the analysis entirely autonomously. To find out more about this project, please contact florence[@]2degrees-investing.org.
This project has received funding from the European Union’s LIFE programme under grant agreement No LIFE16-GIC_FR_000061.
PACTA 2020 Initiative with Governments
Following their call to action at the UN Climate Action Summit 2019, Switzerland and the Netherlands are asking Member States and financial institutions to sign on to a new pledge to assess and monitor the climate impact and alignment of their financial flows with the Paris Agreement’s 1.5°C temperature goal.
The 2° Investing Initiative is providing key support to this pledge, notably via the Paris Agreement Capital Transition Assessment (PACTA) climate scenario analysis methodology. Free and open-source, the PACTA methodology analyses exposure to climate change-related sectors in equity and fixed-income portfolios over multiple scenarios – and compares it with scenarios needed for a climate-safe transition. More than 1,500 financial institutions worldwide have already applied the methodology on over $10 trillion in assets under management.
How the pledge works:
Governments (national or sub-national), including some of the world’s biggest financial hubs, and financial institutions will commit to monitor their climate impact and their alignment with the 1.5°C temperature goal.
As well as Switzerland and the Netherlands, Denmark, Italy, Luxembourg, Norway, Portugal, Spain, and Sweden have agreed to commit, with additional interest from other major finance hubs. Private financial institutions, their industry representatives, public financial institutions, and supervisory authorities can also voluntarily commit to take action. Going forward, progress will be tracked to ensure the commitments made will result in climate impact in the real economy.
More on 2°ii’s contributions: the enhanced PACTA methodology
Committed governments and financial institutions will enjoy a number of free benefits, including the chance to participate in testing the enhanced version of the PACTA methodology in 2020. This version builds on our earlier, voluntary pilot project with Swiss pension funds and insurance companies in 2017. It also incorporates new insights from our partnership with ING and 16 other banks to test a methodology for corporate lending.