Results can be used by governments, supervisors, and participating financial institutions to understand their alignment with climate objectives; to measure their exposure to climate-related risks; and to inform their climate action strategies.
The program’s name evokes the Paris Agreement objective to align financial flows with climate goals, enshrined under Article 2.1c. At the time of the Agreement in 2015, tools to track progress towards this objective were still lacking. In response to this challenge, the Swiss and Dutch governments initiated an international governmental effort to prioritize tracking of financial sector alignment with climate goals. Now, 2DII has worked with 16 countries to carry out these assessments, covering more than €11 trillion in assets and over 2,600 financial institutions. These exercises can be subdivided into three different types:
- Government exercises: coordinated projects that are led by typically the Ministry of Environment or the Ministry of Finance. So far, we have completed or are carrying out eight government-led exercises.
- Supervisory exercises: led by a country’s central bank and/or financial supervisor. These have been conducted in five countries, at state level in the United States in California and New York State, and at the EU level. Sometimes, these run in parallel to government-led exercises.
- Private sector exercises: coordinated projects led by industry associations in four countries so far.
While each of these exercises have their own discrete application plan and process, they share a set of common features:
- 100% comparable analysis across financial institutions’ portfolios for a discrete set of asset classes and climate-related sectors;
- An aggregated understanding of the alignment/misalignment with climate goals of the financial sector across these asset classes and sectors.
How it works
Participating governments, supervisors, and industry associations act as hosts of the coordinated assessments, inviting relevant financial institutions and associations to participate on a voluntary basis. Participants then upload their equity and corporate bond portfolios to a dedicated, secure, and confidential platform, which in turn delivers individual climate alignment results with anonymized peer comparisons. Participating banks analyze their loan books portfolios independently with the PACTA for Banks toolkit. As part of this process, the participating financial institutions are asked to respond to a qualitative survey on their climate action strategies. 2DII also offers participants access to a new stress-testing module to help them measure their exposure to transition risks.
As a last step, the host government, supervisor, or industry association receives an aggregate-level report containing the results for the entire participating financial sector. This report provides a unique overview of financial institutions’ exposure to key climate-relevant sectors and their alignment with the Paris Agreement goals, aggregated by peer group. All reports are confidential, and it is the decision of the government to publish the meta results and the individual participants to publish their individual results.
Results & impact thus far
Marking COP26, 2DII published a stocktake of the coordinated climate assessments thus far. Based on our previous work, we project that the number of countries conducting such exercises will quadruple to 60 by 2025. As more countries repeat these assessments, this will also enable more meaningful progress-tracking and understanding of the real-world impact of financial markets.
Luxembourg (2022) Luxembourg Financial Centre PACTA Analysis
Peru (2022): Assessing Readiness for the Low-Carbon Transition
Austria (2021): Am Zielpfad nach Paris?
New York Department of Financial Services (2021): An Analysis of New York Domestic Insurers’ Exposure to Transition Risks and Opportunities from Climate Change
Asociación de Fiduciarias de Colombia (2021): ¿Riesgo u oportunidad?: Un análisis del desempeño de los Fondos de Inversión Colectiva de Colombia frente al cambio climático
Liechtenstein (2021): Assessing the Alignment of the Liechtenstein Financial Sector with the Paris Agreement
Colombian Insurers Federation (Fasecolda) (2020): Gauging the Exposure to Transition Risks of Colombian Insurers’ Investment Portfolios