Launched in 2018, PACTA was developed by 2º Investing Initiative (2DII) with a range of partners, including the Principles for Responsible Investment (PRI), University of Zurich, and Frankfurt School of Finance. Thus far, PACTA has been used by more than 4,500 individuals from over 3,000 institutions worldwide, as well as by supervisors and central banks to assess their regulated entities (such as the European Insurance and Occupational Pensions Authority, California Department of Insurance, Bank of England, and more). On average, more than 600 portfolios are tested every month using PACTA.
Access the online version of tool here: TransitionMonitor.com.
How PACTA works
PACTA compares what needs to happen in climate-relevant sectors in order to minimize global temperature rises, with financial institutions’ exposure to companies in these sectors. It employs a dynamic, forward-looking approach, based on the 5-year production plans of companies to which a portfolio is exposed.
The methodology measures alignment per sector or per technology, because what needs to happen to meet the goals of Paris Agreement varies by sector. Some sectors need to move more quickly than others; some sectors need to reform (such as power generation); and others need to phase out (for instance, fossil fuels).
The climate-relevant sectors currently covered by PACTA are power, coal mining, oil & gas upstream sectors, auto manufacturing, cement, steel, and aviation, with the shipping industry to be added soon. Collectively, these sectors account for about 75% of global greenhouse gas emissions.
A critical feature of PACTA is that it relies on physical, asset-based company data as the core analytical concept, which provides granular, regional, sector-specific, forward-looking production pathways that can be compared with various scenarios.
This core alignment functionality is complemented by a stress-testing module for investors that measures various climate scenarios’ influence on asset prices. 2DII is also developing a stress-testing module for banks, which will be available by late 2021.
2DII has developed two tools to help apply the methodology:
- PACTA for Investors, an online interactive tool for investors and others to apply PACTA to their equity and corporate bond portfolios.
- PACTA for Banks, a stand-alone software package and toolkit that enables banks to apply PACTA to their loan books. As part of this, 2DII and Asset Resolution provide the underlying company production forecast data for free.
New: Transition Disruption Metric helps investors gauge potential future portfolio disruption stemming from a disorderly transition
The PACTA tool now features a Transition Disruption Metric (TDM), helping investors prepare for potential portfolio disruption stemming from risks associated with a disorderly transition to a low-carbon economy. Developed by 2DII in partnership with the Inevitable Policy Response (IPR) consortium, PACTA now provides the TDM alongside its portfolio alignment model. It indicates the degree of potential portfolio disruption under the IPR’s new Forecast Policy Scenario (FPS), going out to 2030.
Access the TDM here.
Access the methodology document here.
The latest FPS, released just before COP26, shows that rapid policy acceleration up to and post 2025 would bring the “below 2°C” Paris Agreement goal within reach. Attaining this goal would require a significant ramp-up in energy and land use policy action, including electrifying transport, retiring coal, and ending deforestation. The new FPS is based on a high conviction forecast of likely policy developments and real economy impacts of significant acceleration in climate policy from 2025 onward, leading to a 1.8°C outcome.
How the Transition Disruption Metric works
The TDM measures the portfolio’s transition pace from 2021-2026 against what will be needed in the subsequent four years from 2026 in order to align with the FPS scenario by the end of 2030. In other words, it provides a quantitative score of potential disruption based on how far the portfolio lags / leads the FPS scenario in the first five years.
The indicator will be available at technology and portfolio level, subject to scenario and data availability. The higher the score, the higher the chance of portfolio disruption in the medium-term. If investors want to mitigate policy risk and transition more smoothly, they would need to move ahead of the FPS. This means they should begin adjusting exposure or engaging with companies at a faster or slower pace, according to their results under the TDM.