Measuring Paris Agreement alignment and financial risk in financial markets - Internationale Climate Initiative (IKI)
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Measuring Paris Agreement alignment and financial risk in financial markets

As of: January 2022

The Paris Agreement pursues the goal of aligning global financial flows with global mitigation targets. At the same time, however, investors have been offered few tools for incorporating associated risks into their decision-making. Policymakers have also lacked instruments for measuring the alignment of capital markets with the ‘below 2 °C’ target. The key point of focus for this project is a tool for modelling the risks of realigning the financial system with a low-carbon economy and so making these risks measurable. The tool will be provided free of charge for investments in low-carbon market portfolios in emerging markets and developing economies. Risks for green recovery measures have been integrated into the tool as part of the IKI’s Covid-19 Response Package. Alongside the assessment of investment risks, instruments for political decision-makers will also be developed, which can help in monitoring (towards the ‘global stocktake’) at a national level.

State of implementation/results

  • 2DII has developed a series of tools for investors, banks and supervisory authorities in emerging markets and/or with financial exposure to emerging markets.
Investors:
  • 2DII has updated the online scenario analysis tool PACTA, which is currently hosted at platform.transitionmonitor.com/… The reports now offer interactive functionality, that allow the user to see pop-ups that give more data points than what is possible with static charts, as well as dropdown menus to enable customization of the charts.-- As of the beginning of March, the tool has been used by over 4800 individual users from approximately 1000 organizations. Of these, 2200 individuals work either at an asset manager, pension fund or insurance company.
Banks:
  • The PACTA for banks “toolkit” was launched on September 10th, 2020. The toolkit consisted of: i.) software; ii.) a methodology document and additional supporting documents; iii.) training materials; and iv.) a free dataset. Around 30 banks have started their journey towards the software application. All information on the toolkit can be found here: www.transitionmonitor.com/…
Supervisory Authorities:
  • The tool has applied the beta version of its stress test in partnership with three supervisory authorities; the European Insurance and Occupational Pensions Authority, the Colombian Financial Superintendence and the Brazilian Superintendence of Complementary Welfare. Ongoing improvements to the tool, its application to portfolios of other supervisory authorities, and the public release are currently planned by mid-2021.
Industry associations:
  • The study with the PACTA scenario analysis results of the Colombian Investment Trust Association were published in March. Work with the the Mexican Pension funds association is ongoing.
Ministries:
  • 2DII launched the PACTA 2020 initiative, now renamed to PACTA COP. The PACTA COP initiative offers governments the possibility to apply the PACTA scenario analysis and stress testing tools for free. Investors in each participating country can access a dedicated interface at www.transitionmonitor.com/… 2DII has implemented such projects with Switzerland, Austria, and Liechtenstein. Outreach activities to recruit governments in emerging markets are ongoing.
Other Research:
  • In December 2020, 2DII published the report A Corporate Rainy Day Fund: A Regulatory Approach to Ensuring Financial Resilience in the Face of Future Risks . The report includes policy recommendations to strengthen corporate resilience and avoid future government bailouts. The next steps in 2DII research on future long-term risks include the launch of a research report comparing Covid-19 policies to climate policies. This report will emphasize the urgent need to act now. The current pandemic demonstrates how even a few weeks of faster action could have dramatically inhibited the spread of the virus in some areas, a concept that likely equally applies to climate change. 2DII has also partnered with Metabiota to develop indicators that translate covid 19 scenarios to financial risks.

Project data

Country:
Chile, Colombia, Mexico, Singapore

Implementing organisation:
2° Investing Initiative

BMU grant:
3.806.294,00 €

Duration:
07/2018  till  12/2022


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