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: April 2021

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

  • Due to COVID-19, there is increased interest in strategic climate-friendly infrastructure development and international funding. The tool should now also help to mobilize sustainable climate finance and anchor GHG reduction projects in economic stimulus packages.
  • 2DII has developed a range of tools for investors, banks and regulators in emerging markets.
Investors:
  • 2DII has updated the online scenario analysis tool PACTA, which is currently hosted at tool.transitionmonitor.com/… The update included a data update (data from December 2018) as well as new functions for adapting the analysis and visualizing the analysis results.
  • A total of 780 investors had used the tool by the beginning of March. Of these, 37 of these investors are either located in emerging markets or have offices in emerging countries that have used the tool. At least 66 investors in industrialized countries evaluated portfolios with investment activities in emerging markets.
Banks:
  • The PACTA tool as a pilot for banks is now reaching its final phases. At the end of May, 2DII will publish the method documentation, the software and the related documentation for its application, as well as the input databases required for its application. Around 45 banks have already expressed interest in using this tool.
Regulators:
  • 2DII has developed a second version of the bottom-up tool for climate stress tests (the first version is available at www.transitionmonitor.com/… The tool is now being tested and applied in partnership with two supervisory authorities; the European Insurance and Occupational Pensions Authority and the Colombian Financial Superintendence. Ongoing improvements to the tool and its application to portfolios of other supervisory authorities are currently planned until the end of 2020.
Ministries:
  • 2DII has launched the PACTA 2020 initiative, which supports governments’ pledge to “assess and monitor the climate impact and the alignment of their financial flows with the 1.5°C temperature goal of the Paris Agreement”. Around nine European governments have now signed up to this pledge. Outreach activities to recruit governments in emerging markets are ongoing. The PACTA 2020 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/…

Project data

Country:
Chile, Colombia, Mexico, Singapore

Implementing organisation:
2° Investing Initiative

BMU grant:
2.806.403,00 €

Duration:
07/2018  till  06/2021


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