Open source tool to measure climate alignment of financial portfolios

Stock prices on display board

The IKI supported PACTA tools enable banks and investors to assess the alignment of their financial and corporate lending portfolios with climate goals. Photo: iStock.com/Nikada

In order to limit the global temperature rise to below 1.5 degrees Celsius, the international community has set itself the goal in Article 2.1.c of the Paris Agreement to bring financial flows in line with low-emission and climate-resilient development. But how can we measure whether financial markets are on the right track and to what extent investment portfolios are exposed to climate risks?

One approach is the Paris Agreement Capital Transition Assessment (PACTA), supported by the International Climate Initiative (IKI). This open-source methodology enables users to analyse whether their financial assets, such as bonds, loans, or listed equity portfolios, align with climate change scenarios. It helps investors incorporate climate considerations in their investment decisions, as well as promote climate-related investment strategies in emerging and developing countries. 

The PACTA analysis is based on an assessment of financial portfolios: using the technology deployment roadmaps derived from various climate change scenarios, including those from the European Commission Joint Research Centre (JRC) and the International Energy Agency (IEA), PACTA compares them to the production plans over a period of five years of companies that are part of the portfolio.

The IKI project "Measuring Paris Agreement alignment and financial risk in financial markets" has largely contributed to the development of the tool, which has been led by the 2° Investing Initiative (2DII), involving a variety of international partners including UN Principles for Responsible Investment (PRI), the University of Zurich and the Frankfurt School of Finance, among others.

75 per cent of global greenhouse gas emissions covered

Given that the achievement of global climate targets depends to a large extent on the evolution of sectors with the largest emissions, the tool focuses on seven sectors accounting for about 75 percent of global greenhouse gas emissions: power generation, coal mining, oil and gas upstream, automotive manufacturing, cement, steel, and aviation, with the shipping industry to be added soon.

The companies' production plans based on their physical assets are at the heart of the analysis. For example, the analysis will focus on installed and planned capacities of power plants over the next five years, or the number of vehicles manufactured in the automotive industry.

PACTA compares the current technology mix and the production plans of the companies with the technology roadmaps derived from the climate scenarios, thus providing indications of how extensively companies use high carbon technologies and whether they will increase or reduce it in the future. The tool can also be used to identify which companies have the greatest impact on a portfolio and whether they are on the right track towards a low-carbon economy. The core functionality is complemented through a stress-testing module for investors that reveals potential losses in possible scenarios. 2DII is also developing a stress-testing module for banks, which will be available by the end of 2021. PACTA methodologies are also currently being adapted to help a Latin American asset manager to launch a fund aligned with the goals of the Paris Agreement.

Two versions: Investors and banks

PACTA for Investors tool enables the analysis of equity and corporate bond portfolios and targets investors such as pension funds, insurance companies, and asset managers. It takes the form of an online platform where users can upload their portfolio, which automatically generates interactive reports.

There is also a version of PACTA for Banks, which was launched in September 2020 after more than twelve months of testing in collaboration with 17 banks, five of which, known as the Katowice CommitmentBanks, have committed to actively managing their portfolios in line with the Paris Agreement, relying in part on PACTA. PACTA for Banks is a stand-alone software package and toolkit that enables banks to analyse their loan books. Asset Resolution provides a free data set as part of this package.

The analysis reveals a variety of options for investors and banks to take action and reduce transition risks in their portfolios. Investors and banks that want to contribute to the reduction of greenhouse gas emissions can identify companies whose business models are not compatible with climate change scenarios, which in turn can lead to these companies reducing their emissions.

PACTA is unique through its open-source approach. The programming code of the tool is freely available and it is free to use. In addition, the software can be linked not only to the data set provided by Asset Resolution, but also to other data sources.

Extension for a sustainable restart

As part of the Corona Response Package, the IKI is supporting the project with an additional one million euros, enabling the expansion of the tool to include new indicators, long-term risk models/metrics and resilience analyses. The project contributes to better response mechanisms for the financial system and society in the event of a global crisis, such as a pandemic or climate change. In addition, a Green Recovery Tracker is being developed to assess whether companies are making their production more environmentally friendly or whether there are signs of a sustainable recovery in financial markets. Two different points in time, before and after the pandemic, can now be compared and provide information on whether the economy is indeed rebuilding green after the Covid19 crisis.

A record to be proud of

Since its launch in 2018, PACTA for Investors has been used by over 3,000 people from more than 90 countries and over 1,800 institutions. On average, PACTA is applied to more than 600 portfolios each month: These represent over two billion US dollars in investment portfolios and more than three billion US dollars in loan portfolios. 

In addition, universities, research institutions and other initiatives used the results in numerous papers, such as the Swiss meta-report Bridging the Gap, the sector analysis Changing Gear and a climate scenario analysis by Blackrock called To What Degree. The results of the PACTA analyses and the underlying data also provide important contributions to investor coalitions and NGOs in the climate space, such as Climate Action 100+ and the think tank Influence Map.

In the run-up to the 26th Climate Change Conference in Glasgow, PACTA is also helping governments and regulators measure the adaptation of financial sectors in their countries and analyse the risks of transitioning to a low-carbon economy.

Online-Version of the PACTA tool:



This article is part of the IKI Annual Report 2020 - Active for International Climate Protection. For more information, please visit the special page on the IKI Annual Report 2020.