Paris Agreement Capital Transition Assessment Methodology

By giving banks an overview of the climate direction of their corporate equity and spending plans, the PACTA for Banks toolkit is an important step in analyzing climate scenarios for lenders. The toolkit was developed in six years and tested by 17 global banks and more than a dozen academic institutions. 2DII makes the materials of each interested organization available free of charge. 2DII will hold a webiner on October 13 to explain how PACTA works for banks. In the meantime, this article provides an overview of the main features. Instead of measuring retrograde “sins of the past,” it proactively assesses whether their holding companies are adapting to the Paris agreement. This method is based on a version used by major regulators, including the EIOPA and the California Insurance Commission, and which has been used by more than 600 investors since then. PACTA for Banks provides users with a detailed overview of the direction of their credit accounts to businesses by sector and related technology, both at the corporate customer base and at the portfolio level. Banks can use this information to manage their loans in accordance with climate scenarios; inform their decisions on the definition of climate targets; and gain insight into their engagement with clients through their respective climate change measures.

The toolkit can also help banks identify their exposure to the transient risks associated with a disruptive transition to a low-carbon economy. The PACTA for Banks methodology includes three key elements: physical asset data, financial exposures and climate scenarios. This method evaluates tangible assets (for example. B steel or power plants) that are linked to financial assets (such as loans, bonds and equities) and analyzes the direction of these assets through climate scenarios. The methodology, opened in collaboration with the United Nations for Responsible Investment (UNPRI) and California Insurance Commissioner Dave Jones, helps address the lack of adequate information for investors to assess how their portfolios could be influenced by climate change. The risks associated with climate change take two forms: physical risks (such as sea level rise, storms and forest fires) and the transition risks associated with the transition to a low-carbon economy. While these risks can cause significant disruptions in financial markets, they remain outside the traditional horizon of forecasting and analysis of collateral for credit repayment. PACTA for Banks aims to help banks assess the direction of their lending practices on climate scenarios. For example, banks can use PACTA for banks to assess the impact of climate change on their assets and loans and to analyse risks from EU regulation for carbon-intensive industries to how poor weather can threaten credit risks. As part of this commitment, participating governments and financial institutions will use the PACTA methodology of the 2-Investment Initiative to compare their investments and funding with climate benchmarks. Together, the members of the pilot group have experimented with one of our latest research innovations: the methodology for analyzing climate scenarios in the Paris Capital Transition Assessment (PACTA) agreement for business credit. This methodology builds on our previous research on equities and corporate bonds, which led to the introduction of version 1.0 of the PACTA methodology on TransitionMonitor.com in September 2018.

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