PACTA 2020 Climate Alignment Report

Bell Asset Management


Important Information & Legal Disclaimer

IMPORTANT INFORMATION The 2Dii PACTA Model generates a limited ‘point in time’ estimate of the relative alignment of the Revealed Plans of Securities in the Scope versus the economic trends embodied in the Scenario(s), as identified by external data and scenario providers.


No forecast or prediction The PACTA Model does not purport to generate, nor does this Report contain or comprise, statements of fact, forecasts or predictions. The PACTA Model provides a ‘point in time’ analysis of economic and commercial variables that are inherently dynamic and variable over time. 2Dii neither makes nor implies any representation regarding the likelihood, risk or expectation of any future matter. To the extent that any statements made or information contained in this Report might be considered forward-looking in nature, they are subject to risks, variables and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on any such forward-looking statements, which reflect our assumptions only and those of our data and scenario providers as of the date of modelling.

No financial advice The information contained in this Report does not comprise, constitute or provide, nor should it be relied upon as, investment or financial advice, credit ratings, an advertisement, an invitation, a confirmation, an offer or a solicitation, or recommendation, to buy or sell any security or other financial, credit or lending product or to engage in any investment activity, or an offer of any financial service. This Report does not purport to quantify risk to the portfolio (or any part thereof), nor make any representation in regards to the performance, strategy, prospects, creditworthiness or risk associated with any investment, nor their suitability for purchase, holding or sale in the context of any particular portfolio. The Modelling Outputs reflected in this Report are provided with the understanding and expectation that each investor will, with due care, conduct its own investigation and evaluation of each security or other instrument that is under consideration for purchase, holding or sale.

Scope Securities The PACTA Model is limited in its scope and application. It does not consider all securities across all sectors, nor all securities within those sectors. The PACTA Model applies only to the Scope Securities set out in the Methodology Statement, as updated from time to time.

Scenario(s) The PACTA Model will apply one or more Scenarios, as set out in the Methodology Statement. The choice of any Scenario should not be taken as any endorsement of those scenarios, nor any statement as to the accuracy or completeness of those scenarios’ methodologies or assumptions, nor as a general preference of those scenarios over any other economic scenarios. The analysis provided by the PACTA Model may be carried out using other economic scenarios, and users must form their own view as to the decarbonisation scenarios, trajectories and models that are most appropriate to their portfolio. No explicit or implicit assumption is made in relation to the current or future alignment of the Scenarios with climate-related policies of any government at international, national or sub-national level.

TCFD Use of the PACTA may support you in initiatives undertaken with regard to the Recommendations of G20 Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD). However, its use in isolation does not purport to provide ‘TCFD compliance’.

1 Introduction

1.1 Background

In September 2018, the 2° Investing Initiative (2DII) introduced the Paris Agreement Capital Transition Assessment (PACTA) tool: a free software that calculates the extent to which corporate capital expenditures and industrial assets behind a given equity, bond, or lending portfolio are aligned with various climate scenarios. The first-of-its-kind software taps into a vast climate-related financial database, which covers more than 30,000 securities, 40,000 companies, and 230,000 energy-related physical assets.

Since the tool was launched on, more than 3,000 individuals from more than 1,800 institutions have used it to conduct over 12,000 tests, with an average of 600+ tests per month. Overall, the total assets under management of financial institutions using the tools amounts to more than USD 106 trillion.

The tool allows users to get a granular view of the alignment of their portfolios by sector and related technologies. This information can be used to help steer investment decisions in line with climate scenarios; to inform decisions around climate target-setting; and to gain insights into engagement with clients on their respective climate actions. The tool helps users identify their exposure to transition risks associated with a disruptive shift to a low-carbon economy. The tool also helps users implement the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), as well as comply with related regulations (Article 173 of France’s Law on Energy Transition for Green Growth, upcoming EU disclosure requirements, and more).

1.2 About this report

This report aims to answer the questions identified

Climate scenario analysis for equities and corporate bonds, based on the PACTA method developed by 2DII.

The following questions are answered:

  • What proportion of the portfolio is invested in climate-related sectors?

  • Do the production plans of the companies in the portfolio tally with climate scenarios which comply with the Paris Agreement?

  • Which companies in this portfolio significantly influence the results?

  • How does my portfolio perform compared to market benchmarks?

Results of the climate stress test which is based on the PACTA method

  • To what level of risk is the asset value of the portfolio exposed in various transition scenarios?

Important information about the methodology is summarised in the final chapter. The report refers to the PACTA Knowledge Hub where you can find a detailed explanation of the PACTA method and of the underlying sources of data, as well as videos which can help you to interpret the results.

1.3 Methodology in Brief

The portfolio alignment analysis is based on forward-looking asset-level data in the following nine key climate relevant sectors: power, oil & gas, coal mining, automotive, shipping, aviation, cement, steel, and heavy-duty vehicles. Together, these sectors account for around 75% of global CO2-emissions. This data is mapped to financial and ownership data and compared to climate scenarios that provide low-carbon energy transition roadmaps at technology-level. The core climate scenario analysis provides answers to the following questions:

  1. What share of the portfolio is currently exposed to activities in sectors affected by the transition to a low carbon economy?

  2. How aligned are the investment and production plans of companies in the portfolio with different climate scenarios and the Paris Agreement?

  3. What is the portfolio’s technology mix in climate-relevant sectors expected to look like in five years based on current investment plans of the companies underlying the portfolio, and how does it compare to peers, the market, and a technology mix aligned with the Paris Agreement?

  4. Which companies are driving the results of the portfolio’s exposure and alignment?

The following table provides an overview of key components and principles underlying the PACTA methodology.

Physical asset-level data The analysis is currently based on data covering 40,000+ companies and 230,000+ energy-related physical assets from third-party data providers. This alleviates the necessity to rely on companies self-reported data that is published in a non-standardized manner and often does not account for scope 2 and 3 emissions.
Forward-Looking PACTA provides a forward-looking analysis of the production plans financed by a portfolio that are compared to climate scenarios.
Sector-specific approach The outputs of the analysis are metrics and indicators at sector and technology-level that allow for a detailed evaluation of a portfolios alignment, rather than one aggregated indicator at portfolio level. For sectors in which no low-carbon technologies exist, the sectoral decarbonization approach is used to benchmark the portfolio production against climate scenarios. The SDA was developed by the Science-based Targets Initiative.
Allocating macroeconomic goals to microeconomic actors The PACTA analysis uses a market-share approach to allocate macroeconomic climate goals to companies: all market level trends and goals are allocated to companies based on their current market-share in the sector or technology, for low- and high-carbon technologies respectively.
Mapping company-level activities to financial instruments and portfolios A key question addressed in this methodology is how to allocate company-level activities to financial instruments. A number of different approaches exist, two of which are used in this analysis:

Portfolio Weight approach: This approach calculates the portfolios technology exposures based on the weighting of each position within the portfolio. This approach is used for the analysis of corporate bonds.

Ownership Weight approach: This approach assigns a share of the companies activities to the portfolio based on the percent of outstanding shares owned by the investor. This approach comes closer to allocating responsibility for the companies activities to the financial institution. This approach is used for listed equity portfolios. |

1.4 Practical tips

Interactive graphics. Most of the charts in this report are interactive. They allow you to select specific benchmark scenarios, geographical areas, sectors and methods which you can compare. In the case you would like to review multiple charts, by hovering your pointer over the chart and clicking on the plus button that appears, you can add additional charts to the report and change these parameters as you wish.

Feedback. You can if you like provide your feedback on each chart by clicking on the text bubble which appears when hovering your point over the chart. We appreciate receiving your feedback as it will form the basis for improving this report and the PACTA method.

Method and data set. Each section of the report contains basic information about the methodology and the underlying data. You can find more detailed information at the Knowledge Hub.

Downloading Graphics and Data. By hovering over the right hand corner of each chart you are able to download the underlying data and a png version of the charts. We welcome you to use this for further analysis or rebranding of the graphics and request only that you refer to 2° Investing Initiative as the source of the data.

Sharing the report and the results. This report can be shared by clicking on the button in the bar above this report. This creates a link that allows anyone with that link to access the results and contents of this report. Please note this link can be accessed online by anyone without a log in. No underlying portfolio data is made available through this process, however the aggregated results for the portfolio are still able to be downloaded.

Grouping these Results. If you have uploaded several portfolios, you can group them together to create aggregated results. This can be done on the Results page of the platform.

2 Scope and Parameters of the Analysis

This chapter outlines the scope and coverage of this PACTA analysis by answering the following four questions:

  1. What are the holdings analysed in this assessment?

  2. Which asset classes are covered in the analysis?

  3. Which sectors are covered in the analysis?

  4. How much of the portfolio’s emissions are covered?

2.1 Asset classes

This analysis focuses on asset classes with the most direct and traceable impact on the real economy, and for which public data is available. These are direct investment in economic activities by investments through listed equity and corporate bonds on the secondary market. From the total market value of this portfolio, which corresponds to 85,394,840 USD, 100 %, and 0 % correspond to equity and corporate bonds, respectively.

The table below summarizes which financial instruments are included in the analysis.

2.2 Sector Coverage

This analysis can be applied to listed equity and corporate bonds in climate-relevant sectors (automotive production including light and heavy duty vehicles, aviation, coal mining, cement production, steel production, oil and gas production, power generation and shipping).

Sectors included in the analysis fulfill the following three criteria:

  1. The sectors are relevant from a climate perspective and contribute significantly to the global greenhouse gas (GHG) emissions;

  2. There are scenario benchmarks available for each sector and;

  3. There is sufficient data and business intelligence available.

While other sectors like agriculture, forestry, aluminium, paper and glass are also climate relevant, there is a lack of asset or scenario level data and they are therefore not included in the analysis.

Understanding the Graph

The pie chart shows the financial sector split of the total investment in the selected asset-class. The share that is invested in companies with assets in climate-relevant sectors is represented by the coloured slices.

For more information on asset class and sector coverage of PACTA analysis, please visit the Knowledge Hub.

2.3 CO2 emissions

As PACTA is a granular and forward looking climate alignment tool, it does not work based on "financed emissions" due to the lack of meaningful scenarios as well as data limitations in measuring these emissions. Nevertheless, estimating current CO2 emissions associated with a portfolio can be useful to inform about the relevance of each sector in the decarbonisation of the portfolio.

The following charts indicate the contribution of each of the sectors to the total emissions assigned to the equity and bond portfolio. Comparing these graphs to the graphs from the previous section emphasizes the importance of the analysed sectors in terms of climate relevance. While making up 100% of the portfolio value, by emissions the climate relevant sectors are responsible for the following share of the portfolios estimated CO2 emissions.

Understanding the Graph

The pie chart shows sector split of the total emissions attributed to the investments in the selected asset-class. The emissions from companies with assets in climate-relevant sectors is represented by the coloured sections.

3 Climate Scenario Analysis

This chapter presents the results of the PACTA climate scenario analysis of the holdings in equity and bond portfolios.

The first three sections show the exposure of the portfolio to climate relevant sectors as well as the alignment of production plans of companies in this portfolio with different climate scenarios. To understand these results better, the next section highlights how the company level production plans are driving these results. The performance of this portfolio is then compared to the benchmark.

To better understand the methodology underlying these charts, please refer to the Knowledge Hub.

3.1 Exposure to climate relevant sectors

In this section, the exposure of the portfolio to different sectors, technologies and geographies is shown. This analysis is based on an aggregation of the weight of the companies mapped to the climate relevant sectors in the portfolio. This section addresses the following questions:

  1. What is the current exposure of the portfolio to climate relevant technologies?

  2. How much of the portfolio is invested in low- and high- carbon technologies?

  3. How is the exposure of the portfolio regionally distributed?

3.1.1 Current exposure

Within the climate relevant sectors, each technology differs in its role in the low-carbon transition of this sector. Understanding the exposure of the portfolio on a technology level provides the basis to understand transition risks as well as potential climate investment strategies applicable to this sector. The following chart shows the exposure of the analysed portfolio data to the different technologies within each sector.

Understanding the Graph

For each sector, there are two views that can be seen in this chart. The first show the technology mix as a % of assets under management. This represents the percentage of the portfolio in these sectors and technologies. The second option shows the technology breakdown of the sector. The green line underneath the bars represents the portfolio of the sector in low carbon technologies. The second bar shows the benchmark which can be changed by clicking on the benchmark text. An option also exists to subset the results by an alternative equity market for the equity portfolio.

3.1.2 Geographic exposure

The map below provides information on the regional exposure of this portfolio. It includes two basic insights: it gives a geographical dimension to the exposure per sector or technology as well as a sectoral view with regards to individual countries. This is of importance for understanding regional diversification and potential exposure to risks specific to specific countries.

Understanding the Graph

The colour shading shows the production of a specific technology in the respective country. This is possible as the asset-level data for all companies in the portfolio includes information about the geographical location of each asset. The production capacities in each country are aggregated by weighting the contributions of each company by their weight in the portfolio.

3.2 Alignment with climate scenarios

This section assesses the forward-looking alignment of the companies in this portfolio with different climate scenarios. The results presented in this chapter provide answers to the following questions:

  1. Which climate scenarios are the production trajectories of this portfolio aligned with?

  2. What is the current exposure of this portfolio to technologies and how does this change over the course of five years?

  3. What is the relative exposure between technologies in each sector in five years?

  4. How do emission intensity reductions in relevant sectors in this portfolio compare to climate scenarios?

3.2.1 Alignment of production trajectories

This section assesses the alignment of a portfolio to a range of climate transition scenarios based on the production plans of the companies in the portfolio. This analysis is only possible for sectors with sufficiently granular technology decarbonisation road maps, namely the power, coal and oil and gas, automotive (light duty vehicle and heavy-duty vehicles) sectors. From this, the future alignment (at 5 years) can be inferred, and this is also benchmarked against indices. This can be used to inform risk management, target setting and climate strategies. A section on interpreting the results in provided at the bottom.

Remember you can investigate different options here by clicking on the boldened text and changing the parameters behind these results. You can add additional charts by clicking on the Plus button that appears when you hover over the upper right of the chart.

Understanding the Graph

The solid line indicates the development of the production in the selected technology for the next 5 years. The coloured areas indicate the required chance of production according to different climate scenarios. The dashed area represents the chosen benchmark scaled to the starting point of the portfolio. The benchmark, allocation method and equity market can be changed by clicking on the boldened values.

3.2.2 Future technology breakdown

For sectors with low carbon alternatives such as the power and automotive sectors, it can be useful to compare how the split between technologies looks in five years in comparison to what is expected under scenarios and with what the benchmark is doing in this regard.

This chart shows the split of each sector within the portfolio by technology, both what is currently planned and what is expected under the specified scenario. This chart does not include assumptions around changes in portfolio composition rather how the company changes in production impact the overall portfolio composition.

Understanding the Graph

This chart shows the split between technologies in each sector expected within the portfolio in five years. It also shows what this split if the companies in the portfolio were to align with the scenario. Additionally, it shows this information for the benchmark and for the benchmark if the benchmark portfolio were also to align with the scenario.

This chart assumes no changes in portfolio allocation over time.

For the sectors with low carbon alternatives, one can see how the exposure to low and high carbon technologies compares. For the fossil fuel sector, production has been converted to GJ to allow comparison between the three fuel types. The comparison between the fuels is provided for reference.

3.3 Alignment of emission intensities

For sectors in which there is no low carbon alternative, or even where there is, decarbonisation efforts via increasing efficiency in production and use, as well as investment in research and development in the short term, is necessary in order to bring CO2-neutral alternatives to market maturity. This analysis presents the changes in CO2 intensity in comparison with the scenario.

Understanding the Graph

The chart uses the current emissions intensity of companies within the portfolio as a starting point and shows how this expected to develop over the next five years based on the plans of the company and what would be expected under the scenario.

3.4 Company-level results

The following section is dedicated to the identification of the companies in the portfolio that have the strongest impact on the results in this report. The analysis in this section can serve as the basis for climate strategies such as engagement, best-in class investment, exclusion or use exercising voting rights, among others. The analysis of this section allows to answer the following question:

  1. Which companies are driving the portfolio’s alignment with climate scenarios?

  2. Which companies are the leaders and laggards with regards to shifting towards low carbon alternatives?

3.4.1 Company Low- and High- carbon split

The first chart visualizes the technology exposure and the alignment of companies in the power and automotive sector. Within these sectors, low-carbon technologies compete with high-carbon technologies in the current market, which allows to assess how companies are split.

Companies that are positioned rather left on this graph, own more high-carbon technology, while company on the right side, own more low-carbon technologies. Furthermore, the announced build-out of low-carbon-technologies for each company is compared to the required build-out based on the selected scenario. Companies that are positioned in the lower part build-out less than companies in the upper part. The importance of each company can be measured by the size of the data point. The radius is determined by the weight of the company in the portfolio. Thus, larger dots represent companies that drive the portfolio results.

Understanding the Graph

The visualization combines current technology mix (x-axis) and alignment information (y-axis) for all invested companies in the chosen sector. Dots positioned further to the right represent companies that have a larger share of low carbon technologies. Dots positioned further up indicate that companies have more ambitious build-out plans in low carbon technologies. The size of the dots represents the weight of the company in the portfolio.

Please note, for the corporate bond portfolio, the results are provided at debt ticker level. This is because a single debt ticker could be associated with multiple companies.

3.4.2 Company Technology Exposure

The most important power and automotive companies in the portfolio according to their weight in the portfolio are shown with their technology mix in the production. The companies’ technology mix is then compared to the portfolio’s future exposure and its aligned exposure.

Understanding the Graph

This chart shows the breakdown of each company’s production capacity in each sector by technology. This is compared to the portfolio, benchmarks and this portfolio if it were to be aligned with the selected scenario. Companies that have higher exposure to a technology than the portfolio drive the exposure of the portfolio to this technology up.

Please note, for the corporate bond portfolio, the results are provided at debt ticker level. This is because a single debt ticker could be associated with multiple companies.

3.5 Interpreting the results

Exposure versus Alignment? How to read these results?

The charts shown in this chapter reflect one of two concepts – exposure and alignment. It is important to consider both when assessing the scenario analysis of the portfolio. The first shows the relative importance of the sector and technology in the portfolio. Where a sector has a relatively low presence in the portfolio, the question of alignment of this sector is relatively less important than in sectors that are more heavily weighted. Similarly, the alignment metrics and graphics do not make comment to how relevant the sector is in the portfolio. Depending on the intentions behind conducting scenario analysis of this financial portfolio, influences which metric is more relevant. If you are looking to make an impact in terms of a reduction of real-world emissions, it could be relevant to focus on the companies that are most misaligned and engage them based on these results. If, however you are looking to minimise exposure to potential transition risks, then focussing on the exposure of your portfolio to different technologies or geographies may have more relevance.

Does this analysis indicate a temperature alignment of my portfolio?

This analysis shows whether the technology specific build out plans of companies in my portfolio are in line with technology roadmaps outlined in energy transition scenarios. This analysis however does not provide a single temperature warming indicator for the entire portfolio. If a portfolio is aligned with the Paris Agreement in the Power sector, but not in the automotive sector, how should one sum these up to an overall portfolio level result? While there is obviously a myriad of ways to “score” climate alignment, there are major challenges related to the interconnectedness and 'offsetting' across sectors, uncertainties surrounding data and assumptions, as well as the fact that some technologies and sectors necessary to reach certain temperature targets are not represented in this analysis. Therefore, our research concludes that currently the temperature alignment of a portfolio cannot be represented as a single indicator in a scientifically appropriate way.

4 Climate Stress Test

Climate stress test scenarios based on PACTA results have been developed by 2DII in collaboration with a number of financial supervisors. As of now, the climate stress test shown here only considers transition risks when calculating potential losses. Transition risks are related to policies and regulations that are implemented to transition to a low carbon economy. The results reflect the impact that transition could have on the financial value of the portfolio under a “climate stress-test scenario”, split in terms of impact on the equity and bond portfolios.

Please note that the results in this section do not represent assumptions around the “correct asset price” or mispricing of assets, but rather potential losses under these stylized scenarios. They are derived from macro models covering a large universe of assets and thus should not be compared or confused with bottom-up sell-side or buy-side equity research doing detailed assessments of individual companies. Nevertheless, granular asset-level data allows for a granular application of these scenarios to portfolios.

  1. What are the potential financial losses under certain climate scenarios?

  2. How are these potential financial losses distributed across different technologies and sectors?

4.1 Potential financial losses

The results reflect the impact “transition stress-test scenarios” would have on the financial value of the portfolio. The scenarios differ in expected policy reaction, impact year, temperature rise and therefore exposure to physical and transition risks.


The stress-test calculates the magnitude of potential market value losses of equity and bonds due to a late and sudden policy shock to limit global warming to below 2°C. In order to do so, we first assume that the world economy and your portfolio are on a baseline transition scenario. The baseline scenario assumes that overall production in climate relevant sectors and technologies will follow the trajectories described in the NPS/STEPS (Stated Policies Scenario) scenario. This baseline scenario would likely lead to a global temperature rise between 2.7 and 3.5°C by the end of the century and is therefore not aligned with the Paris Climate Agreement (UNPRI 2019). The stress-test model assumes that, without a policy shock, both the world economy and your portfolio remain on this baseline scenario for the next 20 years, until 2040.

However, in order to remain below a 2°C temperature rise by the end of the century, it would be necessary to transition to another production pathway in climate relevant sectors. The Sustainable Development Scenario (SDS) developed by the IEA provides such production trajectories that are in line with the Paris Agreement.

The stress-test assumes that governments decide in 2030 to take drastic policy action in order to remain within the boundaries of the SDS. Effectively governments decide to switch the world economy from the path of the baseline and onto the SDS path. According to the Carbon Balance method, this switch takes 10 years, with the economy arriving on a sustainable path in 2040. This is called a Late & Sudden transition. Production in carbon intensive sectors will decrease significantly and production in less carbon intensive sectors will increase sharply (both in comparison to the SDS pathways). Along with the changes in production pathways under such a Late & Sudden scenario, the market prices of said technologies are expected to change suddenly, as well as the profits. These changes are quantified as potential losses (or gains) in the value of equity and bond holdings. We do this by employing a DCF model that captures the differences in future profits between the baseline and the Late & Sudden scenarios for each technology. A shock to the discounted cash flow will translate to a shock to the equity value of a holding. For bonds, it would be optimal to explicitly consider the default risk induced by such a shock, but for lack of data to run a fully fledged credit risk model, we instead assume the technology shocks from equity assets carry over to corporate bonds using a 0.15 flat multiplier, as introduced by the Bank of England for the Climate Exploratory Scenario developed as part of the 2019 Insurance Stress-Test (BoE 2019).

Users are reminded that the climate transition stress test does not attempt to quantify the overall financial risk related to climate transition scenarios, as scenarios with limited or no transition are likely to have a higher physical risk and potentially legal risk than scenarios with a transition that manages to stay within two degrees of warming above pre-industrial levels or less.

More detailed information on the assumptions and value loss factors used for the estimation can be found here ( The tool is in its early stages of development and therefore has its limitations, such as an assumed 7% net profit margin across technologies and a flat multiplier on the equity shocks to get bonds shocks rather than a fully fledged credit risk model. These and other limitations are going to be addressed as well as possible in future versions of the tool.

The graph gives the opportunity to explore the impact of the different scenarios on the value of the portfolio, split between equities and bonds. Additionally, there is an option to display the outcome of the IPR FPS stress test calculations on the given equity portfolio (IPR FPS only provides shocks for equity). Note that exact sector definitions differ between these two approaches, and that IPR FPS also covers more sectors than PACTA/Carbon Balance. As such, the share of the portfolio that is considered in the calculation differs too.

Understanding the Results

The left bar shows the portfolio’s overall AUM in mio. USD for either Listed Equity or Corporate Bonds. The bar is split in three sections, the dark blue part indicating the share of the portfolio that is not in climate relevant sectors and therefore not subject to the stress test. The remainder correspond to assets from climate relevant sectors, of which the light blue part was successfully matched with all relevant data and included in the climate stress test analysis. The right bar shows another section, the striped section, which depicts the overall Assets at Risk of the portfolio under a given climate transition scenario. The percentage value is in reference to the overall portfolio value of the given asset type. The boxes to the right, shed more light on details of the analysis. In addition to the overall AUM and the VaR of the total portfolio, this VaR is also expressed in absolute terms, and as a share of the size of the analysed part of the portfolio. Since exposure to climate relevant sectors may be larger than the analysed share of the portfolio, it is important to understand this share and that the overall portfolio VaR may be different if the remaining share of climate relevant holdings were to be included in the analysis.

4.2 Distribution of potential financial losses across sectors and technologies

In addition to the potential overall loss of value for bonds and equities, it is important to understand the distribution of risk across technologies. The graph below shows the risk profile by technology for a given asset type and climate transition scenario.

Understanding the Graph

This graph is a technology level deep dive of the potential losses in total numbers (left axis: value change in mio. USD) and as a percentage of the portfolio’s exposure to each technology (right axis). It is to be read as follows: Under a late & sudden climate transition scenario, 45.37% of this portfolio’s Equity investments are at risk of loss, which corresponds to a value of approx. 421 mio. USD of investments in Oil production. Note: Numbers can take positive values, as a climate transition scenario can be beneficial for some technologies.

Dividing up the Assets at Risk by technology provides crucial insight into sub sector risk profiles to understand where risk originates from and where opportunities lie. It can be helpful to find strategies of adaptation for those companies in a portfolio, which are strongly exposed to technologies with higher VaR.

5 Climate Actions and Next Steps

Upon reading this report, one can understand that PACTA is a tool that informs two objectives. First, it informs financial institutions on defining climate actions and setting aspirations related to the alignment of their portfolio with climate goals. While it does not measure the contribution that financial institutions make in terms of real-world emissions reduction, it represents a first step on that journey. A related project (Evidence for Impact) is currently under way to help design methods and approaches to better understand the real-world impact of climate actions by financial market actors.

Second, PACTA can also be considered a mechanism to understand the evolution of transition risk. By measuring portfolio alignment, it informs on the extent to which companies are adapting their business plans to climate scenarios. Misalignment can then speak to potential higher future risk. A number of financial supervisors are currently using the PACTA model for this purpose. However, while PACTA can be an input into risk frameworks, it does not model actual financial losses.

5.1 Climate Action Guide

The information in this report serves as a starting point for better understanding the possible climate actions and strategies that can be implemented. To assist in planning the next steps, 2DII have developed a Climate Action Guide that serves to breakdown the avenues to achieving impact in the real economy.

The Climate Action Guide provides information on climate actions that can be taken and summarises the current evidence that links these climate actions with CO2 reductions. It also can be used to simulate the implementation of climate actions and what effect these would have on your portfolio. This guide can be accessed here through the website where you have received these results.

6 Methodology

This section provides details about the PACTA methodology.

6.1 PACTA Methodology

This chapter covers the core concepts of the methodology allowing a reader to understand the results being presented here whilst interpreting them correctly. Key assumptions and limitation are pointed out. This is not a detailed description of the methodology. The finer details of the methodology can be found in the knowledge hub on the transition monitor website along with answers to frequently asked questions.

6.1.1 Scenarios and Data Asset Level Data

The PACTA methodology measures the alignment of a financial portfolio to decarbonisation pathways set out in climate change scenarios. It does this by attributing physical assets in the real economy to the financial asset that finance them. The physical asset-level data used in this report is provided by Asset Resolution. Information about the coverage of the asset-level data (ALD) used in this report can be found here.

The production values for each physical asset in the ALD, measured as an economic unit of output, is known. For example, the number of cars produced or barrels of oil for automotive and oil assets respectively. The asset's production values are allocated to the companies owning them based on the "equity share approach". Whereby, if company A owns x% of Asset 1, company A is attributed x% of Asset 1's production. When ownership data is missing, the remaining shares are distributed equally to the companies to which no data is known (for example, if company A owns 50%, company B owns an unknown %, and company C owns an unknown %, then company B and company C both get 25%). In the case where ownership data only exists for one company then 100% ownership is assumed.

The production values are then aggregated up the corporate structure chain following the "equity ownership approach". (e.g. subsidiary > parent company > group). The equity ownership approach allocates production as follows: Assuming Group α is the parent of Company A. Group α is attributed Company A's production multiplied by the ratio of Group α's owned shares in Company A to Company A's total outstanding shares (or 1, if Company A has no shares). If Company A is a joint venture then the same principle is applied to each parent entity. This modelling choice was chosen to reflect methodologies commonly used in the financial industry. The PACTA methodology is open to other modelling choices. Scenarios

The PACTA Methodology is agnostic to any climate scenario that lays out targets in production capacity at the technology level or, for the relevant sectors, emission-intensity units. Scenarios typically differ as follows:

  • They lay out decarbonization paths that occur at different speeds (rapid ramp-up or long-term adjustment)
  • They make different assumptions around innovation and thus around technologies’ availability, scalability, and cost
  • As a result, they favor or rule out different technologies (e.g. phase-out of nuclear in the Energy Revolution scenario (GPER) (Greenpeace), prominent use of carbon capture and storage (CCS) in the IEA’s Beyond 2 degrees scenario (B2DS) scenario)
  • They implement decarbonization paths of different levels of ambition
  • They offer varying levels of granularity, e.g. they are expressed at different times and geographic scales

Given that the targets laid out in climate scenarios can vary by region depending the sector’s value-chain and geographic constraints (e.g., power distribution), alignment is measured at the geographical level in which the sector tends to operate. For example, for the power sector, markets tend to be regional or national, and as such alignment should be measured at that level. However, the oil, gas, coal and automotive sectors operate in a global market and in such a case a global scenario target is used.

A few different sets of scenarios are used in this report, responding to requests for a more ambitious 1.5°C scenario.

The World Energy Outlook scenarios from 2019 and 2020 are included which include a Current Policy Scenario (2019 only), Stated Policy Scenario, and Sustainable Development Scenario. Scenarios developed in the Prospective Outlook on Long-term Energy System (POLES) model by the Joint Research Centre (JRC) have been included in the analysis. Three scenarios have been selected from this model and include a 1.5°, 2° and a reference scenario.

Source Scenario Description
Current Policies Scenario Government policies that had been enacted or adopted by mid-2019 continue unchanged.
WEO Stated Policies Scenario Considers the policies and implementing measures affecting energy markets that had been adopted as of mid-2019, together with relevant policy proposals, even though specific measures needed to put them into effect have yet to be fully developed. It assumes only cautious implementation of current commitments and plans by reviewing the many institutional, political and economic obstacles which exist, as well as, in some cases, the lack of detail in announced intentions and about how they will be implemented.
Sustainable Development Scenario An integrated scenario specifying a pathway aiming at: ensuring universal access to affordable, reliable, sustainable and modern energy services by 2030 (SDG 7); substantially reducing air pollution (SDG 3.9); and taking effective action to combat climate change (SDG 13).
Reference Scenario Corresponds to a world where currently existing policies for GHG emissions, renewables deployment and energy efficiency are carried out and where no additional policies are implemented compared to what had been legislated as of June 2019. It covers worldwide policies.
POLES 1.5C Scenario Assumes a global GHG trajectory consistent with a likely chance of meeting the long-term goal of a temperature rise over pre-industrial times below 1.5C for 2100. It was designed with a probability not to exceed their temperature change at the end of the century of 66%.
2C Scenario Assumes a global GHG trajectory consistent with a likely chance of meeting the long-term goal of a temperature rise over pre-industrial times below 2C for 2100. It was designed with a probability not to exceed their temperature change at the end of the century of 75%. Time horizons

Results given in this report are shown for the present and up to 5 years in the future. This is based on the capital expenditure (CAPEX) plans reported by the company's present in the ALD. No reliable estimate beyond 5 years can be made due to a lack of adequate CAPEX forecasts beyond 5 years.

6.1.2 Accounting Principles Distributing macro carbon budgets to micro-economic actors

Various approaches could be considered when it comes to allocating macro decarbonization effots to micro-economic actors.

A market share approach has been adopted in PACTA. This approach uses a ‘market share’ allocation rule, wherein all sector-level production and capacity trends are proportionally distributed across companies such that by contracting/expanding their production in each technology at the same rate, they retain their initial market share. Put differently, each actor in the sector need to decarbonize as what their current market share would dictate.

Other options include: - A least-cost approach, which considers the economic efficiency of an asset. Here the actor that is most economically efficient in decarbonizing is expected to do the bulk of the decarbonization needed. - A historic responsibility approach, which weights the decarbonisation efforts towards those that have previously contributed the most to climate change. - A bottom-up approach, which would include economic efficiency considerations, political factors (e.g. regulatory frameworks), adaptive capacity and corporate agility (none of which are considered here) Allocating economic assets to financial activity

Another important element is how to allocate the economic assets to the financial asset and then the overall portfolio. Here too there are various approaches that could be considered. This analysis reflects two of these.

  1. “Ownership approach” (or balance sheet approach). This approach allocates the economic assets to financial assets as a function of the ownership share that the financial asset represents. Thus, if one owns 1 share of a coal-mining company and there are 100 free-floating shares on the market, one would get 1% of the production of the mining company allocated to the portfolio. This ownership approach can only be applied for equity stakes – it is not transposable to debt.

  2. “Portfolio-weight approach”. This approach allocates economic assets based on the weight of the financial asset in a specific sector in the portfolio. Thus, if a bond of Power Company A represents 10% of your total Power-bond portfolio, you are allocated 10% of Company A’s production. In debt values, it represents a proxy for capital allocation decisions. For equity, this logic does not apply.

6.1.3 Limitations

Some of the limitations to the model are outlined.

As is a central caveat of modern portfolio theory, in PACTA’s attempt at adapting the modelling of financial markets to include feedback loops with climate risks, a truly diversified market portfolio cannot be accurately observed nor replicated. Not all relevant assets can be satisfactorily mapped and their main variables measured. While a limitation, the modelling work provided here still arguably goes some way in offering a clearer view of climate-related risk as channelled from economic assets to financial institutions, its first purpose and what drove its design is climate alignment rather than risk mitigation.

Companies’ relative extents of climate alignment are approximated using production capacity-based figures, and do not encapsulate R&D investment, historical record, lobbying expenditures, etc. Particulary R&D investments would be an important element to look at. Perhaps a company does not yet have very green capital expenditure plans, but it may invest heavily in R&D.

Another limitation in the approach resides in the necessary choice of climate scenarios: while there exists an endless number of combinations of technology-specific pathways, the model relies on a small number of scenarios and accepts their uncertainty and margins of error.

Beyond the model’s reliance on the quality of climate-scenario data, it also relies on that of the asset-level data, financial data and on that of the financial data fed into it. While efforts are made to check the quality of the asset level and financial data, these subsets aim to reflect the real economy which are difficult to capture correctly.

Last, and while less of limitation than a feature that deliberately falls out of the scope of this model, the approach does not model potential financial losses. Moreover, while model outputs can be used as input into existing risk models to calculate sectoral or company-specific financial risks, their aim is not to comprehensively map all sources of financial risk (e.g. pipelines, distribution networks, upstream supply chain, etc. are not covered).