The PRI, together with California Insurance Commissioner Dave Jones, is pleased to support the launch of a free-to-use, online tool – developed by the 2⁰ Investing Initiative – for assessing climate transition risk in investor portfolios.
This tool, the Paris Agreement Capital Transition Assessment or PACTA tool, analyses exposure to transition risk in equity and fixed income portfolios over multiple scenarios, thereby helping to reduce information barriers on how climate scenario analysis can be done.
Most significantly, the tool allows investors to see the gap between their existing portfolio and two-degree benchmarks. An earlier version has been used by over 250 investors – many of whom are PRI signatories – and four regulators, including the Swiss financial regulator, the California Insurance Commission and the Dutch Central Bank.
The tool offers a solution to a number of existing barriers, notably:
The tool, and the database behind it, is a solution to the problem of where investors can obtain data in the event that companies do not disclose information on their carbon emissions.
It represents the gap between a two-degree benchmark and investor portfolios and the graphs are adjustable by sector, region, type of climate reference scenario and other indicators. The tool can be downloaded in a 30-page output report, which is confidential to the user.
The launch of the tool supports the PRI’s ongoing commitment and its actions to help institutional investors transition to a low-carbon environment, including the alignment of the PRI Reporting Framework with the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). The recommendations provide a globally consistent framework to help translate non-financial information about climate change-related risks into financial metrics.
Incorporating the TCFD recommendations requires institutional investors to obtain better information if they are to navigate their way efficiently through the energy transition. A key TCFD recommendation is the need for forward-looking analysis to assess how investors’ exposure to climate change-related risks and opportunities might impact on portfolio performance over time. Questions, however, linger about how this approach can be implemented, consistently, by investors in practice.
Speaking about the launch of the tool, PRI CEO Fiona Reynolds said: “We are delighted to partner with the 2⁰ Investing Initiative on the launch of the PACTA tool. The PRI anticipates that this tool will help reduce information barriers for investors on how climate scenario analysis could be done. The launch of this tool, as well as solutions offered by other service providers, means there are even fewer reasons for investors not to get started.”
Stan Dupré, CEO and founder of the 2° Investing Initiative, said: “We developed the PACTA tool to enable investors to conduct climate change scenario-based analysis of their portfolios. It can help them comply with the TCFD recommendations, French Article 173 and the upcoming disclosure requirements at the EU level – at no cost. The PACTA tool also fosters comparability between portfolios in the absence of a reporting standard on metrics. This is what makes it attractive to financial supervisors, such as the California Department of Insurance, and governmental authorities, such as the Swiss Federal Office for the Environment. The PRI, with its 2,000 investor signatories, is critical to the deployment of the approach, which is why we are pleased to be partnering them in the online launch of the PACTA tool.”
Also commenting on the launch, David Jones, California Insurance Commissioner, said: “I congratulate the 2° Investing Initiative and the PRI on the launch of PACTA – the free-to-use, online scenario analysis tool. Recognising the uncertainty of the future policy and market pathway as it relates to the transition to a low-carbon economy, scenario analysis can highlight the extent to which a portfolio is exposed to this uncertain and associated risk, as well as the expected evolution to this exposure over time.
”We engaged the 2° Investing Initiative, an expert in climate-related financial risk and which has partnered with other financial regulators, to conduct this analysis for insurers operating in California with over US$100 million in annual premiums. One of the key aggregate results of the scenario analysis reinforced our earlier conclusion that thermal coal investments face long-term financial risks despite any short-term fluctuations in market price. In addition to publishing the aggregate data from this analysis, individual insurer reports were sent to over 100 insurance companies – by size of their investment portfolio – operating in California with more than US$100 million in annual premiums, which we believe will help these companies better evaluate their exposure to transition risks.”
Jean-Francois Coppenolle, Senior Manager at Aviva Capital, Aviva Insurance, said: “As investors like us take stock of the climate change-related risk and opportunities from companies we invest in, with regard to equities as well as corporate bonds, the open-source PACTA tool not only helps us understand how aligned we are with the global climate goals today but also provides a five-year trajectory. This informs us of how the investment decisions we make today will contribute to, or detract from, our ambition to steer the change required for a low-carbon and more sustainable future.”
A webinar on the PACTA tool – set to take place in October – will be announced in due course.
For more information contact:
Head of PRI
The Principles for Responsible Investment (PRI)
00 44 (0)203 714 3143
Head of Communications
2° Investing Initiative
About the PRI
The United Nations-supported Principles for Responsible Investment (PRI) Initiative is an international network of investors working together to put the six principles for responsible investment into practice. Its goal is to understand the implications of Environmental, Social and Governance issues (ESG) for investors and support signatories to incorporate these issues into their investment decision making and ownership practices. In implementing the principles, signatories contribute to the development of a more sustainable global financial system. There are currently more than 1,900 signatories to the PRI which collectively manage over US$80 trillion in assets. Visit www.unpri.org.
The 2° Investing Initiative (2°ii) was set up in 2012 with the mission to align financial markets with climate goals. It has since become a pioneering think tank – with offices in Berlin, Paris, London and New York – on the integration of long-term risks and policy objectives into financial markets and regulatory frameworks. Over the past few years, 2°ii has led one of the largest global research programmes on long-term risks in financial markets, working with over 50 research partners. A core principle of its mission is to reduce the transaction costs across companies, financial institutions and policymakers, while guiding financial markets towards the long-term future.