Bringing climate scenario analysis to banks
Climate scenario analysis is a crucial tool for financial institutions wishing to understand the alignment or misalignment of their investments to various climate scenarios. Financial institutions can use this information to help steer their investments in line with climate scenarios, to inform their decisions around climate target-setting, and to gain insights into their engagement with clients on their respective climate actions. Climate scenario analysis can also be used for climate-related disclosures, such as those recommended by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures.
For too long, this tool has exclusively been available to investors for their bonds and equities portfolios. If we are to achieve the Paris Agreement goals, however, it is crucial to involve the banking sector more deeply in these efforts. After all, banks play a central role in the fight against climate change, through the lending decisions they make and the engagement they carry out with clients. This is why 2DII worked to extend its flagship Paris Agreement Capital Transition Assessment (PACTA) methodology to the corporate lending sector.
Now, with the advent of new data collection techniques and more sophisticated, granular data, as well as text-matching software, we are proud to say we have laid the groundwork for banks to meaningfully assess the alignment of corporate lending practices with climate scenarios.
PACTA for Banks enables banks to measure the alignment of their corporate lending portfolios with climate scenarios across a set of key climate-relevant sectors and technologies. It represents a major step forward in climate scenario analysis for lending, by providing banks with insights into the climate alignment of their corporate clients’ capital stock and expenditure plans.
2DII developed PACTA for Banks as a free-of-charge public good, in partnership with and funding from a range of stakeholders across the banking, academic, and NGO sectors. Over the course of the last two years, the toolkit has been road-tested by 17 leading global banks from Europe, North and South America. It has also been reviewed by over a dozen academic institutions and designed with the input of NGOs and industry experts. As of June 2022, 2DII transferred the stewardship of the Paris Agreement Capital Transition Assessment (PACTA) to RMI, in order to scale the impact of the tool in the financial sector and in the real economy. Under RMI’s stewardship, PACTA remains a free, independent and open-source methodology and tool.
This website presents the PACTA for Banks Toolkit that allows banks to run PACTA independently. The toolkit consists of:
- PACTA for Banks Software. 2DII has created a software package written in R for banks to use for free (basic R skills are required to run the code). It is publicly available via CRAN and open source.
- PACTA for Banks Methodology & Supporting Documents. A series of documents providing further explanation on the methodology, input scenarios, and emission factors.
- PACTA for Banks Training Materials. This is a set of practical user guides provided by 2DII to guide a bank through installing the relevant software, preparing the loan book and running the PACTA for Banks Software.
- PACTA for Banks Free Data Set. 2DII – in cooperation with Asset Resolution – can provide a free asset-based company level data set for a bank to use, subject to a user license agreement.
This project is part of the International Climate Initiative (IKI). The Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) supports this initiative on the basis of a decision adopted by the German Bundestag. The views expressed here are the sole responsibility of the authors and do not necessarily reflect the views of the funders.