About PACTA for Investors
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 financed through 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.
2DII began developing the PACTA tool in 2014, in partnership with academic organizations including the Frankfurt School of Finance and the University of Zurich, funding from the European Commission, German and Swiss governments, and support from UN Principles for Responsible Investment. PACTA for Investors can be applied by asset owners, asset managers, retail investors, researchers, or anyone with a list of ISINs. Since the tool was launched on TransitionMonitor.org, 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.
Building off the vast climate-related financial database, the PACTA tool aggregates global forward-looking asset-level data (such as the production plans of a manufacturing plant over the next five years), up to parent company level. The tool then produces a customized, confidential output report, which allows investors to assess the overall alignment of their portfolios with various climate scenarios and with the Paris Agreement. You can apply the tool here.
PACTA Tool for Listed Equity and Corporate Bonds
The PACTA tool to analyse listed equity and corporate bond portfolios is currently offline while undergoing maintenance. We apologize for this inconvenience but are working to get an updated tool online in February 2021.
The tool is free to use. A csv file including the ISIN, value and currency is required to run the tool. A sample file is available on the tool website. No data about the portfolio is stored and all uploaded data and results files are deleted after the session is completed.
For more information about the PACTA methodology please refer to the Knowledge Hub.
The R code underlying the PACTA tool for equity and corporate bond portfolios can be inspected on GitHub here.
Please note that while the methodology is available for anyone to apply, data licensing means we are not able to share the underlying asset level and financial data that underpins the tool. If you are interesting in obtaining the necessary data, please contact us at firstname.lastname@example.org.
This section explains the general modelling principles, data sources, global parameters, and caveats of the scenario analysis tool (PDF available). It aims to shed more light on the methodology, key features, and parameters of the analysis and to help you to understand the analysis results.
A detailed description of the result interpretation, modelling principles, and data used, as well as a paper that presents the methodology and the underlying equations, can be found in the above section on research reports (Paris Agreement Capital Transition Assessment Background Briefing and The alignment of global equity and corporate bonds markets with the Paris Agreement – A new accounting framework).
The following briefly summarizes the key modelling principles:
- The model calculates the expected benchmark exposure for each technology in the specific asset class by taking the current exposure in the respective asset class and geography and adding the trend line as defined in the scenario (e.g. the IEA's 2°C compatible sustainable development scenario). The build-out percentages take a simple “fair share principle“ under which the companies in the investable universe are assumed to adjust production capacity in line with the scenario, consistent with their market share;
- The model assesses the scenario alignment of financial portfolios with a 5-year time horizon/forecast period. The time horizon is limited to the time horizon of capital expenditure planning for which data can be tracked at a meaningful level. While this time horizon may differ across sectors, a homogenous time horizon is taken to allow for the comparability of results;
- The model applies traditional financial accounting principles, notably where possible the equity share principle (e.g. 1% ownership of a company assumes 1% ownership of assets). Where data is not available, the majority owner is allocated 100% of the ownership.
The scenario analysis uses a general methodological framework which compares the technology build-out plans with climate scenarios, as explained above. While this core methodology is set, there are several parameters that can be set to answer specific research questions. The model parameters that can be set include:
- Scenario to compare the portfolio against that reflects a specific decarbonization transition pathway and technology beliefs as accurately as possible;
- Accounting principle (or Allocation Method) used to allocate build out plans to the portfolio, which determines whether the assessment is of the portfolio’s contribution toward the transition (ownership approach) or the portfolio’s exposure to transition risk (portfolio weight approach);
- Scenario geography to show the portfolio’s regionally specific alignment based on location of physical assets, highlighting the most relevant regions to act on;
- Equity market to show the portfolio’s regionally specific alignment based on company domiciles, highlighting how geographic investment mandates impact alignment results;
- Benchmark portfolio to either assess the portfolio’s current build out plans against its own scenario-compatible targets (referred to as the “Aligned Portfolio”), or to compare the portfolio to a specific benchmark such as an asset class appropriate market portfolio under a scenario-compatible decarbonization pathway (“Aligned Benchmark”);
- Peer group to compare the portfolio to a set of the most relevant peers available (given data availability restrictions)
Scenarios represent potential technologies pathways to reach e.g. climate targets. While being based on the best available scientific research, there remain uncertainties around the outcomes. Furthermore, different scenarios / pathways can lead towards the same climate target depending on technology beliefs and preferences, as well as economic, social and other assumptions, etc.
The most prominent climate technology pathways providers are the IPCC scenario community (i.a. IIASA, PIK) as well as the International Energy Agency (IEA). There are also several other organizations that publish technology roadmaps. Some of which are available in this tool, namely Bloomberg New Energy Finance (BNEF) and GreenPeace (GP). The table below gives an overview of available scenarios in this tool, sector and regionality coverage, the connected global warming in centigrade as well as the key characteristics of the scenarios.
Two different accounting principles can be applied to “allocate” production and capacity build out plans to a portfolio:
- Portfolio Weight approach. This approach calculates the portfolios technology exposures based on the weighting of each position within the portfolio. The technology exposure is presented in weighted technology share (i.e. percentage values). The weighting of the technology share is done by the weight of the company in the portfolio;
- Ownership approach. This approach calculates the technology exposure based on the portfolios ownership in companies. The technology exposure is presented in absolute values (e.g. oil production in barrels of oils per day). The ownership approach is not available for corporate bond portfolios mainly for the following reasons:
- Characteristic of bonds. Bond and other credit instruments are financing instruments rather than ownership instruments. Thus, using an ownership approach per se is counter-intuitive;
- High volatility of results. For credit portfolios the ownership approach would lead to highly volatile results as the total debt outstanding as well as other potential denominators for the ownership calculation frequently change due to companies issuing new debt on a regular basis;
- Counter-intuitive twist: more debt, less risk. The ownership approach would lead to a decrease in ownership share by the investor when a company issues more debt. While this makes sense, it would also lead to a decreased risk exposure for brown technologies (the portfolio would be less exposed to brown technologies and thus be less exposed to risks). However, in reality the risk would increase with higher debt. This is not a problem for equity as the outstanding shares do not change frequently, and the ownership as well as risk really decreases/increases with the percentage of shares a portfolio owns;
- The production intensity (prod/$) can significantly differ between companies as their financing mix (debt vs equity) differs. It has been seen that single companies can significantly drive the portfolio level results despite low portfolio weighting.
The scenario geography is based on the asset location (i.e. production location) and allows a deep dive into the regionality of the production, technology mix and scenario alignment of your portfolio. While the benchmarking of the production is always done at the most granular regional level that is available to realize the most accurate scenario analysis, the scenario geography selection allows you to deep-dive into regional differences within your portfolio. The available options are:
- North America
- Asia & Pacific
The regional granularity of the scenarios differs for each sector: the automotive sector, for example, only has one target as it is a global sector; whereas the power sector in some scenarios has regional breakdown up to the country level.
The equity market selection determines the investible universe in terms of company domicile you are comparing yourself to. The selection options are
- Global market. This selection represents the results of all companies within the global market in your portfolio, in other words your entire portfolio is assessed;
- Developed market. Only companies listed in the universe of countries of the MSCI World are assessed in this case. The filter is also applied to the market and peer results. More information about the countries included in the MSCI World can be found here: https://www.msci.com/world;
- Emerging market. Only companies listed in the universe of countries of the MSCI Emerging Markets are assessed in this case. This filter is also applied to the market and peer results. More information about the countries included in the MSCI Emerging Markets can be found here: https://www.msci.com/emerging-markets
This selection is only available for equity portfolios (or the equity part of your portfolio).
The Benchmark portfolio parameter sets the starting point of the benchmark and thus sets the focus of the analysis. There are two options:
- Aligned market. Uses the current financial market (i.e. the listed developed market) exposure to technologies scaled to the portfolio size as the starting point and thus compares your portfolio against the market under a scenario compatible transition. It thus includes the current existing gap of your portfolios investments compared to the market;
- Your aligned portfolio. For this selection your current portfolio technology exposure is used as starting point of the analysis. i.e. this analysis only focusses on the forward-looking production plans of the portfolio and compares the aggregated capex plans of all portfolios positions with the scenario technology build-out rates.
In both cases the forward-looking scenario build-out rates are applied to the technology exposure starting point to calculate the forward-looking alignment.
The model sources, where possible, forward-looking asset - level data for key technologies (e.g. future production plans) in order to provide geography-specific assessments for climate relevant sectors mapped to the company level. It thus bypasses wherever possible backward-looking, corporate level reporting, although such reporting can be used for validating forward - looking parameters (e.g. GHG emissions). The analysis relies on the following data sources:
- GlobalData. Power plant data, including plants classified as active, announced, financed, partially active, permitting, temporarily shut down, under construction, under rehabilitation & modernization, and Oil and Gas production data and forecast for the upcoming 5 years, as well as coal mining data;
- AutoForecastSolutions. Light passenger duty vehicle including light trucks and BAU production forecasts for the upcoming 5 years;
- RightShip. Ship data, including ship type and carbon efficiency developed by Carbon War Room;
- Airplane data for passenger flights, cargo and combined aircrafts, including number of seats or tons transported, plane model, etc;
- Other sectors databases: PlantFacts (steel plant data, including status and type); Cemnet and Global Cement Directory (cement plant databases); combined with EY´s emissions intensity model per plant by type;
- Bloomberg. Financial data with information about sector classification, share price, unique identifiers, etc.;
- Database on funds that are currently used for the peer comparison.
Caveats/notes on interpreting the results
The following briefly highlights key caveats to the model and the results:
The forward-looking data is based on current ‘revealed’ plans from companies and is subject to change. The estimates should thus not be interpreted as final predictions, but rather the current plans of companies if they don’t change. Another way to interpret the results is the call for action with regard to the required change to align with the 2°C economic trend. Given the 5-year time horizon, there is a high degree of certainty that plans will still change in some way over time. Similarly, the participating financial institutions can of course alter their portfolio exposures over time. The analysis however seeks to be a point in time assessment of future exposures under current conditions.
The model takes a diversified ‘market portfolio’ as a basis, focusing on key technologies reflected in the IEA roadmaps. By extension, thematic portfolios invested in breakthrough technologies and/or SRI portfolios with a range of environmental, social, and governmental considerations may not value these elements.