The objective of aligning financial flows with climate goals has been defined as a political mandate by the Paris Agreement. However, financing the transition to a low-carbon economy calls for significant reallocation of private investment into low-carbon technologies.
Financial institutions, retail investors, financial regulators, civil society and climate policy-makers need tools to assess into which technologies investment should be directed. Tools are also needed to calculate the transition and financial risks relating to the shift of capital needed for decarbonisation.
The current landscape of quantitative models is not designed to assess large numbers of financial portfolios in an effective way. Financial regulators, however, may seek to create transparency on thousands of portfolios.
LIFE PACTA aims to develop and apply the Paris Agreement Capital Transition Assessment (PACTA) model. This tool will be designed to bulk-load, analyse and deliver results for thousands of portfolios that financial regulators may wish to assess on a continuous basis. The project will use the tool to assess EU insurance companies and pension fund assets.
The project aims therefore to facilitate the transparency and accountability of EU financial institutions with regard to their alignment with climate goals and potential associated financial risk and to build understanding among policy-makers and regulators about the opportunities to increase the coherence of the political mandate of aligning financial flows with 2030 climate goals at national and EU level. Specific objectives are to: Promote awareness among European financial regulators and climate policy-makers of how financing flows are aligned with national, European and international climate goals and of potential associated financial risk in European financial markets; Build capacity among public and private financial market actors as to the exposure of financial markets to the transition to a low-carbon economy and options around integrating climate-related risk assessments and climate finance objectives into the investment decisions of European financial institutions; Facilitate knowledge-sharing between European financial regulators and climate policy-makers from at least five EU Member States; Promote the compliance and enforcement of climate legislation by developing data-driven, science-based assessments of the extent to which climate policy and market signals contribute to shifting private capital to climate-friendly investments; Promote better climate governance by including financial market stakeholders in the dialogue on achieving the Paris Agreement objectives; and Foster the standardisation of measurement and information approaches around climate-related issues in the financial sector.
Expected results: A quantification of the alignment of financial flows in the listed equity, corporate bonds, and syndicated loans portfolios of at least 500 European financial institutions with a range of decarbonisation scenarios (temperature changes / technology assumptions) and a calculation of the associated potential financial risk; Financial regulators and policy-makers made aware of the PACTA model through four seminars, a coordination platform and comprehensive and personalised briefings; The integration of PACTA in the monitoring framework of at least one financial regulator; The adoption of the model by at least 200 EU financial institutions within three years of the end of the project; The integration of PACTA’s infrastructure in the services and products of at least three European environmental, social and governance (ESG) consultants and mainstream data providers; The use of the framework by at least one country as part of its UNFCCC reporting; Improved dialogue and coordination within EU Member States between climate policy-makers (e.g. environment ministries) and financial regulators; and A contribution to the broader objective of standardising climate-related accounting of both financial risk and climate goal alignment in financial markets, referenced in the G20 communiqué and EU Directive on Non-Financial Reporting.