PROJECT DESCRIPTION
BACKGROUND
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.
OBJECTIVES
LIFE PACTA aimed to develop and apply the Paris Agreement Capital Transition Assessment (PACTA) model. This tool was to 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 would use the tool to assess EU insurance companies and pension fund assets.
The project aimed 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 were 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.
RESULTS
The LIFE PACTA project has made a clear contribution to the financial sector’s transition to a low-carbon economy through application of the Paris Agreement. During the project, 2°Investing Initiative enhanced and promoted its open-source platform for climate scenario tools: www.monitortransition.org.
The PACTA approach was developed with important institutions such as the Bank of England and tested by hundreds of institutions (regulatory bodies, banks, service providers) worldwide. The methodology was applied to the European insurance sector by EIOPA (the European Insurance and Occupational Pensions Authority) in 2019 to assess insurance fund data collected under Solvency II from each supervisory authority in the then 28 EU Member States. The work demonstrated the feasibility of scenario analysis by supervisors and contributed to stakeholders in the financial sector being better informed about financial risks arising from climate change. Based on its insights, the EU High-Level Expert Group on Sustainable Finance said that financial supervisors should conduct scenario analysis in the spirit of this project. The recommendation is also included in the EU sustainable finance action plan.
The PACTA tool is open source and available online. Automatic reporting for individual portfolios was implemented at the request of the first partners, adapted to the different types of user, and supports the project’s outreach to other financial institutions. Webinars and workshops were held to disseminate the approach and raise awareness among financial institutions in several Member States.
Work was carried out in partnership with the United Nations-supported Principles for Responsible Investment, which has agreed to co-brand and co-finance the web portal hosting the PACTA tool.
The project was widely successful and continues in numerous ways, including through the LIFE projects PACTA 2 (LIFE19 GIC/DE/001294) and Finance ClimAct (LIFE18 IPC/FR/000010).
Further information on the project can be found in the project's layman report and After-LIFE Communication Plan (see "Read more" section).
