PACTA for Banks
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. PACTA has worked to extend its flagship 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.
PACTA for Banks was developed 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.
The PACTA for Banks Software is designed to allow any user to run the PACTA analysis on their corporate lending portfolio. It is free of charge and open-source (under the MIT licence). Basic programming skills in R are required.
PACTA for Banks comprises three software packages, written in R, each with a website with instructions on how to install and use it:
To report any issues, please see our guide here: How to raise an issue
The PACTA for Banks Methodology allows users to perform climate scenario analysis on corporate lending portfolios. It consists of three core components: physical asset-level data, financial exposures, and climate scenarios. The PACTA methodology relies on an assessment of physical assets (such as steel or power plants) linked to financial assets (such as loans, bonds, and shares) and the alignment of these assets with climate scenarios.
While a specific set of scenario input and asset-bassed company level data is provided, the methodology used to calculate the metrics is stand-alone. Any climate change scenario or asset-based company data (ABCD) set could be used to implement the methodology, provided that the ABCD and scenarios use the indicators on which the methodology is built.
The methodology document presented here is broken down into 3 sections:
- Section 1 explains the methodology and the underlying rationale in more detail. It describes the output metrics and discusses the required inputs. Additionally, it details the scope of the methodology. Finally, it discusses different options for allocating the macro carbon budgets from sectoral pathways (scenarios) to micro-economic actors (portfolios/clients) and for allocating the physical asset-based company data to financial instruments such as loans.
- Section 2 provides the mathematical formulas used to calculate the metrics.
- Section 3 concludes with a breakdown of the sectors covered, including sector overviews, the metrics used, and data inputted.
This is a publicly available, “living” methodology, meaning that we are constantly exploring ways to improve it and expand its scope.
Users wishing to contribute to this process are encouraged to contact RMI via email@example.com.
PACTA for Banks Supporting Documents
RMI has provided a series of documents and additional resources for banks to use as part of the PACTA for Banks Toolkit:
Scenario Input Files: PACTA has prepared a series of climate change scenario input files. These should be used in conjunction with the PACTA for Banks Software. These scenarios range from business-as-usual to better than Paris-aligned and are explained further in the Scenario Supporting Document.
Scenario input files with 2022 start year – to be used with Q4 2022 data
- IEA NZE 2022 CO2 Intensity Steel Cement (start yr 2022)
- IEA WEO NZE 2022 Fossil Fuels Power Auto start (start yr 2022)
- JRC GECO 2022 Auto HDV Fossil Fuels Power (start yr 2022)
- JRC GECO 2022 CO2 Intensity Steel Aviation (start yr 2022)
Old scenarios are provided for user’s wishing to backdate their PACTA analysis. In doing so, users are encouraged to use loan book data, asset-based company data (ABCD) and scenario data from the same year.
Scenario input files with 2021 start year – to be used with Q4 2021 data
(edit made on 16/05/22 to correct starting year to 2021)
- IEA WEO & NZE 2021 Fossil Fuels Power Auto (start yr 2021)
- IEA WEO 2020 Fossil Fuels Power (start yr 2021)
- IEA ETP 2020 Fossil Fuels Power (start yr 2021)
- JRC GECO 2021 Auto HDV Fossil Fuels Power (start yr 2021)
- JRC GECO 2020 Auto HDV Fossil Fuels Power (start yr 2021)
- ISF NZ 2020 Fossil Fuels Power (start yr 2021)
- IEA NZE 2021 CO2 Intensity for Steel Cement (start yr 2021)
- ISF NZ 2020 CO2 Intensity for Steel Cement Aviation (start yr 2021)
- IEA ETP 2020 CO2 Intensity for Steel Cement (start yr 2021)
- JRC GECO 2021 CO2 Intensity for Steel Aviation (start yr 2021)
- JRC GECO 2020 CO2 Intensity for Steel Aviation (start yr 2021)
Scenario input files with 2020 start year – to be used with Q4 2020 data
- ISF NZ 2020 Fossil Fuel Power (start yr 2020)
- NZ IEA 2021 Fossil Fuel Power Auto (start yr 2020)
- IEA WEO 2020 Fossil Fuel Power (start yr 2020)
- IEA WEO 2019 ETP 2017 Fossil Fuel Power Auto (start yr 2020)
- IEA ETP 2017 CO2 Intensity for Steel Cement (start yr 2020)
- ISF NZ 2020 CO2 Intensity for Steel Cement Aviation (start yr 2020)
Scenario Supporting Document: RMI has provided a supplementary document introducing climate change scenarios and summarising the key differences between them. Included in this document is an explanation of the methodology and assumptions used to convert third party scenario publications into the scenario input files above.
Emission Factor Models:
* The following correspond with Q4 2021 ABCD set from Asset Resolution.
Steel Asset Level Emission Model: This document details the methodology behind the steel emission intensities used in the PACTA for Banks Free Data Set.
Cement Asset Level Emission Model: This document details the methodology behind the cement emission intensities used in the PACTA for Banks Free Data Set.
Aviation Asset Level Emission Model: This document details the methodology behind the aviation emission intensities used in the PACTA for Banks Free Data Set.
Credit Portfolio Alignment: An application of the PACTA methodology by Katowice Banks
At the 2018 COP24 in Katowice, five international banks – BBVA, BNP Paribas, ING, Société Générale and Standard Chartered – publicly pledged to develop an open-source methodology to progressively steer (or ‘align’) their lending portfolios with the goals of the Paris Agreement.
Since 2018, in addition to undertaking individual efforts, the Katowice Banks as a group has worked collectively with the 2° Investing Initiative to contribute to the development of PACTA for Banks. This document provides an overview of the application of the PACTA methodology and the options viewed as most useful by the Katowice Banks.
The PACTA for Banks Training Materials comprises practical user guides provided to guide banks through installing the relevant software, preparing the loan book, and running the PACTA for Banks Software.
User Guide 1. Resource Planner
User Guide 2. Prerequisites and Preparing your Loan Book
Loan Book Template
Guidance on running the software can be found under the “Get started” and “Articles” tabs of the respective package websites.