The metrics used in each sector depends on the existence of clearly identified technology decarbonization pathways. For Power, Fossil Fuels and Automotive, there are clear low- or zero-carbon technologies available. For example, in the Power sector, power generation must transition from fossil fuels to renewables. But there are other sectors where technology decarbonization pathways are not so well defined, such as Steel, Cement and Aviation. For these last sectors, given that the climate change scenarios do not prescribe technology roadmaps, but give absolute values of production and carbon emissions, the approach PACTA takes is to measure emission intensity to measure alignment.
Volume Trajectory Mix
The production volume trajectory metric aims to measure the alignment of a portfolio’s projected production volumes, based on the five-year capital plans of companies, to those given in climate scenarios. It is used for the fossil fuels, power, and automotive sectors. Changes in production volumes result either from transfer of production from one technology to another (e.g. internal combustion engines to electric vehicles) or from sheer expansion or contraction in the production coming from the technology/fuel (e.g. a company brings a new coal-fired power plant online). Projected production volumes at a 5-year horizon are considered at the individual client level at the technology level. The resulting volume trajectories are then compared with the trends set as targets in climate scenarios.
Technology / Fuel Mix
The technology mix metric focuses on technology shifts within the power, fossil fuels and automotive sectors, namely: (i) the changes in the technological processes by which outputs are produced (e.g. shift from coal-fueled to renewable-fueled power capacity), and (ii) changes in the nature of the output itself (e.g. shift from internal combustion engines to electric vehicles). This metric measures the bank’s relative exposure to the economic activities that are impacted by the transition to a low-carbon economy.
The emission intensity metric measures the average CO2 intensity of the portfolio in the steel and cement sector. This emission intensity is given as CO2/economic unit of output (for example, CO2/per ton of steel produced). This is then compared to an emission intensity reference point set by a climate scenario.
While this is not the main metric of choice for the largest sectors tackled in this methodology, the emission intensity of the activities financed by the portfolio is nonetheless the first metric in sectors for which no clear technology pathways have been set out (namely, steel and cement). Put differently, for these sectors, no zero-carbon alternative yet exists. As such, it is not possible to use the technology mix metric or the volume production volume trajectory metric to measure alignment. However, it is still imperative to steer capital in a way that aims to decrease carbon emissions in these sectors – hence the emission intensity metric is used.
Transition Disruption Metric (TDM)
The TDM compares the portfolio’s transition pace from 2021-2026 based on the production forecasts of the companies in your portfolio, against what will be needed from the companies in the subsequent four years from 2026 in order to align with the FPS scenario by the end of 2030. In other words, it provides a quantitative score of potential disruption based on how far the portfolio lags / leads the FPS scenario in the first five years.
How to interpret the results:
- Full mitigation (0): The portfolio is ahead of the FPS scenario pathway.
- Managed mitigation (from 0 to 1): A score within this range suggests that if the companies of the portfolio maintain the trend and pace of their first five-year capital stock evolution for the remaining time of the analysis, the portfolio won’t be disrupted.
- Managed disruption (1 to 1.5): While the portfolio is in line with the trend of the FPS scenario, the portfolio companies need to accelerate the pace of their capital stock evolution from the 5th year onwards and over the remaining time of the analysis to reach the level of the FPS scenario.
- Unmanaged or high disruption (over 1.5): A score over 1.5 suggests an increased unmanaged disruption. The acceleration of the pace of the capital stock evolution must be much higher than in the first five years for the remaining time of the analysis to reach the level of the FPS scenario. A score higher than 2 may indicate that the portfolio is even going in the opposite direction of the long-term scenario trend.