PACTA Methodology
Underlying principles of PACTA analysis
PACTA compares what needs to happen in sectoral decarbonization pathways, here referred to as “climate scenarios”, with financial actors’ exposures to companies in climate-relevant sectors. PACTA provides a five-year forward-looking, bottom-up analysis. It looks at the investment and production plans of companies, which are in turn based on physical asset-based company-level data, and consolidates that information to identify the energy transition profile of the companies and their related financial instruments. This information is aggregated at the portfolio level and compared to the production plans projected in different climate scenarios. The (mis-) alignment between the portfolio and these scenarios allows users to infer on the potential exposure to transition risks and opportunities. Further details on the accounting principles behind the methodology are provided in this section.
The PACTA methodology covers eight of the most carbon-intensive sectors in the economy (i.e., the sectors most exposed to transition risks) – oil and gas, coal, power, automotive, cement, aviation, and steel (the “PACTA sectors”). Based on 2019 Greenhouse Gas emissions data taken from the IEA (2021) and IPCC (2021), the PACTA sectors — power, automotive, steel, cement, and aviation — account for just under 70% of the global CO2 emissions and approximately 42% of the global GHG emissions. Fossil fuel production for all sectors of the economy, including the PACTA sectors, accounted for approximately 63% of the global GHG emissions in 2019.
PACTA has three core metrics: Technology Mix, Production Volume Trajectory, and Emission Intensity. The metric used in each sector depends on the availability of clearly defined technology decarbonization pathways. Scenario providers develop these pathways, and they describe the path each sector should follow to achieve a specific climate goal also defined by the scenario provider. These pathways are already defined for some sectors where it is possible to switch from high-carbon emitter technologies to low-carbon emitters. For these sectors PACTA provides the Technology Mix, the Production Volume Trajectory, and the Emission Intensity. Nevertheless, there are some sectors where the decarbonization pathways are not well defined, as it is the case for steel, cement, and aviation. For these sectors, given that the climate change scenarios do not prescribe technology roadmaps but give absolute values of production and carbon dioxide emissions, the approach PACTA takes is to measure alignment using Emission Intensity per unit of production.
This results in a portfolio profile defined by outputs from the previously mentioned metrics, which are described in more detail below. Portfolio results are calculated for the baseline year of the analysis and five years into the future and can be compared to market benchmarks and, most importantly, to different climate scenarios.
1. Technology Mix
The Technology mix metric shows the sectoral technology/fuel mix of companies that make up a bond or equity portfolio and informs how this mix should evolve to be considered aligned with various climate change scenarios. In other words, it represents the weight of each technology in the sector as a percentage of investment therein.
PACTA assumes a static balance sheet. As such, the difference in the technology mix between the baseline year of the analysis and the future Technology Mix, five years forward-looking, is solely a result of the production plans of the companies that make up the portfolio and not a result of any change in the portfolio composition.
Currently, the methodology calculates the portfolio’s financial exposure to different technologies for the following sectors:
Automotive: Engine types for light-duty vehicle production
Power: Electricity-generation technologies across the installed capacity
Fossil Fuels: Energy sources across primary energy extraction (Just available for the baseline year of analysis, considering that production in all these technologies should phase down over time)
The Figure below shows the visual representation of this metric. The example shows the high and low carbon technology mix for the power sector in a bond portfolio, where:
Portfolio 2021: reflects the current technology mix of the power sector in the analyzed portfolio.
Portfolio 2026: reflects the projected future technology mix of the power sector in the analyzed portfolio.
Target NZE 2026: shows the anticipated technology mix of the portfolio in 2026 based on the NZE scenario.
Benchmark 2026: reflects the projected technology mix in 2025 based on the companies' capital plans for the next five years at a global level.
2. Production Volume Trajectory
The production volume trajectory metric aims to measure the alignment of a portfolio’s projected production volumes to those given in climate scenarios. This metric is available for fossil fuels, power, and automotive sectors, and it is presented at a five-year horizon at a technology level.
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. The resulting volume trajectories are then compared with the trends set as targets in climate scenarios and can also be compared to different benchmarks available in the interactive report.
The production-volume trajectory metric displays trends that may not be visible in the technology mix exposure metric, e.g. an increase in coal-fired power generation that would not be observable if renewable-fuelled power generation increased faster.
The next figure shows the production volume trajectory metric for electric vehicles as an example. This metric measures the alignment of a portfolio's projected production volume over the next five years with the ranges of change in production volumes derived as targets from different climate scenarios.
Changes in production volume result either from the transfer of production from one technology to another (e.g., internal combustion engines to electric vehicles) or from the expansion or contraction in production related to the technology/fuel (e.g., a company brings a new coal-fired power plant online). The Y-axis shows the normalized production change planned for the next five years, with the current capacity represented as 1.
In the example, the portfolios' electric vehicle production trajectory falls within the light green area and increases between 2021 and 2026. This means that portfolio companies' production plans for electric vehicles for the next five years are compatible with the 2 Degrees scenario (2DS), but production is not increasing enough to be aligned with the Beyond 2 Degrees (B2DS) scenario. In this example, the portfolio outperforms the results obtained for the benchmark.
3. Emissions Intensity Analysis
The emission intensity metric measures the average CO2 intensity of the portfolio in terms of an 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.
The emission intensity of the activities financed by the portfolio is the first metric in sectors for which no clear technology pathways have been set out (namely, steel, cement, and aviation). 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. For sectors where technological pathways exist, this metric is provided as a complementary metric.
To obtain the metric, PACTA assigns ‘emissions factors’ to the physical assets. For example, a steel plant in Sweden will be assigned an average emissions intensity based on either the known emissions of that plant or will be estimated based on the characteristics of the asset. Hence, tons of economic output (e.g. tons of steel) are converted to tons of CO2 per ton of steel. The scenarios for these sectors are also reconstructed in such a way as to measure emissions intensity.
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