Accounting Principles

The PACTA Methodology relies on an assessment of physical assets linked to companies, and then linked to financial securities, to compare their alignment with climate scenarios. While PACTA as a methodology is data-agnostic, meaning any data provider/source can be used, in the online tool, we use data provided by Asset Impact for all covered sectors.

The data used in PACTA records current and future production levels, enabling a forward-looking analysis. However, this information is consolidated differently, depending on whether the analysis is performed for corporate bonds or listed stocks. Differences in how the information is consolidated are intended to best reflect the particularities of the product being analyzed. The consolidation methodology is applied by our data provider to the company level.

Equity Ownership consolidation methodology (EO)

The EO consolidation methodology aggregates the relevant asset-based activity (activity, capacity, or emissions) for each successive level of the ownership tree (from subsidiary or affiliate to parent company) weighted by the parent company’s equity stake in the subsidiary or affiliate. This also includes subsidiaries and affiliates in which the parent company has minority equity stakes (<50%). The sum of the asset-based indicators across all the subsidiaries and affiliates of a parent company is reflected in its relevant indicator column.

For example, Subsidiary X has 50 MW installed capacity, Subsidiary Y has 20 MW, and Subsidiary Z has 10 MW. The parent Company A has 35% ownership stakes in Subsidiary X, 70% ownership stakes in Subsidiary Y, and 100% ownership stakes in Subsidiary Z, and directly owns 50% stakes in assets with 8 MW of installed capacity. Then, Company A’s aggregated, equity-weighted installed capacity is 45.5 MW. This consolidation methodology is applied all the way up the corporate ownership tree to the ultimate parent company.

Credit Ownership consolidation methodology

The CO consolidation methodology aggregates the relevant asset-based indicator (by activity, capacity, or emissions) to the “credit parent” of the company, unweighted by the credit parent’s equity stake, if any, in that company. The credit parent of a company is the obligor for the debt (including bonds, notes, loans, etc.) of that company. Since the ultimate (equity) parent may not inherit the credit risk associated with a company’s debt, the credit parent and ultimate parent may not be the same entity. The CO methodology is designed to be more closely aligned to credit risk methodologies and is the most suitable for loan book/ corporate bonds analysis.

A company’s credit parent is identified as follows:

• If company X is a direct subsidiary (100% owned) of company Y, the credit parent is company Y.

• If company X is majority-owned by company Y, such that X is not a direct subsidiary of Y, then company X is its own credit parent because it carries the credit risk associated with its debt.

• If company X is purchased by holding company Y, in which several firms hold interests, and company X issues debt to finance the acquisition, company X is also its own credit parent.

• Where company X has no identifiable majority shareholder, company X is the credit parent.

For example , Company A is the credit parent of Subsidiary Z, but not the credit parent of Subsidiary X and Subsidiary Y (despite holding 35% and 70% stakes, respectively). Subsidiary X and Subsidiary Y are their own credit parents and are allocated their respective installed capacities (50 MW and 20 MW). Company A is allocated the capacity of Subsidiary Z, but not of Subsidiary X & Y. Company A directly owns 50% stakes in assets with 8 MW of installed capacity, but is not the credit parent for these assets. Therefore, Company A’s aggregated, unweighted installed capacity on a Credit Ownership basis is 10 MW, where the capacity from Subsidiaries X and Y, and directly owned assets, are excluded. This consolidation methodology is applied only once, since the credit line ends at the credit parent (a credit parent is its own credit parent).

Attribution of companies' production to financial assets

Two different accounting principles can be applied to “attribute” companies' production and capacity build out plans to a portfolio:

Portfolio Weight approach

This approach calculates the portfolios technology exposures based on the weighting of each position within the portfolio. The technology exposure is presented in weighted technology share (i.e. percentage values). The weighting of the technology share is done by the weight of the company in the portfolio.

The portfolio weight approach is more intuitive for credit portfolios, since it can be said to represent the capital allocation decision of the relationship manager behind the portfolio. In other words, the portfolio value of a credit instrument, as measured in book value, can be said to represent the capital allocation of the portfolio manager.

Ownership approach.

This approach calculates the technology exposure based on the portfolios ownership in companies. The technology exposure is presented in absolute values (e.g. oil production in barrels of oils per day). This approach allocates economic activity to the balance sheet based on the weight of the instrument in the balance sheet of a company or a sub-part of the balance sheet (e.g. outstanding equity, enterprise value).

The key challenge with this allocation factor is that when it is extended outside of equity - where ownership percentages can be calculated independent of financial asset price movements, price biases can be introduced related to the movement in asset prices, which in turn introduce fluctuations in the metric that are not necessarily correlated to changes in capital expenditure or production plans. Other limitations include:

• Characteristic of bonds. Bond and other credit instruments are financing instruments rather than ownership instruments. Thus, using an ownership approach per se is counter-intuitive;

• High volatility of results. For credit portfolios the ownership approach would lead to highly volatile results as the total debt outstanding as well as other potential denominators for the ownership calculation frequently change due to companies issuing new debt on a regular basis;

• Counter-intuitive twist: more debt, less risk. The ownership approach would lead to a decrease in ownership share by the investor when a company issues more debt. While this makes sense, it would also lead to a decreased risk exposure for brown technologies (the portfolio would be less exposed to brown technologies and thus be less exposed to risks). However, in reality the risk would increase with higher debt. This is not a problem for equity as the outstanding shares do not change frequently, and the ownership as well as risk really decreases/increases with the percentage of shares a portfolio owns;

• The production intensity (prod/$) can significantly differ between companies as their financing mix (debt vs equity) differs. It has been seen that single companies can significantly drive the portfolio level results despite low portfolio weighting.