Testing for climate goal alignment

Financing and investments are considered climate compatible when they are in line with the internationally agreed climate target of keeping global warming under 2 degrees. The parliament implemented this target explicitly in the purpose article of the completely revised CO2 Act. For the time being, this objective should be implemented through voluntary measures taken by the financial sector. The federal government periodically records the climate impact of voluntary efforts.

After 2017, the FOEN and the State Secretariat for International Finance (SIF) initiated a second, comprehensive test in 2020 to analyse the climate goal alignment of financial portfolios. This test is being carried out under the title PACTA 2020 (Paris Agreement Capital Transition Assessment). All Swiss banks, asset managers, pension funds and insurance companies could test their portfolios anonymously on a voluntary basis. The pension fund association ASIP, the Swiss Insurance Association SVV, the Bankers' Association SBA, the Fund and Asset Managers' Association SFAMA and the Conference for Investment Foundations KGAST support the climate compatibility tests.

A total of 179 financial institutions voluntarily participated this time – more than twice as many as in 2017. The results show a representative picture of the whole Swiss financial market: around 80 per cent of investments in global equity and corporate bonds, half of all properties held by institutional investors and three-quarters of Swiss residential buildings covered by mortgages were assessed. Moreover, a qualitative survey provides information about climate-relevant strategies, while a stress test highlights risks.

PACTA 2020 is being coordinated internationally. Switzerland and the Netherlands presented a suitable initiative at the UN Climate Action Summit 2019 in New York. The countries that sign up to the initiative will help their financial institutions to test investments for their climate compatibility in an internationally comparable way and align them with the Intergovernmental Panel on Climate Change's 1.5 °C target (see press release of 20 September 2019).

How climate-compatible are Swiss financial market investments?

The Swiss financial market not only continues to invest significantly in oil and coal production, but even in its further expansion. This is not in line with the Paris Agreement objective of making financial flows consistent with climate goals. Moreover, financial investments like these can imply financial risks if fossil fuels become less attractive because of climate policy measures. However, there has certainly been some progress: the test participants who said they had taken concrete actions as a result of the 2017 PACTA test did better than their competitors.

All in all, the Swiss financial market currently invests four times as much in companies generating electricity from fossil fuels such as coal and gas than it does in those producing energy from renewable sources. 

 

Illustrations: Shares of companies in the portfolio that produce electricity from renewable or CO2-intensive technologies (coal, oil, gas) compared to all electricity producers in the portfolio. Each bar corresponds to a participating financial institution in the 2020 climate compatibility test (source: 2°Investing Initiative).

Two-thirds of the test participants said they pursue climate strategies. However, to get the financial market on the climate track, more measures are needed in all financial sectors, in particular faster and more stringent implementation of the various projects that have been announced. Financial institutions that are contributing significantly towards climate targets include those who are planning to renovate their buildings in an energy-efficient way, and replacing fossil-fuel heating systems with renewables.

Here you can find the results report, which summarises the results of the anonymised metadata. A summary of the report is also available in German and French. 

The PACTA method

The tests were carried out using the PACTA methodology (Paris Agreement Capital Transition Assessment), which enables a standardised analysis of global equity, corporate bonds and loan portfolios. The underlying database contains about a quarter of a million industrial investments around the world. On the website www.transitionmonitor.com/pacta-2020 you will find more information about the PACTA model, which was developed by the independent non-profit think tank 2°Investing Initiative. It is available unlicensed in the market.

A new module added in 2020 makes it possible to analyse how Swiss real estate and mortgage portfolios perform compared with the climate target for Swiss building stock. The PACTA real estate model, which was developed on behalf of the FOEN, is also available without a licence. The analysis of all these climate-relevant sectors can cover 70 to 90 per cent of emissions indirectly linked to the capital markets.

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Last modification 05.01.2021

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