PACTA versus PCAF
From Open Risk Manual
Contents
PACTA versus PCAF
A carbon footprint approach involves estimating the total amount of CO2 emissions associated with a portfolio. As an output, carbon footprinting gives a single-figure indicator (CO2 emission of the portfolio) and an estimate of which sectors are carbon-intensive versus those that are not. While this approach is useful to help a bank to identify the ‘hotpots’ in the portfolio that need action first, the top-down estimates make the approach a means to arrive at an estimated measurement, not a methodology for target-setting or portfolio steering
Portfolio Absolute Emissions Challenges
Limitations inherent in carbon footprint approaches for credit portfolios that concern the aggregation of absolute emissions (or volumes of emissions) at portfolio level[1]:
- Aggregating absolute emissions across portfolios is challenging and often time incomplete
- Allocating absolute emissions to a portfolio introduces volatility, which makes it unfit for steering
Portfolio Steering Challenges
- Financial assets such as Project Finance with significant environmental footprint are less amenable to portfolio steering techniques
- The actual sustainability constraint is an absolute budget
- Introducing sectoral and/or geographical approaches can create inconsistent views with scope for gaming and arbitrage
See Also
References
- ↑ Credit Portfolio Alignment, An application of the PACTA methodology by Katowice Banks in partnership with the 2 Degrees Investing Initiative, 2020
