2.1 Types of loans
This section describes the types of loans that are relevant for the
PACTA analysis, meaning that they are loans to companies that can be
matched to at least one sector in the PACTA scope.
There are three types of loans with regard to sector split
requirements:
- Loans to companies that only operate in one PACTA sector
- Loans to companies that operate in multiple PACTA sectors, but where
the loan is clearly earmarked for one of the sectors
- Loans to companies that operate in multiple PACTA sectors and where
the loan is not clearly earmarked for one of the sectors 3.1 … not more
than one of the in scope sectors is an energy sector 3.2 … more than one
of the in scope sectors are energy sectors
The methodology outlined below focuses on the third type of loan,
where the loan is not clearly earmarked for one of the sectors. It
explains the basic treatment of such loans and the refinement for energy
companies.
The user is ultimately best positioned to decide if any sector split
is needed beyond the sector classifications provided in the loan book.
In practice, if the sector classifications in a loan book are considered
to be sufficiently granular and reflective of where the loan proceeds
are used, no further sector split is needed and the process should not
be applied. It is more likely that the process will be needed, when the
sector classifications available are not sufficiently granular or not
available at all for the loan book. If the user decides that a sector
split is needed, the methodology outlined below can be used.
2.2 Sector split methodology
Where the decision is made to use a sector split, the general
approach is to split the financial exposure evenly across the sectors
the company operates in. This “equal wights” split implies that every
sector the company operates in gets an equal share of the funding from
the loan. The approach is chosen, because it requires minimal additional
information. Balance sheet information on revenue splits between the
sectors may be a preferable proxy in theory, but such information is not
readily accessible in practice.
Another approach would be to use production numbers as a proxy for
the importance of each sector to the company overall. But for most
sectors, output units cannot be compared, as they measure fundamentally
different things. The energy sectors (coal mining, upstream oil and gas,
power generation) are an exception to this rule, as they can be
converted to a common unit of primary energy. This is the approach that
we opt for and that refines the equal weights approach.
Overall, we still assign each sector the weight inverse to the number
of sectors the company operates in, e.g. one third for each sector if
the company operates in three PACTA sectors. However, for the energy
sectors, these weights are lumped together and then split between them
based on primary energy in GJ. For example, if that same company is
active across three PACTA sectors, two of which are energy sectors, the
non-energy sector will be assigned a weight of one third and the energy
sectors split a weight of two thirds among themselves based on their
relative shares of primary energy. The methodological assumptions on the
primary energy based split are described in detail in the next
section.
2.2.1 Primary-energy based sector split for energy companies
Where a company has activities in multiple energy-related sectors, a
common output unit of primary energy is needed to compare quantities
across sectors. The chosen common unit of primary energy is million tons
of oil equivalent (Mtoe) and is converted for the respective sectors as
follows:
- coal mining sector is converted from metric tonnes of coal (t
coal)
- upstream oil & gas is converted from gigajoules (GJ)
- power generation is converted from megawatt hours (MWh)
A methodological distinction between fossil fuel-based high carbon
power generation and fossil-free low carbon power generation is
made:
- In order to compare the power generation sector to the upstream
fossil fuel extraction sectors a further conversion is needed to account
for the primary energy efficiency of fossil fuel-based power generation.
This is because a large proportion of the thermal energy from burning
fuel is not converted into electricity. This loss is taken into account
by using primary energy efficiency factors for the respective
technologies in the power sector.
- This step is not required for low carbon technologies because even
though some have relatively low primary energy efficiency
(e.g. geothermal power at 10%) the input energy is not a fossil fuel and
so from an accounting point of view does not contribute to the exposure
of a company to fossil fuel production and use.
It follows that to calculate the primary energy use (E) for a company c per technology a in sector b = Power
after accounting for primary energy efficiency factor P (where g is initial electricity generation
before conversion to primary energy use) the following formula shall be
used:
$$E_{a,b=power,c} =
\dfrac{g_{a,b=power,c}}{P_{a}}$$
The primary energy efficiency factors are taken from the IEA.
Then in the next step the conversion to common units of primary
energy across the three respective sectors mentioned is made. The
conversion factors (F) are
taken from the IEA World
Energy Balances 2022 publication and the IEA
Unit Converter.
The output in Mtoe for a
company c in sector b with conversion factor F is:
Eb, cMtoe = ∑∀a ∈ bEa, b, c × Fb
The relative production weighting per sector b for a company c, is then calculated as:
$$sector\ share_{a,b,c} =
\dfrac{E_{b,c}^{Mtoe}}{\sum_{b} E_{b,c}^{Mtoe}}$$
This company level sector split can now be used as a proxy to
attribute parts of a loan to different transition relevant sectors a
company operates in, taking into account the relative importance of each
sector in the companies production profile. Note that the split only
refers to the energy related in-scope PACTA sectors. This means that if
a company additionally operates in another non-energy PACTA sector, the
split should only be applied to the share of a loan that is attributed
to the energy sectors.