Bold ambition: Phoenix sets itself on a path to decarbonise £310bn in assets

A newly presented plan is the first comprehensive Net Zero framework for Phoenix, which is the largest retirement savings provider in the UK.

Phoenix’s announcement comes at a challenging time for net zero strategies in the insurance sector. 

A number of global insurance giants recently announced their retreat from the Net Zero Insurance Alliance, amid growing political pressures from the US Republican party and potential threats of breaching US antitrust laws.

As a long-term savings and retirement products provider, Phoenix has no exposure to climate risks on its liability side, unlike other insurers. Some 99% of the group’s emissions stem from its investment portfolio.

Sovereign bonds challenge

But reducing the carbon footprint of its assets is still far from straightforward. The group’s decarbonisation plan includes a set of interim targets, including a 25% reduction of its carbon footprint across the listed equities and credit portfolio, which account for £160bn of the insurance giant’s overall portfolio. 

In order to do so, Phoenix has introduced an exclusion policy and transferred some 1.5 million of its workplace pension customers into sustainable multi-asset strategies.

But the more challenging aspect of its decarbonisation journey will be the next interim target, which includes a 50% reduction of carbon intensity of its £250bn asset under control. 

By 2050, the insurance firm aims to be fully net zero across its £310bn in assets under administration.

Being Solvency II regulated, Phoenix is required to hold a significant proportion of its assets in matching assets such as sovereign bonds, where decarbonisation is harder to achieve. 

It currently holds £42bn in sovereign bonds and they account for almost half of all carbon emissions in its investment portfolio. 

While the insurer has made some progress in decarbonising its listed equities portfolio, where the carbon footprint has dropped from 92 to 72 tonnes of CO2 per million £ between 2019 and 2021, the carbon footprint of its sovereign bonds portfolio has dropped from 235 to 218 tonnes of CO2 per million £ invested.

Sovereign debt tends to have a higher carbon footprint than equities, if emissions for the country as a whole- rather than just the public sector are being factored in.

Speaking at the insurers' Group Investment Forum, last week in London, Bruno Gardner, head of climate change at Phoenix, acknowledged that the second stage of the net zero journey would be more challenging. 

“Once we move beyond that [equities and credit], we become increasingly dependent on action from others, including governments," Gardner told attendees. 

"This really brings sovereigns into scope. We plan to work proactively with governments and encourage them to move in the right direction but there is only so much we can do, and ultimately the carbon intensity of sovereigns depends on action by their governments," he stressed. 

Solvency II changes

Gardner argued that potential changes to Solvency II rules under the Edinburgh reforms could be an opportunity to invest more in alternative assets, which could be an opportunity to speed up the decarbonisation process.

Phoenix has previously said that it would invest up to £50bn in illiquid, productive and sustainable assets including climate solutions, but that it is currently held back by Solvency II rules. 

The UK government is currently reviewing changes to Solvency II, in an attempt to attract more insurance capital to fund UK assets. 

Having said that, lack of government commitment remained an issue.

“In terms of engaging with policy makers, we set out an aspiration in our transition plan to use our scale and voice to drive wider system change," said Gardner. 

For example, with the right regulatory, policy and market conditions in place, the firm could invest up to £40 billion in productive and sustainable assets, including climate solutions. 

"The wheels are already in motion with regulatory reform around Solvency II, but this only addresses half of the problem, because there is also a shortage of supply of investable climate solutions," he continued. 

"In large part, this is because there is still a gap between the government’s net zero ambitions and the policies in place to deliver them" Gardner argued.