Phoenix Group                            FSUK0020

Written evidence submitted by Phoenix Group

Overview

1. Phoenix Group strongly welcomes the Committee’s focus on the role of the finance sector in supporting delivery of the net zero transition.
2. Financial services is a sector with huge reach across the UK economy.  Its equity holdings, debt provision, and direct investment in assets play a fundamental role in driving growth, and through them the sector exerts real influence across the economy.
3. In line with that cross-economy role, our sector has a central role to play in enabling delivery of the net zero transition – by providing finance to the sectors, technologies and assets which can accelerate the transition, reducing our exposure to areas which are not aligned with the transition, and supporting our customers in using their money to deliver both decarbonisation and strong financial returns.
4. It is important to recognise that, as a sector, we have been too slow in recognising the scale of the low carbon transition, as both risk and opportunity.  For much of the last 30 years, decarbonisation has been a secondary consideration.  But the last two years have seen a fundamental change.  Across the sector, net zero targets are now commonplace; interim 2030 targets are increasingly ambitious; and decarbonisation is a central focus at Board level.
5. We at Phoenix are committed to becoming leaders in this transition. We see tackling climate change as core to our business, for three reasons:
• It offers significant opportunities: the net zero transition could unleash £2.7 trillion of investment in the UK alone over the next 15 years. [1] By investing in the growing sectors of the future, we can deliver strong long-term financial outcomes for our customers and shareholders if the policy environment is right.
• It is essential to managing risk: there is strong evidence that failing to tackle climate change creates significant financial risk both for Phoenix and for the UK economy.
• It’s the right thing to do: our purpose of helping people secure a life of possibilities means ensuring we play our part in tackling the climate crisis.
6. We have set a target of being a net zero business by 2050; to halve the carbon intensity of the c£250bn of assets we control by 2030; and to decarbonise our own operations and supply chains to ensure we are practicing what we preach.
7. But while recognition of the scale of the challenge and target-setting are important, they are only the first steps on the journey to net zero.  It is now imperative that we, and our counterparts across the sector, put in place clear action plans which demonstrate how these targets will be met.
8. In considering what those actions should be, we need to recognise the different nature and capabilities of different parts of the sector.  As the UK’s largest long-term savings and retirement business, the scale of our business brings huge advantages – we are a large-scale, long-term investor with significant customer reach.
9. But it also brings challenges.  Central to our business is the fact that we are heavily diversified across the economy, with exposure to multiple sectors to enable us to manage risks and secure returns for our customers.  This means that, for us to decarbonise our portfolios, we need those sectors to decarbonise. We will use the tools at our disposal to seek to drive the changes in business models within sectors which can support the journey to net zero. But we also need government and regulators to play their part by creating the market incentives for large-scale infrastructure investment, and ensure that we and our customers are not left with a choice between risks, returns and decarbonisation.
10. We would welcome a focus from the Committee on accelerating progress in four key areas:

1: Greater transparency of decarbonisation targets, performance, and plans to deliver them

2: Stronger investment signals from government, with investable business models in key technology areas

3: Reforms to regulation to enable investment to flow to net zero infrastructure

4: A stronger pipeline of infrastructure investment projects in key sectors.

Decarbonisation and Phoenix Group

Our portfolio and emissions baseline

11. As a Group, we have over £300 billion in assets under administration. In line with our responsibilities to our customers and shareholders, these investments are spread across multiple sectors, geographies and asset classes to ensure we deliver strong returns while also managing risk.
12. We have set ambitious carbon reduction targets, as set out in Figure 1.

Figure 1: Phoenix Group emission reduction targets

*against 2019 baseline

13. Our 2025 target relates to our portfolio of listed equities and credit (c£160bn); our 2030 target includes all assets under our control (c£250bn); and our 2050 target covers our entire investment portfolio (c£310bn).  This approach reflects the need for us to focus our efforts in the first instance on those assets where we can most confidently baseline emissions, and where we can have most influence and impact.
14. In line with the size of our portfolio, our carbon footprint is significant – meaning we can play a vital role in delivery of net zero targets.  To date, we have baselined the emissions of our listed equities and credit, which constitutes approximately 50% of the value of our portfolio.[2]  The emissions associated with those assets is estimated at 15 million tonnes per year – equivalent to emissions from heating 5.4m homes.
15. The nature of our business means that our portfolio is, unlike asset portfolios in some other parts of the financial services sector, widely diversified across the economy and we therefore have exposure to a wide range of sectors.
16. As for the broader economy, this broad exposure means that our emissions are concentrated in a small number of sectors.  The vast majority of emissions from our listed equities and credit – almost 90% – derive from just 23% of the assets (see Figure 2).

Figure 2: sector exposure and emissions, listed equities and credit

17. To hit our emissions reduction targets, we – in common with others in our sector – have three broad approaches available: (1) working with and incentivising investee companies to decarbonise their businesses; (2) tilting our portfolio by focusing investment on assets with a lower carbon footprint, and away from those with higher carbon footprint, including through divestment; (3) investing in low carbon solutions to reduce the emissions intensity of our overall portfolio.
18. The most straightforward route in many respects would be to divest our high emissions assets.  But this has a key disadvantage: divesting high carbon assets does not necessarily lead to emissions reductions.  If those assets continue to emit under different ownership, we are only delivering “paper” emission reductions (i.e. within our portfolio) rather than “real economy” emission reductions.  We therefore favour a strategy which has a strong emphasis on working with investees and carbon-intensive sectors to reduce their emissions rather than divesting and passing the problem elsewhere.

Our actions

19. We recognise that targets are necessary but not sufficient. We, like others across the sector, are taking a wide range of actions to support delivery of our targets.  These include in particular:
• Baselining our emissions: As noted above, we have established a baseline for emissions from our listed equity and credit portfolios, and are in the process of setting a baseline for other asset classes.  We are also in the process of seeking accreditation from the Science-Based Targets Initiative (SBTi) for our targets.
• Excluding the most polluting sectors:  We have set exclusion thresholds for the most emitting sectors including thermal coal, oil sands, and Arctic drilling.
• Tilting our portfolio: We are taking a range of actions to “tilt” key elements of our investment portfolio away from high emitting assets, and towards companies which are committed to reducing emissions in line with the requirements of the Paris Agreement.
• Working with investees: We are developing a stewardship strategy focused on working with high-emitting investee companies and assets to ensure a rapid transition towards net-zero aligned business models.
• Direct investment:  We are increasing our investment in low carbon technology and infrastructure, building on recent investments including £220m in renewable energy and £50m in energy efficient housing in Wales.
• Aligning our customer investment products: We are in the process of moving 1.5 million customers and over £15bn of assets to a Sustainable Multi Asset fund which will reduce emissions by 50% against a standard product.
• Decarbonising our operations and supply chain: We are committed to net zero in our operations by 2025, and to decarbonising our supply by 50% by 2030 and to net zero by 2050.  We are working this year to ensure at least 75% of our suppliers have science-based climate targets, and are investing in low carbon solutions including the largest PV glass installation in Europe at our Wythall office.
• Working with partners to deliver systemic change:  We are working with a range of representative bodies and cross-industry groups, including the Glasgow Financial Alliance for Net Zero, Association of British Insurers and many others to advocate for clear action to deliver the systemic change needed to deliver net zero.
20. While these actions are substantive and material, we recognise that we need to go further and faster. We are in the process of developing a sector-leading Net Zero Transition Plan to set out how we will transform our business to drive delivery of net zero across the economy.

Proposed areas of focus

21. As set out above, there are a range of actions we can take to accelerate both delivery of our own net zero targets, and the broader decarbonisation of the economy.  But the transition to net zero – and in particular the transition away from fossil fuel-based business models – also requires more action from government and regulators to ensure we deliver comprehensive and rapid decarbonisation of the real economy.

22. To this end, we would welcome focus from the Committee on four key areas where the UK needs to do more to deliver on its ambitions – both to deliver our stretching carbon budgets and net zero target, and to make the UK the world’s leading net zero-aligned finance centre.

1: Greater transparency of decarbonisation targets, performance, and plans to deliver them: As a large-scale asset owner and investor, we are heavily reliant on high quality and comparable data on environmental performance.  And in the last five years, significant progress has been made – in particular through enhanced reporting under the Taskforce for Climate Related Financial Disclosures (TCFD).[3]  Looking ahead, we need to ensure that (a) there are clear requirements on all listed companies to disclose transparent, comparable data on targets, performance against targets, and future actions to meet them; and (b) alignment of reporting standards to minimise duplication and complexity, and maximise comparability.  The UK Government’s Transition Plan Taskforce provides the route to delivering this.

2: Stronger investment signals from government, with investable business models in key technology areas: The net zero transition in the UK will require an estimated £2.7 trillion of investment, of which the insurance sector could provide up to one-third.  Delivering that investment, at unprecedented scale and pace, requires clear investment signals which enable large-scale investors to support deployment of the range of technologies and infrastructure required.  We are reliant on that to meet our targets – both to enable us to make direct investments, and to more strongly incentivise the companies in which we are invested to accelerate their own transitions. 

In some areas – particularly renewable power – those incentives are in place. But in many more – for example buildings, nuclear power, CCUS, and hydrogen – investment models are nascent and not yet investable at the level required.  We urgently need government to ensure we have investment models across the full range of technologies required to meet net zero, and to ensure that net zero investments have financial returns which are either comparable or superior to high carbon alternatives.

3: Reforms to regulation to enable investment to flow to net zero infrastructure: we need regulation to support rapid scale-up in net zero investment, including through reforms to Solvency II.

4: A stronger pipeline of infrastructure investment in key sectors: A central challenge for large-scale investors seeking to increase investment in net zero-aligned projects is the lack of pipeline.  Government should take steps to increase the size of this pipeline, for example by putting in place local and regional investment plans, and using the Infrastructure Bank to support large-scale infrastructure project investment and crowd in private capital.

23. We would welcome the opportunity to discuss these issues and proposals with the Committee.

June 2022