Sindhu Krishna, Head of Sustainable Investments at Phoenix Group, explains how the asset owner is holding managers to account.
Avoiding the stifling heat in the UK is almost as difficult as avoiding equally stifling conversations about that heat. But whether we love it or hate it, it is difficult to say we didn’t know it was coming.
In 2021, the first instalment of the Intergovernmental Panel on Climate Change’s (IPCC) sixth assessment report said the world had experienced the 10 warmest years on record since 2005, directly linked to an increase in atmospheric greenhouse gasses, driven primarily by the extensive burning of fossil fuels and other industrial processes.
The second instalment, published in February, added: “Hot extremes including heatwaves have intensified in cities where they have also aggravated air pollution events and limited functioning of key infrastructure.”
If the UK stands any chance of minimising further dangerous heatwaves, it must take the necessary steps to realise its target of net zero carbon emissions by 2050; an ambition that needs £2.7 trillion of investment over the next 15 years.
The recently released Association of British Insurers (ABI) 2022 Climate Change Roadmap predicts that a third of that investment could come from the insurance industry. But the association says that “unlocking the full investment capacity requires an increase in the supply of opportunities, reductions in complexity of the investment process and improvements to the financial attractiveness of these opportunities”.
This is why Phoenix Group – the UK’s largest long-term savings and retirement business with £310 billion in assets under administration – has said it will only work with asset managers that are committed to integrating ESG considerations across their investment strategy, risk management and governance processes.
Sindhu Krishna, Head of Sustainable Investments at Phoenix, says: “We want to raise the bar and we want to do that with evidence from asset managers that they are integrating ESG and that it has actually made a difference.
“We have already said – and we will continue to reinforce – that how a manager evidences ESG criteria is a key part of our manager selection,” Krishna adds.
The insurer is setting high expectations for its asset manager partners. It wants them to align with its own ESG commitments, which includes being net zero across its operations by 2025 and in its investment portfolios by 2050, starting with big steps to decarbonise its listed equities and debt holdings.
Asset managers are expected to complete an annually updated due diligence questionnaire which reflects what Krishna calls Phoenix’s “constantly evolving knowledge” and the shifting regulatory landscape.
Devil in the detail
In common with other asset owners, a major challenge for Krishna is managing the climate and other ESG risks in Phoenix’s portfolio in partnership with managers with differing capabilities, including reporting.
“Managers recognise that these financial risks exist. We see a huge increase in terms of the skill set and the detail they’re coming out with. Having said that, there is a range of sophistication. Some people are trying to catch up and some are more advanced. There is quite a range,” she says.
This range of ESG capability creates complexities for asset owners since, as Krishna says, asset managers use a variety of data and reporting mechanisms to assess potential investee companies.
“You can’t say everyone has to provide a particular score or metric because that discretion is with managers. There is a landscape of datasets and vendors, as well as managers using their own intellectual property for ESG analysis.”
This makes life difficult for Phoenix as it tries to meet its target of applying ESG factors across all listed assets by 2025 and across its entire portfolio by 2030.
Krishna says: “We are exploring how to tilt portfolios towards the leaders and away from the laggards. We want to know if their data is backward looking or whether they have got a forward-looking commitment on carbon emissions. That is really what we want to see; evidence of a trajectory towards transition.”
Efforts to harmonise the data the insurer receives on companies in its portfolio is further complicated, Krishna says, by the range of carbon emission metrics.
“Again, the choice of vendors, the way managers approach that work, their ability to calculate all of that, makes it a challenge for asset owners to hold them to account. There’s a lot of devil in the details.”
Phoenix is evolving is own metrics framework based on investee firms’ carbon footprint, transition risk and alignment with the Science Based Target initiative (SBTi) to help the insurer better understand its investment and operational exposure to climate.
Krishna says: “The framework helps us have ongoing dialogue with asset managers about how the portfolio continues to be managed. We work a lot with managers on new and emerging areas asking: what is next?”
For example, Phoenix is partnering with managers on pilots supporting the efforts of the Taskforce for Nature-related Financial Disclosures (TNFD) to establish a framework for integrating nature into financial decision making.
This June, TNFD released the second version of its beta framework which set out nature-based metrics for certain market participants. Through pilot testing these proposed metrics, the TNFD says organisations can “shape and organise their thinking around the management and disclosure of nature-related risks and opportunities. [And] get ahead of the curve as nature-related issues rise in importance in the business agenda and prepare for the future market adoption of the TNFD framework in 2023”.
“We’re working with a couple of managers to establish and build our skill set on nature,” says Krishna. “There is collaboration on emerging areas of expertise, as well as the holding managers accountable to what they have already committed to.”
As Phoenix focuses more on evidence of outcomes from asset managers, Krishna would also like to see progress in how investment impact is quantified.
Krishna says: “We need to scrutinise [managers’] claims of impact investing thoroughly to ask how they define impact because there’s a range of definitions, and how they measure and report it. We work with asset management partners to understand their due diligence on a transaction-by-transaction basis for impact investing.”
Phoenix is a big supporter of collaboration, becoming the largest UK asset owner signatory when it joined the Principles for Responsible Investing in December 2020. It is also a member of the Net Zero Asset Owner Alliance; Institutional Investors Group on Climate Change; Climate Action 100+; Task Force for Climate Related Financial Disclosures; SBTi; ABI Climate Change Roadmap; and the Sustainable Markets Initiative (SMI) Insurance Taskforce.
Krishna says: “Open information sharing is extremely important because we are working together and collectively going into uncharted territories. There is always a lot of openness and willingness to share how one could approach a certain issue or a problem.”
However, given the proliferation of industry bodies, associations and government initiatives, Krishna says members must avoid ‘bandwagoning’, which ultimately undermines the effort to manage ESG risks.
“These groups are only as successful as the level of proactive contribution from members. It is in our hands as members of those bodies to make sure that we are collectively working towards success. We must be careful to make sure that you just don’t sign up for the sake of becoming a member of a certain body or investor forum.”
“We always want to make sure that collaboration results in a win-win for everyone,” she says.