‘Business models have to change’: Phoenix Group’s Sindhu Krishna on how the finance sector can pave the way to net-zero

Krishna spoke to edie during Climate Finance Week

Phoenix Group is the UK’s largest long-term savings and retirement firm, controlling subsidiaries including Standard Life, ReAssure and Sun life. The Group is responsible for around £310bn of assets under management on behalf of more than 13 million customers.

Last year, the company announced an ambition to cut the emissions intensity of its entire £310bn investment portfolio by at least 50% by 2030. Some £160bn of Phoenix Group’s investment portfolio consists of pensions.

In 2020, Phoenix Group committed to setting verified science-based targets, in line with the Paris Agreement’s 1.5C pathway, to underpin its 2050 net-zero goal. The 2030 ambition will form part of the science-based targets, which will also entail a 2025 target to cut emissions intensity by at least 25% and becoming carbon neutral in its own operations.

According to the company’s head of responsible investment Sindhu Krishna, the finance sector can help drive the progress towards net-zero by using its influence and voice to inspire others to act.

“The past way of living is not the way we’ll be living in the future, so business models have to change,” Krishna told edie during Climate Finance Week. “The whole purpose for us is resilience, we don’t just want to uncover the risk, but also capture the opportunity across the spectrum of our decisions. Our key differentiator is our multi-management model, we understand we have the influence to drive change across our partners.

“We can’t just move on our own, we need the whole sector…You need to have a voice. You can influence and hold [others] accountable for how they’re doing. You can decarbonise historically, but you want to engage for change and look at the forward-facing trajectory and reward companies that can bring real-world change. It’s important to have your voice and influence to drive change. We are working on building our own capability and capacity in this area.”

As the company strives to get its own house in order, it is acutely aware of the impact of its spending. Research from CDP found that emissions associated with investing, lending and underwriting activities from financial firms are, on average, 700 times greater than their direct emissions.

To date, the company has invested £2.5bn in social housing deals and £1.3bn in sustainable assets and £250m in climate solutions in 2021 alone.

Krishna noted that there was a “risk spectrum” that Phoenix was analysing when looking at investable climate solutions. While some technologies like hydrogen might perform well on an opportunity basis there are risks associated, such as the current fledgling market for commercialisation. Collaboration, Krishna said, would enable the finance sector to better analyse projects and initiatives to allocate capital into products that can deliver demonstrable benefits for the net-zero transition.

Forging partnerships

As well as planning changes for its own business, Phoenix Group has forged a new partnership with the campaign Make My Money Matter, to encourage greater climate ambition across the investment sector. Since it launched last year, Make My Money Matter, spearheaded by Richard Curtis, has urged individuals and businesses to press their pension schemes to improve climate commitments and enhance emissions disclosure.

According to Make My Money Matter, around two-thirds of the UK’s £2.7trn pensions sector is accounted for by providers that have not yet made “credible” net-zero commitments.

It is clear that Phoenix is prioritising collaboration to create a more unified voice across the finance sector to drive change and ensure that firms do set up credible strategies that feature intermediate targets on the road to net-zero.

The firm has signed up to key global initiatives including the UN PRI, Net Zero Asset Owners Alliance and Climate Action 100+.

The company was also one of the investor signatories, representing more than £3.8trn in assets under management, to call on the UK Government to urgently introduce new regulations and incentive schemes for farmers, to help reduce the sector’s environmental impact.

The letter calls for a holistic approach, in which the sector’s biggest environmental and social challenges – and their solutions – are interconnected. It implores the Government to “consider the full range of regulatory tools at its disposal”, including mandatory reporting of nutrition and sustainability metrics and well-designed incentives for farmers.

Krishna is also leading an external engagement programme with asset management partners, to ensure they meet new climate standards. Krishna helped formulate the company’s open letter in July to all asset management partners, outlining the steps Phoenix has taken and outlined what it expects from its partners

The letter calls on partners to “fully embed and evidence responsible investment practices in their investment decision-making, risk management and governance processes” and encourages them to “have their own net-zero commitments in place and to provide disclosures in line with TCFD recommendations”.

Krishna claimed that most of their partners are aligned with Phoenix’s core values and aims, and notes that there is a risk that needs a legitimate response. While Krishna admitted there was “a variation of the pace at which organisations are moving” the Group was looking for partners to demonstrate that they could “walk the talk” on their climate ambitions.

A key to this will be assisting partners on their own journeys and Phoenix Group will work with them to highlight limitations such as data groups and resources and then take them into consideration why they develop a plan that can be formally committed to.

This collaborative approach, Krishna believes, is crucial in not just responding to the climate crisis but also responding to shorter-term issues like the current cost of living crisis.

While some organisations have used these rising costs to push back on the net-zero narrative, Krishna believes the finance sector needs to strike a balance to ensure net-zero is still delivered while responding to current pressures.

“We cannot drop the ball,” Krishna said. “There are a number of issues coming out of the pandemic and against a backdrop of the cost of living crisis, the window to reach net-zero gets narrow the longer we wait to act.

“We shouldn’t compromise. We have to be mindful of the short-term issues and get the balance right so the transition isn’t delayed. It’s hard; this is the decade of decisions and we’re all in agreement we need to act, so we have to keep the balance on this transition.”

Standards and strategies

The introduction of key legislation, such as the EU taxonomy and the work being done by the likes of the International Sustainability Standards Board (ISSB) on requirements and recommendations will likely help deliver this transition. However, the finance sector still has to be acutely aware of the risks associated with greenwash.

Indeed, one in every five cases of corporate risk incidents linked to environmental, social and governance (ESG) issues stems from greenwashing and misleading communications, new research has found.

RepRisk, a leading ESG data science firm, analysed ESG risk incidents, ranging from a potential violation by a company or specific projects of global standards and frameworks. RepRisk found that, over a two-year period, one in every five of these risks was linked to greenwash.

Lobbying and offsetting were identified as two of the major contributors to cases of greenwashing. While the role of offsets and potential greenwashing side effects are well documented, lobbying is much harder to uncover and isn’t often included in self-disclosure.

From the investor side, Krishna believes that stronger relations can be built between finance and corporates to help improve data.

“We need standardisation,” Krishna said. “We need a better understanding and more defined response to what climate opportunity is. This is where the regulatory direction of travel is, and there are opportunities that we’re aiming to capture as it develops.

“Right now, we have internal frameworks where we look at the EU Taxonomy and guidelines on various green bond frameworks and working across the investor bodies we are involved with we can align ourselves with the best definitions that are available.

“It should be a common set of language where we can share across the industry in time. For now, if organisations can align themselves to standards it will definitely help share consistent data across the investor space.”