Phoenix Group’s climate chief on how asset owners can drive change

Climate expert Bruno Gardner began his career in the oil and gas sector, which doesn’t exactly win the favour of environmentalists. But quickly enough, moving away from fossil fuels started to come up at everybody’s agenda, and certainly at his.

“There came a point when I said: ‘I don’t really want to work here anymore’,” he told Net Zero Investor in an interview.

Although he didn’t jump straight into the sustainability field afterwards, Gardner joined Britain’s Carbon Trust in 2010, hoping to drive decarbonisation efforts of businesses and governments. After eight years, he was leading its policy and innovation division.

“It was a combination of feeling like I wanted to be on the right side of history and making a positive change … and wanting to see the energy system transition,” he explained. “The whole climate agenda … is so much more in the public consciousness now.”

Since November, Gardner has been directing climate change at the Phoenix Group, a U.K.-based long-term savings and retirement business whose investment portfolio represents around 24 million tons of CO2 equivalent – or 99% of its overall carbon footprint, meaning that this is where the firm can make the greatest impact.

Positive change

A specialist on energy matters, Gardner noted that the Phoenix Group didn’t have explicit targets for reducing its exposure to the oil and gas sector “because the ideal outcome is that stewardship from us and from others actually drives a positive change.”

Active engagement is one of the pillars of the firm to decarbonise both its portfolio of investee companies and the economy.

“We want to deliver net zero through delivering real economy decarbonisation rather than turning it into a paper exercise – which in theory we could do, but we wouldn’t be using our role, position and scale to drive real-world change,” the climate specialist said, pointing to the importance of staying exposed to all parts of the economy instead of excluding entire sectors.

According to Gardner, the savings and retirement company has a policy – under regular review – that excludes companies with significant holdings in some industries that it believes have no part to play in a net zero future such as thermal coal or tar sands, “but for companies like the BPs and Shells of this world, we would see divestment as a measure of last resort” to prevent them from carrying on with their current business models and simply find new investors.

“When you have companies that have less than a 20% exposure to these sectors, our philosophical view is that by keeping a seat at their table, we have a greater likelihood of moving them away from those,” he said.

As such, Gardner expects oil and gas majors in the group’s portfolio to have credible net zero transition plans with science-based targets. “That doesn’t necessarily mean that they will stop all activities in oil and gas because there’s a probable expectation that oil and gas will continue to play a role certainly for the next few decades – and potentially even beyond 2050,” Gardner pointed out.

“But what we’re asking for is credible, robust net zero transition plans with appropriate funding,” he added, such as a decrease in oil and gas production between now and 2050 tagging along an increase in other net zero aligned activities.

The Phoenix Group has embarked last year on a three-year engagement programme with 25 companies of its portfolio and intends to begin escalating its interventions progressively. As part of its stewardship strategy, it also plans to bring voting in-house.

“We’ve reviewed how our asset managers have voted on certain key climate-related votes and as you would expect … they’re not all aligned with how we would choose to vote,” Gardner finally said.

Fiduciary duty

The climate change chief, nonetheless, underlines that customers remain front and centre of the Phoenix Group’s decisions. “The actions that we’re taking so far and plan to take over the coming years to decarbonise our investments are all firmly aligned with fiduciary duty,” he stated.

“When we look at climate risks, we look at both transition risks and physical risks. At the moment, our exposure is very largely to transition risks … and that’s due to the nature of our portfolio and our holdings,” he explained. “All of our modelling shows that we reduce customer exposure to climate-related risks if we take the actions that we’ve committed to.”

That includes three main levers: introducing customised decarbonising benchmarks to tilt investments away from investees that have no credible net zero transition plans and towards companies that do, investing directly in climate solutions, and stewardship.

“At this point in time where our primary focus is delivering our 2025 targets, there’s no tension between delivering on fiduciary duty and delivering on our climate aspirations,” Gardner stressed.

By 2025, the group is strongly focusing on decarbonising its £160bn listed equity and credit portfolio, with a 25% reduction in their carbon emissions intensity. By 2050, it eyes net zero across all its investments – or £310bn of assets under administration (AUA).

The climate specialist however pointed that the company was becoming increasingly dependent on other actors, whether that is companies in highly emitting sectors living up to their transition promises or governments taking actions to reduce emissions or setting the right policy framework to enable a rapid scale up of investments in renewable energies and in net zero opportunities.

“If that doesn’t happen, that’s where I think … it could start becoming harder for us to take the sort of actions needed to hit our longer-term targets,” he stressed, citing potential concerns around the implications for fiduciary duty.

But current regulatory, policy and market barriers remain, preventing some wider system change.

Amid regulatory obstacles directly affecting the Phoenix Group, the climate chief flagged as an example solvency to regulations: the reforms currently being discussed that would enable institutional investors to invest more in illiquid assets.

“It’s a really important unlock for us,” Gardner explained, as it would allow his firm to invest in climate solutions more easily.

The savings and retirement group is also seeking to include biodiversity-related assessment of its portfolio, but it’s still early days.

“We’re running a pilot on the Taskforce on Nature-related Financial Disclosures (TNFD) at the moment, and a huge part of that is trying to get better access to robust data to understand the nature-related risks that we’re exposed to,” the climate expert noted, adding that the group was also trying to identify nature-based investment opportunities.

Crisis response

For Gardner, it is essential that highly emitting companies invest further in climate solutions such as hydrogen and carbon capture and storage.

“But at the moment, the policy landscape isn’t supportive enough for that investment to happen at scale,” he said.

As previously mentioned, the Phoenix Group believes that the satisfaction of its climate objectives on the way to net zero by 2050 depends more and more on the barriers linked to government policies and sector regulations, particularly in the United Kingdom where it is based.

“The Climate Change Committee’s (CCC) progress report that came out in June made really clear that there’s still a big gap between what the U.K. government says is our ambition as a country and what’s actually in place to enable it to happen,” Gardner pointed out, as he emphasised that some energy efficiency measures could be dialled up significantly.

“The approach that the current government tends to favour is that technologies, innovations will come through and people won’t need to particularly change their behaviours.”

But as the United States made its mark with the Inflation Reduction Act (IRA) – a climate package that plans $370bn for clean energies – to which the European Union responded with the Net Zero Industry Act (NZIA), the United Kingdom is falling behind.

“We are losing ground on other regions that really stepped up their efforts,” the climate expert stated. “We have not yet come out with something that really addresses that head on,” he added, hoping for a “sufficiently optimistic and urgent” response from the government later this year.

In his view, the Phoenix Group has a crucial role to play in actively engaging in such a debate. “It’s one of the central pillars of our net zero transition plan: engaging to drive wider system change, which means engaging with everybody,” Gardner said, from the customers of the firm to companies, governments, regulators and other stakeholders and decision makers.

“We don’t plan to be passive in any of this. We want to be as active as possible and use our position to try to influence and drive the positive changes that we want to see.”

To do so, the company can rely on international alliances such as the Net Zero Asset Owner Alliance (NZAOA), under which the Phoenix Group has pledged to invest at least £10bn into sustainable assets over five years from 2022, among other targets.

“I think they serve a very useful purpose,” Gardner concluded. “Generally speaking, it’s a much stronger message coming from an industry body where there is an alignment between organisations.”

He however recognised that it was challenging for such alliances to strike a balance.

“It’s crucial that industry bodies set genuinely ambitious goals that are aligned with the science, but if they go too far too fast, it can become harder to secure wide support from across the industry.”