Standard Life’s Gardner on scaling climate investments, sovereign debt challenges and the need for system change
Standard Life has released its first transition report since the rebrand. We spoke to Bruno Gardner, head of climate change and nature, about the challenges ahead
Phoenix’s roughly £3bn acquisition of Standard Life’s insurance business in 2018 was a landmark consolidation deal in the City of London, helping drive the group’s assets to more than £240bn in the years since.
This month, the newly rebranded insurance and pensions provider re-emerged under the Standard Life name. But how will the group approach climate investing? Its first transition report, released this week, offers a glimpse of both the opportunity and the challenges ahead.
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Speaking to Net Zero Investor, Gardner signals continuity: “This transition plan is very much an evolution rather than a revolution. The headline targets remain exactly the same — net zero by 2050, with interim targets for 2030.”
“One of the things we’re really proud of is the extent to which we’ve scaled up action across all of the different levers in relation to the investment portfolio,” he adds.
Standard Life has already met its 2025 interim targets for its investment portfolio and operations, and has rolled out decarbonisation benchmarks across £74bn in assets under administration. Overall, the firm reports a 58% reduction in the emissions intensity of its listed equity and credit portfolio.
However, while Gardner believes Standard Life is “in good shape” to meet its 2030 targets, he admits that the path beyond will be more challenging.
Sovereign bonds exclusion
One of the most notable changes is the exclusion of sovereign bonds from its 2030 targets — the elephant in the room for fixed income investors seeking to decarbonise portfolios.
This marks a significant departure from Standard Life’s 2021 net zero plans, which did include 2030 emissions reduction targets for government debt. Going forward, the group’s £42bn in sovereign bond holdings will no longer be included in its 2030 decarbonisation targets.
The bulk of these assets consist of UK gilts, although Standard Life also holds US Treasuries and European sovereign debt.
As an insurer, Standard Life is required to maintain a significant allocation to high-grade fixed income assets for liquidity and regulatory purposes, Gardner emphasises. However, it has become increasingly clear that exercising influence over these assets is difficult.
This does not mean the firm is abandoning its carbon reduction ambitions, Gardner stresses.
“They remain in scope for our 2050 target. We’ll continue to monitor and report on them, and we’ll keep engaging with governments in support of climate policy that drives real-economy decarbonisation,” he says.
Rather than setting a fixed emissions reduction target, Standard Life will instead monitor climate-related risk exposure in sovereign assets using the Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) framework.
At the same time, Standard Life engages closely with the UK government with the aim of overcoming barriers to investments in climate solutions, he adds.
Scaling private market investments
Standard Life’s transition plan also highlights the difficulty of scaling private market investments.
“We’ve been working really hard to scale up direct investment in climate solutions, and that’s the one we’ve found the most challenging,” Gardner admits.
Four years ago, the group set a target to invest £40bn in sustainable, transition, or UK-focused productive assets, including climate solutions. To date, however, only £2.5bn has been deployed.
This shortfall is partly due to a lack of investable projects, combined with regulatory constraints, Gardner explains.
“There’s a whole range of projects that still aren’t investable for an institutional investor like Phoenix today. They don’t meet our risk-return criteria because they involve more nascent technologies or less proven business models.”
Although UK insurers are no longer subject to Solvency II rules, the new Solvency UK regime includes matching adjustment requirements, meaning many private market assets are not cost-effective to invest in.
While Standard Life has supported the UK’s National Wealth Fund, the investment guarantees it offers are not yet well suited to insurers, he adds.
“Some of the blended finance solutions and guarantees still don’t work as efficiently as they could for institutional investors with a matching adjustment requirement. If those guarantees don’t include a make-whole provision, we need to hold more capital against the investment.”
Standard Life’s transition strategy reflects the challenges many investors face as they move from parts of their portfolios that are relatively easier to decarbonise towards more complex areas such as sovereign debt and private markets.
“We’re in good shape for our 2030 targets, but beyond 2030 things start to feel much more challenging. That’s where our dependencies really start to bite — because when you move into hard-to-abate sectors, decarbonising heat, heavy industry and agriculture becomes extremely difficult,” Gardner concludes.
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