UK asset owner Phoenix Group has developed a climate transition index as part of its promise to shift £160bn into decarbonisation strategies over the next 18 months.

The ‘climate aware’ index series has been created in partnership with FTSE and uses data from the Transition Pathway Initiative (TPI) to help Phoenix tilt towards constituents perceived to have credible climate transition plans in place.

TPI was set up by UK asset owners in 2017 and is now run through the London School of Economics. It evaluates how meaningful corporate decarbonisation pledges are, and how well they are enacted and governed.

Phoenix told IPE the decarbonisation trajectory built into the methodology of its new index was “consistent with getting to net zero by 2050 and our interim decarbonisation objective”.

Unlike the European Union’s rules for Paris-Aligned Benchmarks, which require the exclusion of some of the most polluting companies and a significant upfront reduction in emissions compared with the benchmark, Phoenix has chosen to retain at least the same exposure to high-emitting sectors as the market-cap index.

“Reaching net zero requires the whole economy to decarbonise, and the biggest advances to this aim come from high emitting sectors, eg steel and cement production,” it said. “Without this constraint, it is easy to get portfolio decarbonisation without real world decarbonisation, and defeats the object.”

Phoenix’s head of sustainable investment, Sindhu Krishna, was one of the lead authors on a 2022 paper published by the Net Zero Asset Owner Alliance, which called on benchmark providers to step up their offerings around net zero indices.

Krishna told IPE that the new FTSE index allowed Phoenix to adjust the decarbonisation expectations over time, depending on how climate risks and policy crystalise. “We will do analysis on our side to monitor climate risks, and adjust accordingly,” she explained.

“So we don’t set a rule that means having a decarbonisation pathway makes you eligible and that’s it – we’re constantly reviewing those pathways to understand if they need to be steeper or shallower.”

Krishna added that Phoenix would “be looking at stewardship more closely” as part of the new strategy, pointing out that shareholder engagement network Climate Action 100+ – of which Phoenix is a member – also uses TPI scores and analysis to underpin its dialogues with polluting companies.

Earlier this year, Phoenix released a climate transition plan, in which it said it aimed “to have introduced decarbonisation strategies across our £160bn listed equity and credit portfolio” by 2025. This includes around £12.5bn in credit and £40bn in UK and US equities.

Phoenix would not disclose the AUM that would be moved over to the new index in the first phase, which will cover US equities, but said it would apply to all relevant mandates “where the client has delegated the responsibility of investment strategy and risk management to us”.

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