Committee (6th Day)

Part of Financial Services Bill – in the House of Lords at 6:00 pm on 8 October 2012.

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Photo of Lord Stevenson of Balmacara Lord Stevenson of Balmacara Shadow Spokesperson (Business, Innovation and Skills), Opposition Whip (Lords), Shadow Spokesperson (Culture, Media and Sport) 6:00, 8 October 2012

My Lords, the purpose of this group of amendments is to demonstrate that government recognises that business has a responsibility to respect human rights and sustainable development, to focus corporate behaviour on its wider social and environmental impact, to provide information to affected individuals and communities, and to inform better the investor community.

The Government have said that in discharging its general functions the FCA must act in a way that is compatible with its strategic objective-ensuring that relevant markets function well-and in a way that advances one or more of its operational objectives. I argue that these amendments would be entirely compatible with both the FCA's strategic and operational objectives, as it would uphold the integrity of the Stock Exchange and ensure that businesses take into consideration the full impact of their operations. This approach is supported by a wide range of organisations, including Aviva Investors, the Carbon Disclosure Project, Save the Children, the Co-operative and the World Wildlife Fund.

There is of course a legal case for this. In June last year, along with every other member of the UN Human Rights Council, the UK endorsed the UN framework on human rights and transnational corporations, which enshrines the state duty to protect alongside the corporate responsibility to respect human rights. The Government, including the Prime Minister, have been enthusiastic in their support for these principles, but so far they have not spelt out how they intend to fulfil them. Listing requirements specifically relating to human rights and sustainable development would be a strong first step. The UK has a duty to protect human rights under international conventions to which it is a signatory. The human rights obligations of states under international law include the taking of effective measures to prevent human rights abuses by third parties, including companies.

The Combined Code on Corporate Governance,issued by the Financial Reporting Council, gives guidance to companies on reporting CSR-related matters. The listing rules of the London Stock Exchange require companies incorporated in the UK and listed on the main market of the exchange to report on how they have applied the combined code in their annual report and accounts. Overseas companies listed on the main market are required to disclose the significant ways in which their corporate governance practices differ from those set out in the code. The reporting obligations in the Companies Act 2006 extend to everything of relevance to the company within the terms of Section 417 of the Act. There are no geographical restrictions on what information is relevant or may be disclosed. Markets are driven by information. If the information they receive is short term and thin, these characteristics will define our markets. These amendments would serve to improve the information available to investors and all external stakeholders.

A recent survey of global stock exchanges conducted by Aviva Investors revealed that 57% of respondents agreed that strong sustainability requirements for listed companies made good business sense for the exchange. Only 14% of respondents disagreed. A lack of regulatory support was highlighted by over half the respondents as a factor that discouraged them from undertaking sustainability initiatives.

Stock exchanges play a vital role in economic development as one of the primary tools for the allocation of capital in both emerging economies and developed ones. Yet at present there is no requirement on applicants to the London Stock Exchange to provide information on their social or environmental impact, which means there are no sanctions available to the UK Listing Authority, even if a company listed on its main market is found guilty of the most grievous human rights abuses.

London is already behind the curve in this area and we suffer reputational risk if we do not act. For instance, the Hong Kong stock exchange mandates that mineral companies must: divulge the likely,

"impact on sustainability of mineral and/or exploration projects"; reveal the,

"claims that may exist over the land on which exploration or mining activity is being carried out, including ancestral or native claims"; and state the company's,

"historical experience of dealing with concerns of local governments and communities on the sites of its mines" and,

"exploration properties".

The Shanghai stock exchange requires listed companies to commit to environmental protection and community development while pursuing economic goals and protecting shareholders' interests. In Luxembourg, listed companies must have "high standards of integrity", and behave in a "responsible manner". In Malaysia, listing rules include provisions on CSR reporting, and the stock exchange has also developed a CSR framework with accompanying guidance for directors. Human rights are also referenced throughout guidance materials elaborating on the framework, most recently in a training tool for directors.

The business case for human rights and sustainable development reporting is therefore robust. The current listing requirements are in place to allow investors to make good and informed decisions about the merits of investing. Arguably, this would be impossible without information on the social and environmental impact and responsibility of a company. The UK's largest institutional investor, Aviva Investors, has called for a,

"listing environment that requires companies to consider how responsible and sustainable their business model is, and also encourages them to put a forward looking sustainability strategy to the vote at their AGM".

It is widely accepted that environmental and social governance performance can have a significant impact on shareholder value and should therefore be taken into full consideration by companies in their reporting and financial disclosure.

When a similar amendment to the Bill was raised in the other place, the then Minister said that the proposers,

"have raised some very important issues and there is a lot of truth in what they say. The reputation of the UK listing regime depends partly on the behaviour of companies, and we need to think about that quite carefully".

He also said:

"Matters of stewardship and corporate behaviour are predominantly the responsibility of the Financial Reporting Council, which is responsible for the stewardship code and corporate governance issues".-[Hansard, Commons, 22/5/12; col. 1028.]

However, as the FRC recently explained to the Treasury Select Committee, its role is about implementation and not about applying sanctions.

A gap is developing between what we would all agree is best practice and what needs to be done to ensure that the rules are followed; effective sanctions must be available. There is currently no single body responsible for all aspects of company behaviour, including the raising of finance. Under the current regime, the listing process provides the funds that companies need to invest and grow, and shareholders have the primary responsibility for holding business to account for its behaviour. However, there is no regulatory body responsible for both sides of that equation with sufficient powers to intervene. I believe that the FCA should take the lead as it has the authority, the expertise, the personnel and the funding to enable it to exercise vigilance over all UK listed companies. I beg to move.