Amendment 4

Financial Services and Markets Bill - Report (1st Day) – in the House of Lords at 6:15 pm on 6 June 2023.

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Baroness Penn:

Moved by Baroness Penn

4: After Clause 20, insert the following new Clause—“Sustainability disclosure requirementsSustainability disclosure requirements(1) FSMA 2000 is amended as follows.(2) After section 416 insert—“Sustainability disclosure requirements416A SDR policy statement(1) The Treasury may prepare an SDR policy statement.(2) An “SDR policy statement” is a statement of the policies of His Majesty’s Government concerning disclosure requirements in connection with matters relating to sustainability.(3) In preparing an SDR policy statement, the Treasury must consult the regulators.(4) The Treasury must publish any SDR policy statement in such manner as they consider appropriate.(5) The Treasury—(a) must keep any SDR policy statement under review;(b) may prepare a revised statement (and subsections (3) and (4) apply in relation to any revised statement);(c) may withdraw any SDR policy statement.(6) The Treasury may request a regulator to provide them with a report on any matter that the Treasury require in connection with the preparation of an SDR policy statement.(7) A request for a report under subsection (6)—(a) must be made in writing, and(b) may require a regulator to send the report to the Treasury within such reasonable period as may be specified in the request (or such other period as may be agreed).(8) A regulator must comply with a request under subsection (6).(9) Nothing in section 348, or in regulations made under section 349, is to be taken as preventing or restricting the ability of a regulator to disclose information to the Treasury for the purposes of this section.(10) Subsection (9) does not apply in relation to information provided to a regulator by a regulatory authority outside the United Kingdom.416B FCA and PRA rules etc(1) When making rules or issuing guidance in connection with disclosure concerning matters relating to sustainability, a regulator must have regard to any SDR policy statement (within the meaning of section 416A) that the Treasury have published and not withdrawn.(2) For the purposes of this section, matters relating to sustainability include matters relating to—(a) the environment, including climate change,(b) social, community and human rights issues,(c) tackling corruption and bribery, and(d) governance, so far as relevant to matters within paragraphs (a) to (c).”(3) In Schedule 1ZA (the Financial Conduct Authority), in paragraph 11 (annual report), in sub-paragraph (1)—(a) after paragraph (ha) insert—“(hc) how it has satisfied the requirement in section 138EA(2) so far as regarding disclosure requirements in connection with matters relating to sustainability;”; (b) after paragraph (ia) insert—“(ib) how it has satisfied the requirement in section 416B to have regard to any SDR policy statement of the Treasury published and not withdrawn under section 416A (sustainability disclosure requirements: policy statement);”.(4) In Schedule 1ZB (the Prudential Regulation Authority), in paragraph 19 (annual report), in sub-paragraph (1)—(a) after paragraph (e) insert—“(ea) how it has satisfied the requirement in section 138EA(2) so far as regarding disclosure requirements in connection with matters relating to sustainability;”;(b) after paragraph (fa) insert—“(fb) how it has satisfied the requirement in section 416B to have regard to any SDR policy statement of the Treasury under section 416A (sustainability disclosure requirements: policy statement), and”.”Member’s explanatory statementThis amendment would support the regulation of disclosure requirements relating to sustainability by requiring the FCA and the PRA to a.) comply with a request by the Treasury to provide a report in order to inform a policy statement by the Treasury on such requirements and b.) have regard to such a policy statement when making rules or issuing guidance about such requirements.

Photo of Baroness Penn Baroness Penn The Parliamentary Secretary, HM Treasury

My Lords, the UK is a leading jurisdiction for sustainable finance, and the Government are proud of that record and determined to maintain and further that position. Since Committee stage, London has been ranked as the leading global green finance centre for the fourth consecutive time. Government effort, including on sustainability disclosure and reporting, has played a vital role.

The Government’s success in green finance has been down also to the responsiveness and technical capability of our independent regulators, who have collaborated to drive forward our policy on sustainability disclosures. The Government’s approach was established in the 2021 paper, Greening Finance: A Roadmap to Sustainable Investing, where we set out the foundations of sustainability disclosure requirements—or SDR—which build on our world-leading implementation of the recommendations of the Task Force on Climate-related Financial Disclosures, or TCFD. This includes taking forward an approach across the economy to implementing international standards, enabling firms to plan for the transition and ensuring that this information flows to investors and financial consumers. Credible, usable information is a core component of green finance that will allow us to reach our goals on sustainability. When this information is available, market participants can use it to take sustainability into account when making investment decisions. Our plan for SDR is central to delivering this.

In Committee, some noble Lords raised concerns about the Government’s ongoing commitment to implementing these important reforms, the legal basis for implementing them, and the timelines for doing so. I am therefore pleased to be able to update noble Lords on a number of substantive developments since then.

Significantly, the Government published an updated green finance strategy on 30 March. This set out next steps across core elements of SDR. The Government will consult on extending the transition planning requirements—a core component of SDR—to the largest private companies once the Transition Plan Taskforce has completed its work later this year. The Government will also set up a framework to assess the suitability of the IFRS International Sustainability Standards Board’s standards for adoption in the UK. The Government remain committed to delivering a usable and useful UK green taxonomy and expect to consult on this in autumn 2023. They are also committed to setting out further detail on SDR implementation and the timeline for it this summer to reflect the rapid development of international standards.

Alongside this, the Financial Conduct Authority continues to take forward SDR for authorised persons, including consumer-facing disclosure requirements, under its existing objectives and rulemaking powers, which are sufficiently broad for the purpose. The FCA intends to issue its policy statement on SDR and investment labels in the third quarter of this year.

However, the Government recognise that SDR policy has strong links to wider environmental policy and that they therefore have an important role to play in shaping SDR. That should be recognised in legislation. Parliament must be able effectively to scrutinise the actions of government and the regulators in this area.

Amendment 4 will therefore require the FCA and the PRA to have regard to any policy statement made by the Treasury on SDR when they make rules in connection to sustainability disclosures. The amendment obliges the regulators to consider the Government’s wider policy goals when bringing forward SDR rules, while still maintaining their independence.

Regulators will also be required to report on how they have satisfied the requirement to have regard to any such policy statement on an annual basis. This will support Parliament in scrutinising the regulator’s actions on SDRs. This ongoing reporting will support transparent, structured co-operation between the regulators, government and Parliament to achieve the UK’s objectives in this space.

We will be debating a number of other sustainable finance issues today, and disclosures are at the heart of some of the matters that they raise. The amendment is therefore an important measure in that context as well as in its own right. I beg to move.

Photo of Baroness Wheatcroft Baroness Wheatcroft Crossbench

My Lords, I thank the Minister for her introduction of Amendment 4 and her willingness to engage with Peers on the topic of sustainable disclosure requirements. However, while a government amendment on this important topic is welcome, what we have heard is yet more delay. A cynic might judge the amendment to have a whiff of green- washing about it. It does not do enough and does not do what is required. The amendment seeks to give regulators and Ministers the necessary powers to bring forward rules and regulations on SDRs in fulfilment of commitments that they made in 2019, 2021 and again in the green finance strategy in March this year.

Amendment 114 is an effort to be helpful because, despite making commitments for five years, the Government still do not have the powers to make sustainable disclosure requirements happen. Amendment 4 does not confer those powers. The noble Baroness, Lady Ritchie of Downpatrick, submitted a Parliamentary Question on this issue on 14 November last year, and the Government’s response was that:

“The FCA has extensive powers to … impose some of the Sustainability Disclosure Requirements”.

The noble Baroness also asked about the powers available to the Department for Work and Pensions, which would legislate for sustainability reporting by occupational pension schemes. An extensive search of the powers held by the DWP in relation to public reporting and sustainable reporting has found none that is suitable.

Amendment 4 gives the Treasury the power to issue a policy statement on SDRs and to require the regulators to report against it, but it is not an obligation—the Treasury “may” prepare an SDR policy statement. As the Minister admitted in her response last year to the noble Baroness, Lady Ritchie, the FCA does not have the powers to actually implement SDRs. It seems that we are looking at a Whitehall paper trail that keeps everyone occupied but with no meaningful legislation.

I am in favour of easing unnecessary burdens on business. However, repeatedly indicating—as they have for five years—that the Government are planning to legislate but not actually doing it creates a burden in itself for business. Should it invest in data, in systems or in strategy? After so many reassurances but so little progress, and more reassurances today, no one really seems to know the answer.

I noted with interest that the Minister’s letter to Peers ahead of tabling this amendment said that

“the Financial Conduct Authority is taking forward Sustainable Disclosure Requirements (including consumer facing requirements) under its existing objectives and rulemaking powers which are sufficiently broad for the purpose”.

I would like to understand the misalignment between that statement and the earlier Answer to the Question from the noble Baroness, Lady Ritchie. Is it because there has been a change of heart and the Treasury has discovered that the powers exist after all? I would be grateful if the Minister could clarify that. Or has the Treasury limited its proposals from its original ones so, while it did not have the powers for the original proposal, it does for the new, limited proposals? Or—and it would be deeply disappointing if this were the case—is the reference in the Minister’s letter to the FCA to “taking forward” SDRs intended to mean that the FCA would be merely progressing the work but not actually implementing it? Again, I would be grateful for clarification. The FCA consultation on SDRs closed on 25 January. We are promised a policy statement in the third quarter but, without statutory powers, that would be pointless.

I hope the Minister will be able to answer those questions and now, if we are able to accept the amendment, I hope she will be able to go a little further. While the amendment sets the right tone, it does not do what is needed. It embraces the idea of SDRs but does not make them a reality. The same governmental reluctance to take real action lies behind my Amendment 7, concerning vote reporting. If investors are to make serious decisions on ensuring that their savings are put to work in a sustainable way, it is essential that they be able to see how those who manage the money choose to vote on corporate issues. That is a crucial part of being an engaged investor. The FCA itself acknowledges that. Earlier this year, its vote reporting group stated:

“Improving transparency of how asset managers vote on behalf of their clients will mean investors can better hold them to account on their stewardship”.

We would all want that, but currently it is not possible for investors always to learn how their investments are being voted. Yes, there is now an FCA requirement under the shareholder rights directive that fund managers and insurers produce an annual report on how they have voted, but it is only that they must comply or explain; and even then, the requirement is only that they should report on significant votes. The FCA gives no guidelines as to what should be deemed significant, and what one investor feels is significant may not concur with what a fund manager deems so.

The fund manager is required to report only at group level, so, in terms of the individual funds in which investors and pension funds might be invested, how their votes have been voted in the individual funds cannot be seen; it is only possible to see across the group, which is effectively meaningless for many people who want to find out how their money is being used. A report is required to be made only annually—a hopeless timescale in an industry that moves as fast as this one. Nor is there any standard form for vote reporting. It is not a lot to ask in a digital age. The SEC in the US certainly demands it.

For all those reasons, the current situation does not serve investors as well as it should. Amendment 7 would require FCA-regulated investment managers and insurers to provide clients and those investing with them with voting information that they requested in a standard format and within 30 days. In Committee the amendment on this topic included pension funds in the requirement to report but, mindful of the DWP review of pension fund reporting, the current amendment is much narrower and does not prejudge the review. However, in the meantime it should help pension funds to monitor the way their investments are being voted. It is true that the FCA vote reporting group has yet to reach conclusions, but there is no reason to wait for that. Parliament has the power to put demands on the FCA, and this is a case where it should.

The Government accept the need for good stewardship by investors, and transparency on voting aids that. It is important, indeed crucial, for good corporate governance that decisions taken on behalf of investors should be clear and easily ascertainable. Making voting records available speedily in a machine-readable way would be a service to investors that, thanks to digital innovation, should be easy and relatively cheap to implement. Why would the Government resist that? I beg to move.

Photo of Baroness Hayman Baroness Hayman Crossbench

My Lords, I declare my interest as chair of Peers for the Planet and apologise for the fact that I may need to speak a little longer than I normally would on Report. This is a very diverse group of amendments on different subjects, some of which are quite technical, but I can be brief in relation to Amendments 4, 7 and 114, which the noble Baroness, Lady Wheatcroft, has just so ably described. I appreciate that the Minister has done what she said she would on SDRs and tried to make some progress, but I fear there is still a legislative gap there—a gap that we could, on this Bill, usefully fill for her. I support what the noble Baroness has said and look forward to the debate on Amendment 91, on forest risk commodities, to which I equally give my support.

I will focus my comments on the three cross-party amendments in this group, which are in my name. I start by speaking to Amendments 93 and 113 on investment duties, specifically relating to fiduciary duty. They have a parallel with Amendment 114, in that they seek to be constructive by giving the Government the powers they need to advance their own stated policy agenda. These amendments provide powers to the FCA in relation to fund managers and personal pension schemes and to the Secretary of State for DWP in relation to occupational pension schemes, respectively, to issue guidance about consideration of the long-term consequences of investment decisions, the impacts of risk and the impacts of investments on society and the environment. The amendments work alongside each other. I will focus my remarks on Amendment 113 and allow colleagues to provide more insights on Amendment 93 in due course. I am extremely grateful for the support of the noble Baronesses, Lady Altmann, Lady Drake, Lady Sheehan and Lady Wheatcroft.

Both the Principles for Responsible Investment, a UN-funded body with more than 3,000 signatories and more than £80 trillion in assets, and the UK Sustainable Investment and Finance Association, a body with more than 300 members and £19 trillion in assets, have identified a common lack of understanding within financial services on investors’ fiduciary duties, and have called for guidance. The Government’s green finance strategy, published in March, recognised this. It said that

“trustees would like further information and clarity on their fiduciary duty in the context of the transition to net zero” and commits to measures to clarify this. My amendment seeks to support that clarification.

The strategy also included announcements of a working group of the Financial Markets Law Committee, a body chaired by the noble and learned Lord, Lord Thomas of Cwmgiedd, and separate government-convened round tables to look at what further action is needed. The Government are right to recognise that this is an issue on which pension fund trustees actively want further information and clarity. I have been extremely grateful to the noble and learned Lord and to members of the FMLC for their engagement on the text of this amendment and helpful input on the subject. However, the wording of the amendment is of course my own.

Given the Government’s agreement that there is a demand from pension fund trustees and the actions under way to look at what action is needed, my amendment simply seeks to give the Government and regulators the tools to finish the job. I should make it clear, for the avoidance of doubt—I know that there are noble Lords who are pension fund trustees and are concerned on this issue—that this amendment does not seek to undermine anyone’s duties to their clients. It puts the duty to act in savers’ best interests in the Bill. It limits the topics on which the Secretary of State can issue guidance and makes it explicit that pension fund scheme trustees must manage financial risks, as well as environmental and social impacts.

At the moment, neither the DWP nor the Pensions Regulator can issue guidance with statutory weight on this topic. The Government are limited to non-statutory guidance, which is purely voluntary and often not widely followed. I cite as an example the Pensions Regulator’s 2021 survey of defined contribution schemes, which found that more than 80% did not allocate any time or resources to managing climate risk, despite guidance encouraging them to do so since 2016. My amendment is designed to address this issue by giving the Government the power to issue statutory guidance that pension schemes must have regard to, but are not required to follow if they identify good reasons for divergence.

The DWP does not currently have powers to issue such guidance. This strikes a balance between support on the one hand and freedom to innovate on the other. Although work on the issue is ongoing, given the Government’s recognition that action in this area is urgent, it makes absolute sense to take the powers they need now rather than wait for a future relevant Bill, which could be two, three, four or five years away.

I think that the noble Baroness, Lady Drake, will speak more on Amendment 93 about the importance of guidance issued by the FCA. I simply note two things. First, where guidance is issued for occupational pension schemes, corresponding guidance should be made available for personal pension schemes. Otherwise we face regulatory arbitrage, whereby firms on one side of the fence are subject to different expectations from organisations that happen to be on the other. Secondly, a symmetry of duties is desirable. If pension schemes are to have guidance about factoring in the long-term effects of decisions, and both the risks and impacts of their investments, it is important for their agents—the fund managers—to have corresponding guidance on how to serve their clients. Companies already have such a duty to their shareholders under Section 172 of the Companies Act 2006. It would do no harm, and could offer a great deal of help, for investment intermediaries to have similar guidance. I hope that the Minister will be able to respond positively to these amendments.

Finally, I turn to my Amendment 15. All the amendments in this group go with the grain of stated government policy, and nowhere is this clearer than in relation to Amendment 15. It would add nature to the new regulatory principle on net-zero emissions, and require the PRA and the FCA to consider the need to contribute towards commitments made to address both climate change and biodiversity loss. It would give legislative effect to clear government policy. I thank the noble Baroness, Lady Sheehan, the noble Lord, Lord Vaux of Harrowden, and the noble Earl, Lord Caithness, for their support.

It is with some reluctance that I am not pursuing my Committee stage amendment introducing a climate and nature secondary objective to the Bill. It was made very clear by the Government in Committee that no progress could be made on this, but I hope that we can take action in relation to the regulatory principle, as Amendment 15 so patently follows stated government policy. Indeed, I considered not using any of my own words in this speech and simply reading out a list of the Government’s consistently repeated commitments on policy in this area. Alas, some linking paragraphs were required, but much of this speech is a reminder of what has been promised—and what must be delivered to make good those promises.

Financial regulators and financial sector actors are empowered to act on both the economic benefits of nature and the costs and risks of not doing so. In the Government’s words,

“we want our world-leading financial services sector to drive every step of the global transition”.

In recent years there has been a growing recognition that nature is a critical part of this transition. The risks and opportunities this presents led to Her Majesty’s Treasury commissioning Professor Sir Partha Dasgupta of Cambridge University to undertake an independent review on the economics of biodiversity

“and to identify actions that will simultaneously enhance biodiversity and deliver economic prosperity”.

This resulted in the Dasgupta review of 2021, which clearly articulates the extent to which economic growth has come alongside massive environmental degradation, and that a failure to make transformational change towards a path of sustainable growth is actually undermining our prosperity, now and for the future.

The Government responded to the findings of the Dasgupta review, acknowledging that:

“Delivering a nature positive future requires integrating the natural environment—and its goods and services on which we all rely—into our economic and financial decision-making, and the institutions and systems that underpin and drive those decisions”.

I am tempted to say “I rest my case”, but I will continue.

At the end of 2022, on the international stage the UK agreed the Kunming-Montreal Global Biodiversity Framework at COP 15. Its two targets seek to embed biodiversity within fiscal and financial flows. Just a few months later, the Government published their updated green finance strategy, which continues to bolster their commitment towards conserving and enhancing nature. It stated:

“The global transition to a resilient, nature-positive, net zero economy will see trillions of pounds reallocated and invested into new technologies, services and infrastructure. There are huge opportunities for the UK’s financial and professional services industry in this transition”.

I recognise that various initiatives are under way, such as the work of the Taskforce on Nature-related Financial Disclosures, which will undoubtedly make a contribution over time, but relying on voluntary action and market forces will not produce a transformation at the pace and scale required. What is needed is a systemic approach and it is essential that we use the opportunity of the Bill, which deals with the regulatory architecture of the financial services sector, to provide an enabling regulatory environment which can help turn government commitments into clear legal signals.

This is not just my view; it is shared by Professor Dasgupta, who has written to the Chancellor in support of this amendment. He has also issued a statement saying that

“the government recognised the urgent need to integrate nature into economic and financial decision-making and related institutions. The Financial Services and Markets Bill … presents an opportunity to make progress on this commitment. I urge the Government to support the proposed amendment to place a responsibility on financial regulators to consider nature alongside net zero when carrying out their functions. We need to empower those in charge of regulating our financial system to support the sector, to arrive at a nature positive destination”.

I am enormously grateful to Professor Dasgupta for his contribution, both in his report and to our discussion today.

In the ministerial foreword to the green finance strategy document this year, Jeremy Hunt, Grant Shapps and Thérèse Coffey—the Chancellor, the Secretary of State for DESNZ and the Secretary of State for Defra—were crystal clear:

“Our ability to exploit the opportunities of this new Green Industrial Revolution will depend on our readiness to finance it”.

It will depend on our readiness and the regulatory framework that allows them to do so. Too often this Government will the end but not the means, and their aspirations are not turned into actions. I hope that the Minister will, even at this late stage, be able to accept the amendment. If not, when the time comes, I will certainly seek the opinion of the House.

Photo of Baroness Boycott Baroness Boycott Crossbench 6:30, 6 June 2023

My Lords, I declare my interests and will speak to Amendment 91, which is in my name. I also express my absolute support for the other amendments, particularly Amendment 15, which was so brilliantly introduced by the noble Baroness, Lady Hayman, and accompanied by the quotes from Professor Dasgupta. It underlines everything that this group is trying to achieve.

I very much thank the noble Lord, Lord Randall of Uxbridge, and the noble Baronesses, Lady Chapman of Darlington and Lady Sheehan, for their support on Amendment 91. This amendment specifically introduces due diligence obligations for UK financial institutions to prevent the financing of illegal deforestation. Research I found last week stated that February 2023 had the highest rate of deforestation of the Amazon ever recorded, despite the conferences and the world’s agreement. Clearly, this is out of control and needs much more tough regulation. That is what this amendment seeks to introduce.

The Government list halting deforestation as a “top priority” in their net-zero strategy, but the scale of finance continuing to flow from British banks and investors to the companies actively destroying the world’s tropical forests shows that in practice the Government do not prioritise this issue. Much as was said by the noble Baroness, Lady Hayman, we are talking a good talk but in practice we are not walking a good walk.

Over 90% of tropical deforestation is driven by agriculture. Research commissioned by the FCDO shows that at least 69% of forest clearance for agricultural purposes is illegal. Despite this exceptional level of risk, that sector continues to hide behind weak voluntary pledges, hoping that the public and the Government will not notice that they are the main characters in this crisis.

In many ways, this amendment is extremely modest. It merely asks that financial actors carry out simple checks to ensure that the companies they finance are not routinely engaged in breaking the law through illegal deforestation. It is taken straight from the recommendation made by the Government’s own expert body, the Global Resource Initiative taskforce. It has been updated for Report to take into account the views of the Minister, which we were grateful for, and the financial sector, so that the specific procedural requirements placed on financial actors would be brought forward through secondary legislation. This leaves the Government with the flexibility to design a regime that works to genuinely minimise the risk of financing deforestation but does not lead to unnecessary de-risking because of incomplete information.

The Minister presented several arguments against this requirement in Committee, including that there is insufficient data on how to conduct due diligence because there are no

“equivalent disclosure requirements to those that will be set out under the Environment Act 2021 in jurisdictions across the globe”.—[GC 110.]">Official Report, 7/3/23; col. GC 110.]

My noble friend also proposed that we must wait for a new framework, under development by the Taskforce on Nature-related Financial Disclosures, which is a very long time coming. Both arguments are incorrect.

The European Union’s new deforestation-free product regulation has introduced a much tougher regime than the one we set under Schedule 17 to the Environment Act. Traders wishing to place products on the single market must now ensure that their products are both deforestation free and produced in accordance with local law. That regulation requires traceability to the geolocation where a commodity was grown. This level of supply-chain monitoring is eminently practical, and such information will soon be readily available.

Moreover, triggered by that regulation, the EU has begun an analysis of the role of the European financial institutions in financing global deforestation. This process gives the European Commission the power to propose new regulations for the financial sector. It has been supported by civil society and progressive financial institutions, with over €177 billion now under management in this way.

I do not wish to indulge this line of argument too much, because there is, even without this new EU regulation, already more than enough data for financial institutions to carry out their due diligence. It is just the incentive that is missing. For this reason, I do not agree with the Minister that we must wait for the framework being produced by the Taskforce on Nature-related Financial Disclosures before we ask banks to take action. More data would be useful, but there is no reasonable excuse for not using the data already freely available from the clients, in combination with open-source information such as satellite data, grievances from local communities and adverse media coverage. We are talking about illegal activity here.

I am grateful for the Minister’s engagement on this amendment, but I am yet to hear a compelling argument about why any information a company would share in its TNFD reporting would result in a change in financing patterns. Right now, financial institutions routinely choose to ignore high-profile exposés about illegal deforestation practised by their top clients. Put simply, the TNFD will not stop UK finance from flowing to those offenders. A lack of information is not the problem; the problem is the lack of a mandatory due diligence duty requiring that the information be put to use.

This amendment is a logical next step to Schedule 17 to the Environment Act 2021, which, if secondary regulations are ever brought forward after over a year of delay, will ban the import of certain goods produced on illegally deforested land. This amendment would allow us to future-proof UK financial regulation so it delivers a liveable planet and a workable food system, with all the attendant benefits for global economic stability. Inaction allows these deforesting companies to continue turning a profit by undermining the basis for future prosperity. It goes absolutely in the face of everything in the Dasgupta review. I look forward to the Minister’s response, and will be testing the opinion of the House on this.

Photo of Baroness Drake Baroness Drake Chair, Constitution Committee, Chair, Constitution Committee 6:45, 6 June 2023

My Lords, I declare my interests as trustee of DB and master trusts. I will speak to Amendment 93. Government Amendment 4 is welcome because it recognises the necessary direction of travel on disclosure requirements on sustainability, but the problem is that it is not sufficient. It gives the Treasury the power to issue a policy statement on SDRs and to require the regulators to report against this, but the FCA does not have the powers to actually implement SDRs. As Amendment 93 proposes, there is a need to give the FCA the power to publish guidance on how asset managers must consider the long-term consequences of any decision; consider the impact of climate, nature and society on their investments; consider the impact of their investments on climate and nature; and publicly report on their considerations.

It is interesting that the explanatory statement accompanying the published government amendment states that it supports

“the regulation of disclosure requirements relating to sustainability” by requiring the FCA not only to have regard to Treasury policy but to inform a policy statement by the Treasury. It is difficult to see how the FCA could optimally inform Treasury policy if it does not set guidance on expected content and open reporting by asset managers on the impact of their investment decision-making.

Confusion among fiduciaries about the extent of their duty to consider such impacts is not limited to occupational pension schemes; it runs across the length of the investment chain. The FCA has broad powers to issue guidance under Section 139A of the Financial Services and Markets Act 2000, but there is still an ambiguity. Amendment 93 gives the FCA the explicit power to issue guidance on the disclosure of considerations of sustainability impacts as a core part of the investment managers’ duties. This is not inconsistent with the existing duty on trustees, in Regulation 2 of the occupational pensions investment regulations, to report on how they have complied with the Section 35 duties of the Pensions Act 1995.

The proposed FCA guidance is not legally binding: regulated firms would be free to diverge from it, but there is an expectation that they would need to explain why they have done so. There is a need to apply the guidance to contract-based personal pension schemes as well, to avoid the risk of regulatory arbitrage between a weaker FCA regime and a more robust TPR disclosure regime.

The concept of fiduciary duty borne by those responsible for the best interests of pension scheme members is evolving, and, as we heard, the Government’s updated green finance strategy of 2023 includes a commitment to review pension trustees’ fiduciary duties and stewardship activities. That trustees must act in the best interests of scheme members must not be a principle in doubt or, indeed, overridden. The key issue is what “acting in savers’ best interests” means in law for fiduciaries, and the extent to which it includes stewardship and ESG engagement. If fiduciaries ignore the impacts of investment strategies on society, climate and nature, or vice versa, those major externalities will eventually impact them at a later date.

In seeking more productive investment by the finance sector, the Government should acknowledge that pension funds are not the only decision-maker or the beginning and end of the problem; asset managers have an equally key role to play in managing impacts and considering the long-term consequences. Amending FCA regulation powers to guide open reporting on these matters will encourage investment away from environmentally and socially damaging activities, and towards supporting efficient transition to net zero, nature protection and healthy societies, in a way that is in the savers’ best interests and that supports the successful transition of the wider economy.

Guidance from regulators is required along the length of the investment chains as risks become more acute. Pension schemes contract with fund managers to manage assets. If schemes are expected to consider the sustainability of their investments, they need fund managers to support them by undertaking that activity too. Trustees’ ability to discharge their ESG and stewardship responsibilities to greatest effect has a dependency on how regulators expect asset managers to discharge their duties. Expectations placed on pension funds and asset managers are a complement to, not a substitute for, government policies on efficient transition to a sustainable economic future. Government regulations that perversely drive greenwashing or green asset bubble risk are equally unsustainable.

The Government want to see more productive investment by the financial sector, but mandating how citizens’ private assets are invested would displace trustee fiduciary duty with state control of private assets, inviting litigation and risking impacting public attitudes to private saving. But, in giving the FCA power to guide the content and require open reporting on sustainability, Amendment 93 can assist confidence in aligning members’ best interests with increasing productive investment. I commend it to the House.

Photo of Lord Naseby Lord Naseby Conservative

My Lords, I welcome Amendment 4. Having listened to my noble friend on the Front Bench in Committee and subsequently, I know that she played a major role in this absolutely vital amendment coming forward.

The noble Baroness, Lady Wheatcroft, was quite right. Let us reflect on two key areas where we desperately need the SDR policy statement. First, in terms of the energy market, is the national grid. Today, all sorts of decisions have to be made by the energy market, whether on nuclear, solar or whatever else. People in that market want to know at what point the national grid will be in a position to be connected to them—that is absolutely key to sustainability.

Secondly, in my judgment, the public in general are confused and have no understanding of what they should do about making their contribution to net zero with the condition of their property. Some of us had a good briefing on that situation from the building society movement today. We must address this. But the principle is here, and I thank my noble friend on the Front Bench for how it has come forward.

I declare an interest as a trustee of the Parliamentary Contributory Pension Fund. Noble colleagues will not be members of it unless they have been in the other place or are ministerial colleagues. Nevertheless, I can assure anybody who knows anything about that particular area that, in my judgment, our fund—given the care and attention paid by its chairman and the members in terms of the time put in freely and the trouble that is taken to ensure that we listen to asset managers, question asset management and challenge the advisers we have—is aware of government policy, whatever it may be. Yes, we welcome guidance and particular in- depth information. But—and this is a very big “but” in capital letters—our primary duty is to the membership and the beneficiaries, and we must never forget that. We are not there to take risks, unless we really have to take them, and we debate these issues.

All I will say in relation to the forestry dimension is that I do not welcome that particular one more than any other. I want concrete material that is of benefit to those who are the beneficiaries. With that, I do not think that I need to say any more.

Photo of Lord Davies of Brixton Lord Davies of Brixton Labour 7:00, 6 June 2023

My Lords, I support the amendments in this group, particularly Amendment 93. It is always a pleasure to follow my noble friend Baroness Drake, who has said it all. I will join on the back of her comments to say that I strongly support the approach she has taken.

I also support Amendment 113 from the noble Baroness, Lady Hayman. I respect the extent to which some concerns have been taken into account to make it clear that the interests of the members are paramount in the amendment—that is crucial. On the idea that pension funds should have a more active role in growing our economy, obviously its time has come. It is not new—people have been making suggestions about it; I have been involved in it in the past—but there now seems to be a confluence of views that something must be done. However, it has to be done in a way that respects the fiduciary duty to put the interests of members front and centre in the decisions that are taken. I take a fairly broad view of what constitutes members’ interests, but it is the members and their trustees acting on their behalf who have to take that decision, rather than bodies which do not have the direct results inflicted on them if they get it wrong.

It is important to stress that any ideas have to be practical and effective. I have some doubt as to whether the problem we face is about the supply of money; rather, it is about how the money will be used. Putting these proposals forward without having the other side of the bargain improved will be a problem. It is also important to stress that there are very different types of schemes, and they all have different investment needs. Again, whatever guidance is given has to respect the particular types of schemes.

I have one concern, which I would like the Minister to address, about the phrase “have regard to” in relation to guidance. It appears in the government amendment and in Amendment 113 put forward and supported by my noble colleagues. The problem with the “have regard to” is that it is a legal lottery. It is very difficult to know in advance what exactly it means, so it would be very helpful to me, and I hope the House, if the Minister could say something about that. Is it, as is sometimes suggested, like the accounting requirement—you comply or explain—or do you have to, in some way or another, follow the requirements as they are set out? What does “have regard to” mean in this legislation? It would be good to have clarification during the progress of the Bill, because the phrase appears several times.

Photo of Baroness Altmann Baroness Altmann Conservative

My Lords, I congratulate my noble friend the Minister on her Amendment 4. I am sure that it is very well-intentioned, and it meets some of the concerns that were clearly expressed in Committee. I welcome the update that will be coming from her on the green taxonomy; I believe that there will be a consultation on that. There is also the new green finance strategy, which has been published. They are all welcome.

Amendment 4 is welcome, but, as the noble Baroness, Lady Hayman, explained, although it will ensure that the Treasury produces guidance or requirements for sustainable investing by pension schemes and others, it would appear that the FCA and the PRA may not have the powers to issue that guidance. So, once the Treasury has produced its recommendations, we will still need to legislate. Can my noble friend the Minister confirm that that is the case, and that we will need further legislation if we want to implement the impacts of Amendment 4 through to pension schemes?

I have added my name to Amendments 93 and 113 in the name of the noble Baroness, Lady Hayman. Amendment 93 deals with the investment duties of pension providers and investment managers, and Amendment 113 deals with the investment duties of occupational pension trustees and managers. Clearly, if we are to make progress in line with the Government’s laudable objectives—and I congratulate them on all the work they have been doing, including some of their world-leading work on trying to ensure that pension schemes invest more in line with green objectives and sustainable investments for the long term—the amendments will ensure that the FCA and the PRA can make those rules. The amendments are very reasonably drafted; the FCA and the PRA may make these rules, but they do not require them at this stage to do so. The trustees and investment managers must then have regard to the rules, but, as the noble Baroness explained, they can explain why they are not going to implement the rules. However, at least we can set up a system where the trillions of pounds of long-term investment money in pension schemes can assuredly do more to protect the planet and provide investment opportunities that will help with social objectives for this country.

I do not have a problem with the concept of government directing pension schemes to invest a certain proportion of their assets, if necessary, in green, sustainable and socially desirable projects, including infrastructure, forestation, nature preservation and so on. At least 25% of all pension schemes—we are talking about hundreds of billions of pounds—has come from the taxpayer in the first place in the form of tax relief. Given that 25% of everyone’s pension is tax free, that is money that was spent by taxpayers. Given the budget circumstances that the country faces, and as taxpayers would otherwise be funding these projects outside pension schemes, I do not think that it is impossible to justify the idea that, should the private sector not be forthcoming with its investments in these vital elements for future growth and for a sustainable future for us all, the Government might themselves decide to require it.

These amendments will at least pave the way to ensure that there is more chance of these huge amounts of money, which are put aside for millions of people’s retirement income later in life, being invested in a way that will benefit them and the economy, as well as ensuring that there is much more and better protection for the planet, which I know that the Government wish to achieve. So I support Amendments 93 and 113, and I have added my name to Amendment 114, so excellently explained by the noble Baroness, Lady Wheatcroft, again facilitating rules that it will be necessary for schemes to follow, should the Government desire that—which is the indication that I have had from my noble friend the Minister and which is implied in the Government’s Amendment 4.

Photo of Baroness Meacher Baroness Meacher Crossbench

My Lords, I shall speak to Amendment 91—this is a somewhat variegated group. The amendment was very ably introduced by the noble Baroness, Lady Boycott, and I am privileged to be asked to speak to it—it has widespread support across the political parties and within the public, as well as from key figures such as Sir Ian Cheshire and financial institutions representing no less than £1.18 trillion in assets under management and advice.

The UK is in the invidious position of being a leading financier of global deforestation and linked human rights abuses. This country provided an estimated $16.6 billion to businesses implicated in deforestation over five years to 2020. How many of us have money in pension funds contributing to the £300 billion of UK pension fund money supporting high deforestation risk companies and financial institutions? The Government claim that the answer to this problem—if you like—is the Taskforce on Nature-Related Financial Disclosures. However, the Government’s own expert Global Resource Initiative task force has already explicitly rejected the TNFD’s disclosure-based model as a solution. It has told the Government that new due diligence laws are needed to stop UK finance flowing to deforestation —and that is precisely what this amendment does.

I am aware of the noble Lord, Lord Field’s rather wonderful Cool Earth charity, which finances indigenous tribes in the great forests to retain the trees and live within them. Amendment 91 is vital to prevent all Cool Earth’s good work being undermined by UK financial institutions investing in high deforestation risk companies. The UK led the Glasgow leaders’ declaration on forests and land use at COP 26, making a commitment to halt and reverse deforestation and land degradation by 2030, including by realigning financial flows. This amendment begins to meet that commitment; surely, this should not be neglected. My only regret is that the amendment allows for a 24-month delay before due diligence obligations come into force to allow the sector to prepare—and, of course, I understand that sectors need to prepare. But this issue has been debated in Parliament for some months. I wonder how far the sector has reached in its preparations and whether it would support a reduced delay. How does such a delay fit with the view of experts that commodity-driven deforestation must end by 2025 at the latest to limit global warming to 1.5 degrees centigrade? A 24-month delay takes us right into 2025. I understand that agricultural expansion drives more than 90% of tropical deforestation. Again, the amendment is business friendly and widely supported, and I hope that the Government will support it and accept it.

Photo of Lord Vaux of Harrowden Lord Vaux of Harrowden Chair, Finance Committee (Lords), Chair, Finance Committee (Lords)

My Lords, I have added my name to Amendment 15, tabbed by the noble Baroness, Lady Hayman. It aims to ensure that the conservation and enhancement of the natural environment are included in the regulatory principles of the regulators. Like the noble Baroness, I would have preferred another secondary—what is the word?

Photo of Lord Vaux of Harrowden Lord Vaux of Harrowden Chair, Finance Committee (Lords), Chair, Finance Committee (Lords) 7:15, 6 June 2023

Yes, objective, thank you. But we are where we are.

The noble Baroness has already explained this with her usual skill, so I shall not repeat what she has said. However, I am sure that I am not alone in experiencing a feeling of déjà vu in even having a debate on this subject. The noble Baroness, Lady Hayman, has given similar excellent speeches on multiple occasions now— I am really quite amazed by her patience. All this amendment tries to do is ensure that government policy is embedded in the activities of the regulators, yet we seem to have the same debate on so many Bills. Each time, generally, the Government give way—and rightly so. I think that the most recent occasion might have been on the UK Infrastructure Bank Act. Frankly, if it makes sense to accept this for that bank, how much more sense does it make to accept it in respect of the entire financial services industry? Surely, it is time that all Bills to which the impacts of environmental change and risk are relevant should include these clauses by default. It really should not be up to this House to ensure that the Government apply their own policies. So I hope that the Minister will follow the multiple precedents and accept Amendment 15.

The Minister introduced Amendment 4 on SDRs, which is extremely welcome, but it is only a “may prepare” clause, not an obligation, and there is no timeframe included. Frankly, it could have gone an awful lot further.

I add my support to Amendment 91, which seeks to introduce a new due diligence requirement for regulated persons to ensure that the forest risk activities that they wish to finance or otherwise support are in compliance with local laws. I am sure that the Minister will refer to creating undue burdens on regulated persons, which seems to be the usual argument in these things—but the amendment leaves the level of required due diligence for the Government to decide and regulate, so I am not going to be terribly impressed by that argument. To put it simply, our financial services industry should not be financing illegal deforestation activities.

I also strongly support Amendments 93 and 113, which seek to ensure that the impacts on climate, nature and society are properly considered by occupational pension scheme trustees, and that the FCA may publish guidance in that respect. Noble Lords with much more experience in this area than myself have spoken to that at length. Pension funds are by their nature long-term investments and systemic in size, so it is especially important that these issues of sustainability are considered fully by pension schemes. I hope, perhaps forlornly, that the Minister will look favourably on these amendments, but particularly on Amendment 15, which seems self-evident to me.

Photo of Baroness Northover Baroness Northover Liberal Democrat

There have been a number of powerful contributions in this group. I add my voice as a signatory to Amendment 114. My noble friend Lady Sheehan will speak to others in this group, which we also support from these Benches.

The noble Baroness, Lady Wheatcroft, very ably made the case for Amendment 114, which seeks to give the powers to Ministers and regulators to legislate for sustainability disclosure requirements along the whole length of the investment chain. As she indicated, although we obviously welcome the fact that the Minister has brought forward Amendment 4, this simply does not match up to what needs to be done and what the Government, as others have said, say that they wish to do. We know that some change is already being driven—for example by the disclosures that are now required under the task force on climate-related disclosures. We know that the International Sustainability Standards Board continues its important work, with the involvement of Mark Carney, and we hope that the Government will adopt its recommendations—they are currently equivocal about that.

We urgently need the guardrails that Chris Skidmore recommended were required to reach net zero by 2050. The Government have made repeated commitments, as we have heard, to legislate for sustainability disclosure requirements and in these other areas to which noble Lords have referred. Amendment 114 and all the others help to deliver what the Government say that they wish to do. The noble Baroness, Lady Hayman, beautifully outlined how the other amendments also help to deliver for the Government on what they say that they wish to do. Therefore, I support this amendment and the others.

Photo of Baroness Young of Old Scone Baroness Young of Old Scone Labour

My Lords, I support Amendment 15 in the name of the noble Baroness, Lady Hayman, who introduced it very powerfully. I want to talk to the House about the real relationship between nature conservation and climate change and the need to bring those together in the regulatory process. Nature restoration is essential for our reaching of net zero—we cannot do net zero without restoring nature; I think that is globally accepted now—but nature restoration is important to economic prosperity in several other ways. More than half of global GDP is considered moderately or highly dependent on natural assets and half the world’s population is completely dependent on biodiversity for their livelihoods. That means that biodiversity is as important as climate change.

Biodiversity is also highly material in assessing risk, including financial and economic risk, and it is pretty clear that if biodiversity is going down the tubes, so is the economy and, indeed, so are we. So, it is a bit of a no-brainer, in my view, that financial services regulators should have, as a regulatory principle, net zero and nature recovery together: the two are absolutely indissolubly linked. I hope the Minister will not say that the provisions that are in the Bill for net zero will act as a proxy for biodiversity restoration. It does not work that way: net zero is a necessary condition but not a sufficient condition for biodiversity recovery.

The noble Baroness, Lady Hayman, threatened the House with simply reading out all the commitments that have already been made that are encapsulated in her Amendment 15. I want to add another one that no one has mentioned so far. The Environmental Audit Committee, in its report on biodiversity in June 2021, highlighted the fact that, although some progress had been made in transforming the financial system to reflect the pressures of climate change, the whole accompanying handshake with biodiversity was way down the line and much slower and needed to accelerate. It called on the Government to play a part in creating a narrative that there is a lot of international commitment to biodiversity recovery linked with climate change that we are going to have to respond to in this country, because we have signed up to it globally, and that it is therefore important to get the financial services industry and its regulation up to speed soon in order to cope with that global pressure. The noble Baroness’s Amendment 15 would do that and, more importantly, it would secure this through a legislative approach and not be overly reliant on voluntary action.

Without delaying the House any longer, I also support Amendment 91 on deforestation. I will not repeat what the noble Baroness, Lady Boycott, said, but it was the bee’s knees. I end with a note of distress at the comments made by the noble Lords, Lord Davies and Lord Naseby, about pension scheme investments and investors and pension committees and pension advisers’ responsibility and duty to pensioners. I declare an interest, having set up the Environment Agency pension scheme some 25 years ago to be, at that stage, the only really green pension scheme and now probably the foremost green pension scheme in the world.

Let us not be in any doubt: there is not a dichotomy about responsibility to pensioners and taking action on climate change and biodiversity. They are absolutely one and the same thing. If climate change and biodiversity decline continue, there will be irreparable harm to the economics that pensioners and pension schemes depend on. Let us not be in any doubt about that: pension scheme trustees and their advisers—and I hope, if the Minister will accept Amendment 15, their regulators—have a responsibility towards climate change and biodiversity recovery, because it is absolutely in the economic interests of their beneficiaries.

Photo of Baroness Bennett of Manor Castle Baroness Bennett of Manor Castle Green

My Lords, I rise very briefly to express Green support for the non- government amendments in this group and acknowledge the way in which the weakness of the government amendment has already been acknowledged. Noble Lords will note that the explicitly environmental amendments, from Amendment 15 onwards, do not have a Green name on them. I am delighted about that because there was not space for one, because the amendments have cross-party support from right across the House, which really shows how far we have come in these debates.

I shall make four brief points, because I am very aware of the time. They are building on the points just made by the noble Baroness, Lady Young, and reflecting on an article published last week in Nature, which demonstrated that in seven of eight key measures, including climate, biodiversity and water, we are outside the safe and just operating space of this planet. We are absolutely at crisis point and I pick up the point made by the noble Baroness, Lady Hayman, that we cannot afford to wait. We cannot wait for the next Bill, the Bill after that and the Bill after that. I very much agree with the point just made by the noble Lord, Lord Vaux, that the country should not have to wait for the House of Lords to insert these things into Bills; they should be there in government Bills as a matter of absolute, basic course.

I have a particular point about Amendments 93 and 113, which strengthen the fiduciary duty of pension funds to ensure investors consider the impact of their investments on environment and society. The case has already been made that there is no finance on a dead planet and there are no pensions on a dead planet, but the society element also deserves to be noted. We have had a huge amount of discussion of the problem of the large number of people of apparently working age who are not engaged in our labour force at the moment, and the public health crisis that is associated with that. It is the kind of thing that Green councillors have been going on about, as members of governing boards of pension funds for years: such things as tobacco and the kinds of food products that are being supported are all issues that have an impact on pension returns.

On deforestation, the noble Baronesses, Lady Meacher and Lady Boycott, among others, have already made points about this, but there is £300 billion of UK pension money in high deforestation risk companies and financial institutions—that is a figure from Make My Money Matter. Again, there is a point about risk. The financial sector in the UK faces up to £200 billion of risk in Brazilian beef and soya and Indonesian palm oil supplies alone.

Finally, there is another risk in terms of our international reputation. We are of course enthusiastic signatories of the global biodiversity framework, which promises, under target 14, that the UK will align

“all relevant public and private activities, [fiscal] and financial flows with the goals and targets of this framework”.

How could the Government not be accepting all the amendments in this group?

Photo of The Earl of Caithness The Earl of Caithness Conservative

My Lords, I have my name to Amendment 15, so ably introduced by the noble Baroness, Lady Hayman. I thank her for her very clear exposition of it and I thank the noble Baroness, Lady Young, for her little additions just to fill in some of the other parts of this important subject. I thank the Minister for her time yesterday when I came to discuss this amendment with her: it makes a lot of difference that a Minister is so receptive to a discussion, even though we did not part any closer than when I walked through the door.

I congratulate the Government on their world-leading position on green finance. That is a nice position to be in, but we need to work very hard on that if we are to retain it.

To me, it is absolutely logical that nature should be added into the Bill in the way proposed in Amendment 15. As has been said, nature underpins the whole financial system. Without nature, it is not going to work—and it has suffered because we have not given nature the economic value and attention it needs. Nature restoration is crucial to reaching net zero.

We can talk about climate change and net zero, but we must not believe that solutions to climate change always benefit nature—they do not. I give your Lordships the example of biomass and what was set out as a very good idea by Drax to move on to biomass. It has now been proven that it is not working as well as we had all hoped and that there has been degradation of nature. One can take the view that it does not affect the UK, because all the timber is imported, but it is causing a loss overseas. That links very well to Amendment 91 in the name of the noble Baroness, Lady Boycott, which I support.

Most of what I wanted to say has already been said, so there is no need to repeat it. It is strange how often we hear the Government make all sorts of encouraging statements, but when it comes to putting them in the Bill they are reluctant to do so. There is an old adage: if it is not on the face of the Bill, it will not be implemented in the proper way. That is why Amendment 15 is important.

Photo of Lord Randall of Uxbridge Lord Randall of Uxbridge Conservative 7:30, 6 June 2023

My Lords, I strongly support Amendment 15, so ably introduced and supported by others. I will speak principally to Amendment 91, to which I added my name. I tabled a similar amendment in Committee, but unfortunately ill health prevented me speaking then. I was grateful to the noble Baroness, Lady Boycott, for taking over the reins then and I am very happy to support her now.

I support the Government’s amendment in as far as it goes. As we have heard, the Government have made a lot of strides in this area through public finance commitments. Only last month the Prime Minister met with the President of Brazil, pledging £80 million to the Amazon Fund to help stop deforestation. There is more money coming through; at least £3 billion of our international climate finance is devoted to nature protection and restoration.

The question we must ask ourselves is: are we turning a blind eye to the private finance undoing all this good? Preventing private finance doing harm is just as important as the aid we provide. As we have heard, the Government have endorsed this conclusion by pioneering the Glasgow declaration on forests and land use, which includes a commitment to:

“Facilitate the alignment of financial flows with international goals to reverse forest loss and degradation”.

Now is the very time to make good on this pledge and get our own house in order.

This is a sensible proposal rooted in Schedule 17 to the Environment Act and limited to illegal deforestation for that very reason. The amendment itself has been publicly endorsed, as we have heard, by Sir Ian Cheshire, as well as financial institutions representing more than £1 trillion in assets under management and advice, including Rathbone Greenbank Investments, Federated Hermes Ltd and the Local Government Pension Scheme Central Ltd—so it is not just the usual suspects.

At the G7 last month, the UK committed to take steps to redirect finance away from activities causing biodiversity loss “without delay”. I am very grateful to the Minister. As we heard from my noble friend Lord Caithness, she has bent over backwards to try to help and is committed to this. She has not quite convinced me that the Government should not accept this sensible amendment. I hope that it will be accepted and that the Government will follow through here. As I have got older, I may have got mellower but I have got more impatient. I am fed up with hearing every time that it will be in the next Bill.

Photo of Baroness Sheehan Baroness Sheehan Liberal Democrat

My Lords, I rise on behalf of our Benches in support of these amendments. In doing so, I declare my interest as a director of Peers for the Planet.

Before I move on to the bulk of the amendments in this group, I will address government Amendment 4. I agree with noble Lords across the House who have welcomed it but feel that it is deflective and a little weak. The policy statements required from the Treasury may be followed by the regulators, but it just does not go far enough. It certainly does not fulfil the spirit of Amendment 114 on SDRs, spoken to so ably by the noble Baroness, Lady Wheatcroft.

In the briefings I have received on this Bill to make provision about the regulation of financial services and markets, it struck me that the phrase “systemic risk” appears frequently. According to the Systemic Risk Centre, part of the London School of Economics and Political Science:

“Systemic risk refers to the risk of a breakdown of an entire system rather than simply the failure of individual parts. In a financial context, it captures the risk of a cascading failure in the financial sector, caused by interlinkages within the financial system, resulting in a severe economic downturn”.

I think we all recognise that scenario.

Therefore, the amendments in this group all aim to strengthen the Government’s hand either by aiming for better governance in financial services and markets or by pre-empting disastrous practices as financial services and markets transform and orientate towards a future that encompasses our net-zero ambitions. Deep change of this nature is a risky undertaking for the sector that the Government can act to mitigate. Indeed, the Government can act to enforce their own policy statements, as so many noble Lords across the Chamber have already mentioned.

I will briefly address the amendments to which I have added my name. Amendment 7 addresses an essential element of openness and transparency and would require the FCA to make rules to mandate fund managers and insurers to give information to clients and beneficiaries on the exercise of all voting rights on their behalf by appointed investment managers. The noble Baroness, Lady Wheatcroft, in whose name the amendment appears, has already given us chapter and verse on why this would be a sensible move by the Government. Currently, it is difficult for underlying fund managers and insurers to access information about how voting rights in investee companies are being exercised on their behalf in a consistent and comparable format. I will give just two examples and, I hope, not repeat too much of what the noble Baroness, Lady Wheatcroft, has already said. This is very important.

Reporting is currently voluntary and contained in a single dense report across the whole of the fund manager or insurer’s operations. That is problematic, because in practice it means that pension funds will find it difficult or impossible to identify whether their pension fund is invested in that share. They cannot get at the information they need. That is one shortcoming; the other is that the reporting is non-standardised. Many investment managers disclose votes in a non-standardised way in long PDF reports—sometimes up to 10,000 pages—which makes it extremely difficult for pension funds to extract the data they need out of it.

The aim of Amendment 7 is to rectify these shortcomings and others that have already been mentioned, and requires the FCA to make rules requiring information on the exercise of voting rights to be disclosed on request and in a standard format. The US Securities and Exchange Commission has a regularly updated standard reporting template which managers must follow. The FCA should achieve parity with the USA on voter reporting and enable consistent and comprehensive vote disclosure. Voting at AGMs is a key tool in ensuring good corporate governance, good long-term investor returns and good economic outcomes more broadly, and is key to government realising its policy ambitions, not least its net-zero ambitions. Indeed, HMT has publicly acknowledged that good voting and good vote reporting are crucial to meeting net zero. Finally, as the Aldersgate Group identifies in its 2022 report, it is critical that financial institutions engage with systemic risks via stewardship—such as exercising voting rights—rather than managing portfolios by divesting from high-carbon assets.

Amendment 15, which adds nature to the new regulatory principle on net-zero emissions, is in the name of the noble Baroness, Lady Hayman, and was spoken to ably by her. We have only to gaze and wonder at the efficiency of bees and other pollinators in their role in providing us with good food. Various estimates have put a figure verging on £1 billion to pollinators’ contribution to the UK economy in terms of worth of crops they produce. However, if one inputs human labour in their stead, we know that their value is far greater than that.

The Government’s own green finance strategy, published just a few weeks ago, stated:

“Nature sustains economies and livelihoods, and protecting and restoring nature is inseparable from addressing climate change”, which completely echoes what the noble Baroness, Lady Young of Old Scone, said. The funny thing is that those are the Government’s own words, so why do the Government balk at this amendment? In their response to the seminal Dasgupta review, The Economics of Biodiversity, which has already been mentioned, the Government committed to delivering a nature-positive future by reversing nature loss, and to

“leave the environment in a better state than we found it”.

This amendment is urgently needed. Current investments are working against nature and driving nature’s depletion. We have heard these figures before but they are worth reiterating. In 2019, financial institutions provided $2.6 trillion in loans and underwriting services to sectors identified as primary drivers of biodiversity loss and ecosystem disruption. Globally, Governments spend $500 billion per year that is potentially harmful to biodiversity.

Nature loss can be massively detrimental to investments and must be considered in assessing risks. I will give a couple of examples. First, shareholders lost billions when the European pharmaceutical company Bayer lost near 40% of its market capitalisation in less than a year after acquiring an agrochemical company accused of adversely affecting honeybee populations. Secondly, company shares in the Canadian gold-mining company Infinito Gold fell 50% when in 2012 the Costa Rican Government denied permission to develop a mine due to potential impacts on forests and endangered species.

In conclusion, we need investment in nature restoration to be commensurate with investment in net zero—here I disagree a little with what the noble Earl, Lord Caithness, said. In having similar amounts and similar resources deployed on net zero and climate change, we are able to protect our natural capital, which we must do if we are to meet our net-zero targets. Nature and climate change are two sides of the same coin. I hope that when the time comes, noble Lords will give this worthy amendment their full support, as we will from these Benches.

I have added my name to Amendment 91. The noble Baroness, Lady Boycott, moved it so comprehensively that I need to say very little other than to add my support to it. I will just say that the Treasury’s Greening Finance road map claims that financial actors should factor climate change into “every investment decision”. However, this is currently not the case when it comes to deforestation.

I will cite one example. In June 2022 Global Witness, a relatively small NGO, published an analysis showing that HSBC and Barclays have continued to provide billions to Brazilian meat giant JBS in spite of widespread and credible allegations of the company’s involvement in illegal deforestation, land grabs and human rights abuses. The UK financial sector faces up to £200 billion in risk exposure to Brazilian beef and soy, and Indonesian palm oil supply chains alone, according to the WWF. There I echo the words of the noble Baroness, Lady Bennett. It is shocking that financial institutions are not required to conduct any due diligence to find out whether their dealings are leading to illegal deforestation, even when their clients have been implicated in many public cases before.

Due diligence is not that hard to carry out. Sources are not limited to what is available in the public domain. Financial institutions can request supplementary data from their existing and potential clients to inform their due diligence. For example, they can ask the extent to which a supply chain is fully traceable, how many deforestation incidents that client detects per year, and whether they can demonstrate if they obtained the consent of indigenous peoples to operate on protected lands, among many other such questions. There are so many tools available to companies these days.

Photo of Baroness Sheehan Baroness Sheehan Liberal Democrat

I am just about to conclude.

Global Witness, for example, recently launched a “Brazil Big Beef Watch” Twitter bot to show how simple and effective supply-chain traceability can be. Therefore, due diligence requirements are not an onerous ask and are long overdue. It is deplorable that indigenous people are on the front line in defending against deforestation. Some 40 people per week are killed in the process. This must stop. I think I speak for our Benches when I say that should the noble Baroness, Lady Boycott, seek the opinion of the House on her amendment—we hope that she will—we will give it our wholehearted support.

Amendments 93 and 113 on fiduciary duty have been covered extensively by the noble Baronesses, Lady Hayman and Lady Drake, and by other noble Lords across the House, so I need say very little other than that we are in full support of them.

Photo of Lord Livermore Lord Livermore Shadow Spokesperson (Treasury)

My Lords, this has been a fascinating if somewhat disheartening debate, and I have learned much listening to the contributions from noble Lords on all sides of the House.

We welcome the tabling of government Amendment 4, which brings forward new provisions relating to sustainability disclosure requirements, but we agree with the views expressed across the House, particularly as set out by the noble Baroness, Lady Hayman, arguing that the Bill simply does not go far enough in supporting the country’s green ambitions.

We support many of the amendments in principle but particularly Amendment 15 in the name of the noble Baroness, Lady Hayman, and Amendment 91 in the name of the noble Baroness, Lady Boycott, the latter having been signed by my noble friend Lady Chapman.

The financial services sector touches many more aspects of our lives then we may sometimes realise, with firms’ investment decisions having a direct impact on virtually all sectors of the economy. This activity can, and often does, do much that is good. For example, if we are to secure the green jobs of the future, businesses will need investment. But, as we see in some cases, such as investment activity that leads to deforestation, there can be severe negative environmental impacts. In a recent poll cited by Global Witness, 77% of UK savers said they would be unhappy to discover that their pension was funding deforestation and habitat loss, with 14 million people estimated to switch pension provider if they made such a discovery. However, as Amendment 7 highlights, there is currently no way for the public, nor indeed the Government, to tell if their money is invested in that way, and therefore no way for consumers to exercise choice. That surely cannot be right.

Amendment 91 would implement recommendations from the Government’s own Global Resource Initiative taskforce in relation to deforestation, a practice which causes significant harm to global climate ambitions, as well as to indigenous peoples who are evicted from their ancestral homes. We are told by the Government that they are serious about achieving net zero and protecting nature, yet, at present, the net-zero regulatory principle still fails to mention nature, which is what Amendment 15 would correct. Indeed, nature is not even mentioned in the Bill. As the WWF rightly points out, by excluding nature from this key financial services legislation, the UK will fail to secure opportunities that could make the UK a leading green finance centre, while exposing the country to nature-related risks.

We should also give serious weight to the intervention of Professor Sir Partha Dasgupta, who led the Government’s review of the economics of biodiversity, when he urges the Government to support the amendment. He says:

“We need to empower those in charge of regulating our financial system to support the sector to arrive at a nature-positive destination by recognising the value of natural capital and the significant social and economic benefits restoring nature presents”.

We are losing nature at an alarming rate, and these issues are only going to become more urgent. We have missed opportunities to act in the past, and we cannot continue to make the same mistakes. We therefore urge the Government to think again on these important areas, but if they are not willing to do so, we will support the noble Baronesses, Lady Hayman and Lady Boycott, should they choose to push their amendments to a vote.

Photo of Baroness Penn Baroness Penn The Parliamentary Secretary, HM Treasury

My Lords, let me first take Amendment 15, from the noble Baroness, Lady Hayman. I reassure noble Lords that the regulators already consider issues related to sustainability, and specifically nature, as part of their work under their existing objectives. For example, the Government and the regulators are active participants in the work of the Taskforce on Nature-related Financial Disclosure, which we have heard about, which helps organisations to report and act on evolving nature-related risks; and the Bank of England is a key member of the Network for Greening the Financial System, which recently launched a task force on nature-related risks.

The noble Baroness listed the work that is happening and the various commitments, and I interpret that to mean that the lack of the reference to nature in the framework does not equal a lack of action by either the Government or the regulators. I understand the desire of noble Lords to see that reflected in the framework in the Bill. However, further work needs to take place to better understand the interaction between nature targets and the work of the financial services regulators when including it in regulation, and the conclusions of that work are not yet clear. Moreover, equivalent targets to those in the Environment Act for England and Wales in 2021 do not yet exist in the other devolved Administrations, so we remain of the view that it would not be appropriate to place a requirement within the FSMA regulatory principles without the clarity I spoke about, or to impose requirements that link to targets that do not yet exist; so unfortunately, the Government are unable to support the amendment.

Turning to Amendment 91 in the name of the noble Baroness, Lady Boycott, the Government are committed to working with UK financial institutions to further tackle deforestation-linked finance. As set out in the updated green finance strategy, we will begin this work with a series of government-convened round tables this year, and I am keen to work with noble Lords on this process.

As we discussed in Committee, the amendment we are considering today would involve imposing requirements on all regulated financial services firms, obliging them to undertake due diligence on practically all their client firms and their clients’ supply chains. In practice, this would amount to UK banks being required to check most of the world’s major companies and their supply chains for links to illegal deforestation, and stopping any finance to them until those companies can provide the data needed to do so. This is while the rest of the world’s banks carry on financing this activity with no global standard on deforestation in place.

Global due diligence is not something that can be legislated for by Parliament and the UK financial sector alone. In fact, trying to do so may make this problem harder to solve. Imposing this data requirement on UK financial firms alone where such data is lacking globally could lead to one of two things: firms trying to satisfy the requirement but failing due to a lack of data, leading to misreporting and misallocations of capital; or keeping that business outside the UK, with no chance of securing the type of environmental change we want and that is the aim of the amendment.

The Government therefore want to find a workable solution, and we are pursuing a number of different lines of action to do so, in addition to the commitment we made to work with UK financial institutions in the green finance strategy. First, we are directly addressing deforestation in situ by our partnerships approach. The Government launched the forest and climate leaders’ partnership at COP 27, and also fund the partnership for forests, which has channelled more than £1 billion of private investment into forests and sustainable land use, and brought more than 4 million hectares of critical landscapes under sustainable land use.

Secondly, the Government are working to address due diligence for illegal deforestation using the Environment Act. The most relevant UK businesses that use forest-risk commodities or products derived from them will be required to ensure those products are produced in compliance with relevant local laws. Thirdly, the Government are supporting the development of a coherent international approach on disclosure and management of nature-related risks and impact.

Since our debate in Committee, the Taskforce on Nature-related Financial Disclosure has published its latest draft framework. This now includes recommended metrics and associated governance strategies for businesses to understand and mitigate deforestation in areas of direct or indirect operational control. We committed in the green finance strategy to explore how the final TNFD framework should be incorporated into UK policy and legislative architecture, and we will start this work later this year, once the final framework is published.

I personally made the case to the International Sustainability Standards Board, while at COP 15 in Montreal, that such standards should be considered for integration into its work. If that happens, global standards are genuinely within reach. I acknowledge that TNFD or any subsequent global standards do not prohibit the financing of deforestation in itself but, as a disclosure framework, it is the bedrock for action, both by incentivising firms to take action on the risks that they identify and allowing the Government to consider taking further regulatory action after the establishment of such a disclosure framework. I hope, therefore, that I have explained why the Government cannot accept the amendments, but have also demonstrated that effective action is under way to address noble Lords’ concerns in these areas.

Turning to Amendments 93 and 113, also from the noble Baroness, Lady Hayman, in the updated green finance strategy, the Government have already recognised that decisions about investing in the context of systemic risks such as climate change and biodiversity loss are complicated, in particular for pension funds. The Law Commission’s 2014 report suggested that fiduciary duties mean that non-financial factors can be considered as part of investment decisions if trustees have good reasons to think their members share their concerns and if such decisions do not involve a risk of significant financial detriment to the fund.

However, the Government recognise that trustees would like further information and clarity on their fiduciary duties in the context of the transition to net zero, and that is why we are taking steps to ensure that such clarity is forthcoming. Later this year, DWP will examine how closely its stewardship guidance is being followed, including whether incorrect interpretations of fiduciary duties are playing a role in this area. The financial markets and law committee, which includes representatives from both DWP and the Treasury, is working to consider issues around fiduciary duties and sustainability and whether further action or clarity is needed.

The Government and regulators will hold a series of round tables with interested stakeholders to gather further information on what can be done to clarify fiduciary duties. This extensive programme of work will make clear to the Government and regulators whether and where further action may be required to ensure that trustees fully understand how they can take the transition to net zero into account while meeting their fiduciary and trustee duties. The Government are confident that they have appropriate vires to act on the outcomes of this extensive programme of work; at this time, we see no reason to take additional powers.

I turn to Amendment 7 from the noble Baroness, Lady Wheatcroft. We recognise that transparency is crucial to effective stewardship and corporate governance by pension funds. We also acknowledge the argument that the existing voting disclosure framework is not working as well as it could. That is why, in November, the FCA convened the independently chaired Vote Reporting Group, following the recommendations made by the Taskforce on Pension Scheme Voting Implementation to develop a standardised and decision-useful framework for voting disclosure.

That group is due to publish its first output soon. The Government believe that it would be more appropriate to wait for the group’s output before requiring the FCA to produce further rules and regulation. When reviewing the group’s output, the Government will carefully consider whether its recommendations go far enough to address existing issues of transparency, and what further action may be appropriate. We therefore believe that this amendment is premature.

Turning to Amendment 114, also from the noble Baroness, Lady Wheatcroft, I am grateful to noble Lords for highlighting the importance of the Government’s own sustainability disclosure requirements framework in fulfilling our goals for green finance in the UK. This is something we can all agree on. It is worth clarifying a number of points in relation to the regulators’ powers in this area. The noble Baroness is right that, previously, the Government have said that we need to bring forward primary legislation to implement SDR. The relevant departments and regulators would then set out sector-specific requirements through their usual rule-making powers.

Since then, the Government have considered this position further. We do not consider there to be any limitations on the implementation of SDR, as was set out in the green finance strategy. We have therefore adapted our approach in the light of that. To be absolutely clear, the FCA has sufficient powers for authorised financial services firms and listed companies to take forward SDR; indeed, it is already doing so, building on the work of the TCFD.

My noble friend Lady Altmann and others asked how the policy statement applies to pension schemes; there is also the question of how SDR can be applied to pension funds. The policy statement in the Government’s amendment applies only to the PRA. The FCA will be required to have regard to the Treasury policy statement; it will therefore apply to FCA-regulated pension schemes, such as personal pension schemes. DWP is responsible for occupational pension schemes and has the powers to take forward SDR in the areas set out in our green finance strategy. The Government can therefore directly ensure that their priorities are addressed in SDR requirements for occupational pension funds.

The noble Lord, Lord Davies, asked what “have regard” means in the context of the Government’s amendment. I can answer that. The “have regard” approach obliges the regulators to consider the Government’s policy goals in their rule-making and increases scrutiny of their efforts to do so while respecting the regulators’ independence, in line with the overall framework for financial regulation in the UK. In this respect, the aim of the amendment and the “have regard” approach is to ensure that the Government’s ambition and policy in relation to SDR are properly considered by the regulators when making rules. I hope that, when it comes to the powers to implement SDR, I can reassure noble Lords that, having reviewed this issue in the context of the policy commitments we made in our green finance strategy, we are assured that we have the powers we need to take this forward.

I want to end on the point about commitments versus action. This is an area where there is not just government commitment but government action. We were the first country to implement TCFD reporting across the economy. Not only that: we used our G7 presidency to get other countries to commit to doing so too. We have pushed for this to become an international standard. We expect that to come out this month. We have set out how we will assess that for adoption in the UK. Transition plans are already a requirement for FCA-regulated firms, and we have set out our commitment to taking that further for large companies in the real economy later this year. The FCA already has its consultation on SDR and labelling out, so action is already under way. Again, this demonstrates that the regulators have the powers they need to take forward policy in this area.

I will not detain the House any further. I beg to move government Amendment 4.

Amendment 4 agreed.

Schedule 5: Financial promotion: related amendments