Amendment 4

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

Alert me about debates like this

Photo of Baroness Hayman Baroness Hayman Crossbench 6:15, 6 June 2023

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.