Amendment 4

Part of Financial Services and Markets Bill - Report (1st Day) – in the House of Lords at 7:45 pm on 6 June 2023.

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Photo of Baroness Penn Baroness Penn The Parliamentary Secretary, HM Treasury 7:45, 6 June 2023

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