Financial Services and Markets Bill

Baroness Sheehan Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Baroness Sheehan (LD)]

My Lords, I declare my interest as a director of Peers for the Planet. The public want action on climate change. When people are given a choice, they are voting with their feet—the uptake of electric cars, which is beating all expectations, is a case in point. It is clear that businesses and financiers also want a robust net-zero framework. The UK Sustainable Investment and Finance Association, an organisation of over 300 financial services firms with over £19 trillion in assets under management, published recommendations of a number of “critical actions” to move the UK’s financial sector towards net zero. The Aldersgate Group business alliance, which has a collective global turnover of over £550 billion, has noted how the

“lack of clarity on the direction of public policy confuses businesses and investors and leads to an ineffective allocation of money.”

People and businesses want action because the dire impacts of climate change are visibly here with us now, and the increasing ferocity of climate events has taken even pessimistic scientists by surprise. The Met Office has confirmed that 2022 was the hottest year on record in the UK, and 2023 is set to be even hotter. This legislation should reflect that concern.

I will leave it to others far more knowledgeable than myself to speak on the technicalities of the regulatory framework for financial services and to say whether the Bill is fit for purpose. I will confine the rest of my remarks to what I believe to be a serious shortcoming of the Bill, which is its almost dismissive approach to the role that money plays in safeguarding the health and natural capital of our planet.

To start with deforestation, the agriculture, forestry and land use sector produces almost a quarter of all global greenhouse gas emissions. The Global Resource Initiative task force, established by the Government and comprising finance and private sector leaders, has independently recommended the introduction of new legislation applying deforestation and human rights due diligence obligations to UK financial institutions. Its report is worth reading—the stakes are high. It states:

“No pathway to 1.5 degrees is possible without addressing forest loss”.


However:

“If properly protected and restored, forests and other ecosystems could provide more than one-third of the total CO₂ reductions required to keep global warming below 2° C. This decade provides a narrowing window of time to act.”


Deforestation is a “top priority area” in the UK’s net zero strategy, yet the UK is a major financier of global deforestation. The Government could have used the Bill to follow through on the GRI’s recommendation and stop UK financial institutions bankrolling forest destruction abroad to the tune of hundreds of billions of pounds. Why did they not do so?

I have a list of other concerns, which include: the regulators’ requirement to “have regard to” climate goals is inadequate to support net zero and nature; the removal of sustainable disclosure requirements from the Bill is causing concern; there is a need for a better interpretation of “fiduciary duty” to help clarify that climate change is financial risk; and, last but not least, the implications of the abolition of Solvency II rules and the safeguarding of environmental targets by a replacement regime—information on that would be welcome.

In conclusion, the markets serve a societal function, but they are there to serve us, and it is up to the Government to set the parameters within which the market will deliver the social and environmental values without which we cannot thrive.

Financial Services and Markets Bill

Baroness Sheehan Excerpts

Committee stage
Monday 30th January 2023 Grand Committee

Moved by

[Baroness Sheehan]

42: After Clause 23, insert the following new Clause—
“Vote reporting
(1) The FCA must—(a) make rules requiring relevant FCA-regulated persons to give clients information on request about the exercise by the persons or on their behalf of all voting rights attached to assets in which the clients have an interest, including in respect of any specified description of scheme or investment vehicle, and(b) issue guidance in respect of the format of the information provided.(2) A Minister of the Crown must make regulations requiring other relevant persons to give beneficiaries information on request about the exercise by the persons or on their behalf of all voting rights attached to assets in which the clients have an interest.(3) In this section—“relevant FCA-regulated persons” means—(a) managers of personal pension schemes within the meaning of an order under section 22 of FSMA 2000 (regulated activities),(b) managers of stakeholder pension schemes within the meaning of such an order,(c) persons managing investments within the meaning of an order under section 22 of that Act, including the activity described in paragraph 6 of Schedule 2 to that Act,(d) persons effecting or carrying out a contract of insurance within the meaning of an order under section 22 of that Act;“other relevant persons” means—(a) trustees of occupational pension schemes within the meaning of section 1 of the Pension Schemes Act 1993 with £1 billion or more in assets;(b) an administering authority of the local government pension scheme.”Member’s explanatory statement
This amendment requires (a) the FCA to make rules requiring fund managers, personal pension providers and insurers to give information on request to clients, and (b) Ministers to make regulations requiring pension funds to give information on request to beneficiaries, on the exercise of all voting rights on their behalf, however those rights are held.

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[Baroness Sheehan (LD)]

My Lords, I rise to move Amendment 42 in my name, to which the noble Baronesses, Lady Hayman and Lady Wheatcroft, have added their names; I thank them for their support. I refer noble Lords to my interest as per the register as a director of Peers for the Planet.

Amendment 42 seeks to inject a much-needed dose of realism into this Bill. I quote my noble friend Lady Kramer’s summing up of the debate on it at Second Reading:

“This is an industry that knows how to promote itself and speaks with a great sense of invincibility.”—[Official Report, 10/1/23; col. 1394.]


Yet this is also the industry that comprehensively crashed the economy in 2007. Some individuals walked away with accumulated profits, leaving the taxpayer to pick up the costs, with the most vulnerable suffering the most—as ever—through the years of austerity that followed.

I am sure that there are those who say that the financial services sector is our biggest asset; that we must unleash its potential, not shackle it with undue openness and transparency; and that we should most definitely not saddle it with an overarching requirement to safeguard the future of the one and only planet we have. However, I profoundly disagree, which is why I think that a healthy dose of realism is needed—not wishful or short-termist thinking, but reflection on what is happening to our planetary ecosystems in the real world and whether our sons and daughters will curse us in future as the last generation that could have acted in time to save the planet but did not do so.

Money matters. Money drives our economy and all our futures. We need to be able to find out easily what is being done in our name with our money. Amendment 42 is a simple but necessary one. It would require the FCA to make rules requiring fund managers, personal pension providers and insurers to give information on request to clients. It would also require Ministers to make regulations requiring pension funds to give information on request to beneficiaries, on the exercise of all voting rights on their behalf, however those rights are held.

This amendment is necessary because, at present, investors cannot easily find out how fund managers managing their money have voted on their behalf. This cannot be right. Good disclosure principles dictate that investors should be able to find what they need easily, be able easily to understand what they find and be able to use what they find to make informed investment decisions. It also goes without saying that good disclosure principles are a precursor to good governance and essential to a stable financial sector.

Noble Lords will be aware that with ownership of listed companies comes the opportunity to exercise the right to vote at the company’s AGM, including on the appointment of the chair and other independent directors, to accept or reject the annual report and accounts, to appoint auditors, and to agree pay arrangements and any shareholder resolutions which have been tabled or to table resolutions if they meet the minimum threshold. Voting with or against the management and supporting or rejecting shareholder resolutions is an incredibly important tool in ensuring good corporate governance, good long-term investor returns and good economic outcomes more broadly.

Of course, it is also important for the journey to net zero. The Treasury acknowledges this in its report Greening Finance: A Roadmap to Sustainable Investing, which was published in September 2021. In that report, the Government set out their expectations that pension funds and investment managers should

“Actively monitor, encourage, and challenge companies by using their rights and direct/indirect influence to promote long-term, sustainable value generation”


and

“Be transparent about their own and their service providers’ engagement and voting, including by publishing easily accessible, high-quality quantitative and narrative reporting.”


This is what Amendment 42 would do. It is necessary because, regardless of the Government’s expectations, the reality is that the complicated architecture of investment with large numbers of intermediaries, such as investment managers, insurers, consultants and additional fund managers, means that despite efforts by the DWP and the FCA to give pension savers greater transparency about how votes connected with their investments have been cast, it is still practically impossible for savers and often difficult even for the pension funds to get the information.

It is true that the FCA has made rules under the shareholder rights directive, which—in another world many millions of years ago now, it seems—the UK Government championed to improve levels of corporate governance and oversight across the EU. However, in DWP’s implementation of the directive, the pension fund must publicly report on only those which it considers significant. Guidance issued by the pension funds trade body—the Pensions and Lifetime Savings Association—recommends that around 10 out of at least 1,000 votes in which a pension fund typically has a stake should be disclosed. A fundamental weakness is that the pension fund does not have a statutory right to information on unreported votes from the fund manager, and the pension saver does not have a statutory right to information on unreported votes from the pension fund. Obscurity rules, it seems. I guess that even this weak reporting requirement will be swept away by the Retained EU Law (Revocation and Reform) Bill.

The difficulties with obtaining information on voting were covered at length by the DWP-commissioned task force on pension scheme voting implementation—I think it is called TPSVI—which reported in September 2021 and recommended that the DWP and the FCA should closely monitor delivery of vote reporting at fund level. It recommended that if investment managers do not deliver by the end of 2022 the FCA should legislate or issue handbook guidance to deliver fund-level reporting. Managers have not so far delivered.

In its letter to the DWP in October 2022, more than a year after the report, the FCA indicated that it was setting up a vote-reporting group with a view to having draft proposals by the middle of this year. However, the solution still seems entirely reliant on voluntary participation by investment management firms, which I understand are lobbying furiously against standardised disclosure. Some firms do not wish to provide reports on request because it will make them look bad and some do not want to invest in the technology to allow them to provide the data, but neither of these positions is acceptable today.

It was surprising to hear, in response to two Parliamentary Questions from the noble Baroness, Lady Ritchie of Downpatrick, that the Government do not appear to know anything at all about the voting records of UK-authorised fund managers and pension funds in relation to climate-related resolutions at AGMs. Yet the Government are reliant on the financial sector to take strong action on climate change through the exercise of voting rights.

For 16 years, the Government have had powers to require comprehensive vote reporting via the Companies Act 2006, but they have not yet used them. My amendment is intended to give the FCA, which regulates the voting behaviour of fund managers and insurers, the duty to make rules, rather than BEIS or the Treasury.

The US Securities and Exchange Commission regularly updates requirements for standardised disclosure of voting by fund managers, which must be presented in a consistent and machine-readable form, so action by our regulators in the UK is long overdue. Smart regulation is a vital aspect of retaining competitiveness, and this amendment is intended to be smart by giving the FCA the nudge to make rules and ensure that reporting is standardised, with similar provisions for pension funds, but it is not prescriptive on the details. If the FCA intends to make comprehensive reporting in standardised form mandatory, the Minister should welcome the amendment. I look forward to his response. I beg to move.

[Baroness Wheatcroft (CB)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Sheehan, and I echo everything she said. I apologise to the Committee that I was unable to be at Second Reading.

I believe that this amendment is necessary if we are to have a properly active shareholder democracy in this country. At the moment, shares are not held by the majority of individuals directly; they are held through institutions, and shareholders tend to be passive. The individual shareholder does not know what is happening with his or her money. Yet when we look at how companies behave, all too often, one is reduced to saying, “How on earth could the owners allow that to go on?” Whether it is overpaying executive directors while the people at the bottom of the pile in the business are dependent on universal credit, paying the executives in the water companies huge bonuses while they pour sewage into our rivers or continuing to do business in Russia when the country is absolutely begging people to come out of Russia, too many companies behave badly, and they are not held to account.

It is very rare for institutional investors to vote against a remuneration report to the extent that a majority forces the company to think again. It is probably even rarer for institutional investors to vote against a proposed merger when it will be in the long-term interests of the executives, perhaps, but not of the workers in the UK.

We need individual investors to take a serious interest in what the business is doing. Not all of them will, but for those who are interested, it should be very easy for them to find out how their money—their shares—are being voted. It is a perfectly simple thing to do. Websites could easily be made accessible to show how the vote has been cast on every issue with every company at every annual meeting. Technology would find that quite straightforward. The majority of private individuals with investments in pension funds and insurance companies would not find it difficult to access that information, but it has to be made available.

It has to be an absolute requirement that all companies make all that information available, not just a fraction of it, and the sooner the regulators and the Government move towards that position, the better. The more information is out there, the more individuals will look at it and decide, for instance, that their company—the company in which they have a stake through their pension fund or insurance company—is not behaving as they would wish it to, and they can begin to put pressure on those who hold their shares. That might be because they are passionately involved in the employment issue or in remuneration, or because they want to see evidence that the company is taking its net-zero responsibilities seriously, and in many cases companies now have a vote on the net-zero target and how they are meeting it. Let us give the majority of people who hold shares through intermediaries the chance to see how those shares are being voted and to decide for themselves whether they approve of the way their shares are being used.

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[Lord Harlech (Con)]

My Lords, I thank the noble Baronesses, Lady Sheehan, Lady Wheatcroft, Lady Hayman, Lady Bennett of Manor Castle and Lady Kramer, for raising voter reporting.

The Government recognise that the ability of investors to exercise their voting rights is an important issue, which is why they are taking steps to address barriers in this area. The Financial Reporting Council’s world-leading UK Stewardship Code 2020 already requires detailed and annually assessed reporting from its voluntary signatories on voting disclosure, and the recent stewardship guidance for pension scheme trustees from the Department for Work and Pensions, which included substantial guidance on the exercise of voting rights, came into effect in October 2022.

However, the Government recognise that there is still more work to do. The DWP’s guidance includes sustainability-related issues, and its stewardship guidance focuses on areas where existing policies and reporting appear to be weakest: stewardship and, to a lesser extent, consideration of financially material ESG factors and non-financial factors. Stewardship encompasses a range of activities, and this guidance focuses specifically on voting and engagement; it is about creating long-term, sustainable value for savers and includes recognition of environmental and social governance factors, which is encompassed in the DWP’s guidance.

Furthermore, the DWP has already made a public commitment to review voting disclosure requirements in the response to the consultation on Climate and Investment Reporting: Setting Expectations and Empowering Savers. This review will be conducted jointly with other government departments, including the Treasury, and regulators. This will ensure consistency across the investment chain. The review will begin in late 2023, which will give the Pensions Regulator time to gather evidence on how the DWP’s existing guidance has influenced standards of voting disclosure.

[Baroness Sheehan (LD)]

Why is this review starting in late 2023 necessary when substantial reviews have already been carried out and there are various ongoing task forces? I am really at a loss to understand why this is necessary.

[Lord Harlech (Con)]

Is the noble Baroness asking why the review is necessary or why it is scheduled for that time?

[Baroness Sheehan (LD)]

It would be useful to have answers to both: why is a review necessary and why is it scheduled so late?

[Lord Harlech (Con)]

The review is necessary because it is important to take into account multiple government departments, including the Treasury, and non-governmental bodies such as the regulators. I believe it is scheduled for that time to facilitate the gathering of evidence and set out the scope of the review.

[Lord Harlech (Con)]

If I could go on, perhaps my further remarks will address the noble Baroness’s question; if not, I will endeavour to write to her, if that is all right.

In November 2022, the FCA convened an independently chaired vote reporting group following the recommendations made by the Taskforce on Pension Scheme Voting Implementation. The aim of this is to develop a more comprehensive and standardised vote disclosure framework for asset managers, ensuring a fair, proportionate and practicable approach. The group’s draft proposals are expected to be published in April 2023 for public consultation. Moreover, local government pension scheme funds are already required to publish an investment strategy statement, including their policy on voting rights and ESG matters, with guidance on annual reports also encouraging transparency on how voting rights are exercised.

The FCA’s Conduct of Business Sourcebook—COBS—Shareholder Rights Directive rules already require all investment firms to develop and disclose an engagement and voting policy. This includes how the engagement is integrated into the investment strategy; how environmental, social and governance issues are monitored; and how conflicts of interests are managed. This policy must be reported on annually online.

The Government believe that it would be premature and unnecessary to amend voting disclosure legislation at the current time, given the initiatives that are already under way. I therefore ask the noble Baroness, Lady Sheehan, to withdraw her amendment.

[Baroness Sheehan (LD)]

I thank the Minister for his response. I also thank the noble Lords who spoke in support of my amendment.

I found the Minister’s response unsatisfactory. It did not address any of the issues that have been raised. We know that the voting reporting group is doing its work at the moment. The issue that I wanted the Minister to address is that participation is going to be voluntary; over the past 17 years, that has not produced any further transparency of the kind that we are looking for in this amendment.

Before he sits down, I want to ask the Minister a question about the rules made under the Shareholder Rights Directive. If the rule Bill becomes an Act, will there be a void there? Will there be nothing in its place? I assume that that will be the case.

[Lord Harlech (Con)]

I will have to write to the noble Baroness.

[Baroness Sheehan (LD)]

Undoubtedly, there are a great deal of unanswered questions but, for now, I beg leave to withdraw the amendment.

Amendment 42 withdrawn.

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[Baroness Sheehan (LD)]

My Lords, I rise to speak to Amendment 69 in my name and those of the noble Baronesses, Lady Hayman and Lady Young of Old Scone. I should say at the outset that I support all the amendments in this group. It is heartening to see support from across your Lordships’ House for strengthening the Bill’s remit on green finance.

My noble friend Lady Northover is unable to be with us today as she has Covid. I know other noble Lords will join me in wishing her a speedy recovery.

[Noble Lords]

Hear, hear.

[Baroness Sheehan (LD)]

I thank your Lordships. In my noble friend’s absence, I will speak briefly in support of the amendments to which she has added her name.

I turn first to Amendment 69, which should not have been necessary if the Government truly understood how intertwined the twin threats of climate change and nature loss are. They are two sides of the same coin. Climate change is destroying nature and the destruction of the natural world is accelerating climate change; it is us humans who have set this downward spiral in motion, and it is us who can put a stop to it. My Amendment 69 would add nature to the new regulatory principle on net-zero emissions; I tabled it purely for the sake of completeness and to make the point that the Government have, at best, been careless in leaving out nature from the single line that they have devoted to this issue in the entire Bill. I quote from the Explanatory Notes:

“This clause embeds the UK’s net zero target into the regulatory principles for the PRA and the FCA.”


It patently does not do that. My tabling this amendment in no way takes away my support for the series of amendments in this group tabled by the noble Baroness, Lady Hayman, which is a far more satisfactory way of embedding the net-zero target and nature loss into the Bill. She has already introduced her amendments in such comprehensive style that I have little left to say on them.

In any case, let me turn to those amendments in the names of the noble Baroness, Lady Hayman, my noble friend Lady Northover and the noble Lords, Lord Vaux of Harrowden and Lord Randall of Uxbridge. I strongly support their Amendment 44, as well as the consequential Amendments 53, 56, 62 and 68. That is because Amendment 44 would introduce a climate and nature secondary objective for the FCA, alongside the competitiveness and growth objective. That has to be the correct place for this objective. It must be clear that it is an overarching objective for the two most important regulators in the financial space.

Government is as government does. Failure to put in place firm rules on the drivers of the economy, the institutions of the financial services and markets sector, would be irresponsible on the part of the Government. The reason why this is important is because there will inevitably be difficult decisions ahead, where the fork in the road points one way to a short-term gain but with negative effects on the environment while the other fork points to a safer, greener investment that will mature later but will be beneficial to future generations. Decisions must be made to favour the greener, more sustainable path. There must be no incentive to take the quick buck to the detriment of the carbon budget or nature.

Amendment 65 in the name of the noble Lord, Lord Tunnicliffe, is not in this group and will appear later. However, it is interesting because it probes such a dilemma, albeit from the point of view of potential conflict between primary and secondary objectives. I look forward to the debate on that amendment.

Where in the Bill are the safeguards for future generations, the respect for nature and the recognition and acceptance of the findings of the seminal Dasgupta review? Nowhere. It unleashes the power of money to do its worst and seek short-term profit. I say to the Minister, for whom I have a great deal of respect, that a reference to the medium and long term does not cut it without clear direction to the financial sector that green growth and international competitiveness in long-term, net-zero and nature-compatible investment is where sound investment decisions must be directed.

In the US, the IRA—the Inflation Reduction Act—is showing the power of government to unleash private investment into this century’s big growth opportunities. All that UK investors need is a regulatory nod from the Government, then they will take money to where it can deliver good green growth. Growth is the holy grail and future growth will be green; of that, there is no doubt. We will let UK Ltd down big time if we do not put in place policy and regulatory levers to deliver the confidence that business needs to move forward.

In the blink of an eye, the US has transformed international investor confidence in renewable energies. The EU will follow suit. Where are we in giving the clear direction that business is calling for? Chris Skidmore’s review and the report from the Industry and Regulators Committee by the noble Lord, Lord Hollick, made it clear that there is a large quantity of money waiting for a clear signal from the Government to invest in the UK. In the words of the Minister at Second Reading,

“this Bill is a landmark piece of legislation—the most ambitious reform of our financial services regulatory framework in over 20 years.”—[Official Report, 10/1/23; col. 1331.]

Our Government cannot let this historic opportunity pass by without adding those words to a third secondary objective: climate change and nature.

I have added my name to Amendment 208 in the name of the noble Lord, Lord Tunnicliffe, for the simple reason that the Government have stated their ambition for the UK to become the world’s first net-zero financial sector yet we are still waiting for an updated green finance strategy. For the regulators to be able to do their job on net-zero and nature targets, we must have sustainable disclosure requirements and a green taxonomy.

Finally, I support the amendment in the name of my noble friend Lady Northover, which seeks to place a requirement on the PRA and the FCA to report on the ways in which they have promoted and incentivised green finance and green investment. It would be very useful if that information were placed in Parliament.

To conclude, we do not have the luxury of waiting another 20 years for the next financial services Bill. This is the Bill that will decide whether the transformative change that we need in our big investment decisions gets the nod from the Government. The answer has to be yes.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I rise to speak to Amendment 69A in my name and briefly express my support for all the other amendments in this group. They have been very ably and clearly introduced.

I had something of a flashback to the Pension Schemes Bill, which was the first time I spoke in this Room. I believe that that was the first time that climate had ever appeared in any finance Bill. The noble Baroness, Lady Sherlock, did a great job of supporting me through that: I had no idea when to speak so she gave me a nudge with her elbow. That was three years ago. We have now got to the point where we are trying to get nature to join climate, which is so obviously necessary.

As you might expect from a Green, my Amendment 69A goes further. I do not know whether the Minister can respond to this but the fact is that the economy and financial system are complete subsets of the environment. There is no financial system on a dead planet, to amend a phrase. All the amendments on climate and nature are clearly essential but we know that they do not fully cover the way in which we are breaking the limits of this planet.

Financial Services and Markets Bill

Baroness Sheehan Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

[Baroness Meacher (CB)]

My Lords, I wish to speak extremely briefly to support my noble friend Lady Boycott—I am sorry, I did not see the noble Baroness, Lady Sheehan.

[Baroness Sheehan (LD)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Wheatcroft. I am sorry that I kept bobbing up and down while she was speaking.

This is an essential group of amendments, several of which I have added my name to. They are important because billions to trillions of pounds will be invested over the near to medium term into an economy that is transforming with increasing rapidity into a low-carbon one. It is clear that climate risk is financial risk: returns on investments and the ability to pay back loans are exposed to the risks of rising temperatures, as evidenced by recent catastrophic climatic events, and action taken by policymakers to transition to a low-carbon economy, such as the US Inflation Reduction Act.

Businesses, big and small alike, are poised to pull the start trigger on investments but are held back in the UK by lack of clarity about the Government’s intentions. The Government have made the right noises but not followed through, leaving doubt and uncertainty in their wake. The situation is urgent. The US Inflation Reduction Act is a game-changer, and the EU will follow suit. Green investment is the future. Our businesses know that but are hesitating to commit, waiting for a clear signal from the Government that they are 100% behind the green revolution. Currently, the messages are rather mixed. 

For the sake of the debate’s flow, I will address the amendments to which I have added my name before addressing my Amendment 232. I start with Amendment 168, in the name of the noble Baroness, Lady Worthington. Climate risk is not specifically factored into either the regulatory capital risk requirements for banks or the solvency requirements for insurers. I support Amendment 168 and have added my name to it. I have pursued the theme of stranded assets for several years. I am concerned that the taxpayer is not left to pick up the cost, for example, of decommissioning oil and gas platforms in the North Sea abandoned after profits have been creamed off. How much better it would be if the Government clearly laid out a framework, via their regulator, that the risks in financing fossil fuel exploration, exploitation and production, as well as other climate risk-exposed sectors, must be taken into account prior to investment decisions being made.

I move on swiftly to Amendment 199 on deforestation. After fossil fuels, deforestation is—as the noble Baroness, Lady Boycott, pointed out—the second-largest contributor to global warming. It is responsible for 12% of all global greenhouse gas emissions. Scientists tell us that, to stand any chance of limiting global temperature rise to 1.5 degrees centigrade, commodity-driven deforestation must be ended by 2025.

What happens to rainforests matters to us all. In fact, although thousands of miles away, the UK has a large deforestation footprint. It is for this reason that, in July 2021, I and noble Peers from across the House tabled amendments on the issue to the Environment Bill, now the Environment Act 2021. I was pleased to see the noble Baroness, Lady Meacher, poised to add her contribution to this. I commend the Government for the action that they have already taken on this issue. Schedule 17 to the Environment Act was the first time that forest risk commodities have been addressed in legislation.

As already mentioned by the noble Baroness, Lady Boycott, Sir Ian Cheshire, the former chair of Barclays and head of the Government’s own Global Resource Initiative task force, tells us in an open letter dated 23 January and addressed to the Minister, the noble Baroness, Lady Penn; Andrew Griffith, the Economic Secretary to the Treasury; and all Members of the House of Lords:

“Under forthcoming secondary regulations, large companies will be required to establish a due diligence system to assess and mitigate the risk of importing commodities grown on illegally deforested land, reporting annually on their progress”.


When the Minister comes to reply, can she tell us when we may expect to see these regulations?

Sir Ian goes on to say that

“while this is an important step, regulating supply chains alone is not enough”.

It is therefore recommended that

“the Government should make it illegal for financial institutions to invest in or lend to supply chain companies that are unable to demonstrate forest risk commodities have been produced in compliance with ‘local laws’ (i.e. legally)”.

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[Baroness Penn (Con)]

You should finish.

[Baroness Sheehan (LD)]

Thank you. I come to Amendment 232 in my name on green savings bonds. My reason for tabling this amendment is to draw attention to the success of the National Savings and Investments green savings bonds, which are an important part of the green finance landscape. Really it is a pat on the back for the Government—much-needed, maybe —so the Minister should view this as an opportunity for the Government to congratulate themselves. For me, it is an opportunity to ask them what more they can do to raise awareness of these bonds and promote them more aggressively. After all, the Climate Change Committee identified public engagement and behaviour change as major elements in the success of measures to keep the planet in a fit state for future generations, but many people complain that knowing what to do for the best is confusing. These bonds represent a safe way of putting their money to work for the benefit of all our futures.

Here is the background. The NS&I’s new green savings bonds became available from 22 October 2021, introduced by the then Chancellor, Rishi Sunak. They pay a fixed rate of interest over a three-year fixed term, and the current rate is 4.2%. The minimum deposit is £100 and the maximum is £100,000 per person. NS&I’s savings accounts are long-standing, recognisable and safe. They are hugely popular with UK savers, not least because investments are totally safe, being 100% backed by the Treasury. There is not the usual limit of £85,000 that there is with providers covered by the Financial Services Compensation Scheme. Many savers want to make green and ethical investment choices. Work by the Cambridge Institute for Sustainability Leadership found that the median saver would prefer a sustainable fund, even if they have to sacrifice up to 2.5% returns.

Money saved with NS&I’s green savings bonds is used to fund six types of green projects: making transport cleaner; switching to renewable energy; improving energy efficiency; pollution prevention and control; protecting living and natural resources; and adapting to climate change. These projects are publicised and clearly audited for climate and nature benefits. Another benefit is that raising funds through NS&I can actually give greater financial stability than raising funds on the financial markets. During the meltdown in borrowing costs following the botched “fiscal event” in September last year, investors in NS&I did not dump their bonds because they could not do so; there was no panic in NS&I’s offices in Blackpool, Glasgow, Birkenhead and Durham—please note, none in the south-east—because the bonds are not transferable. Further, when a larger amount of a Government’s debt is held by their citizens, it is less prone to volatility. There is lots to like about the products. There are few cash-based green savings products in the market, especially ones with such a high level of transparency about their use of proceeds.

My amendment is intended to put in the public domain at regular intervals the contribution made by the NS&I’s green bonds and the like towards UK green financing and the consequent reduction in targeted greenhouse gas emissions. It is worded in such a way as not to make proposals over the amount of government borrowing or how they should raise taxes, only to seek information on how the Government are raising funds for green investment. It would be helpful if the Minister could say how much has been raised through the Government’s green bonds to date, how much is forecast to be raised annually in future and what the Government’s ambition is for their future, including in relation to the promotion of these products.

Committee adjourned at 8.21 pm.

Financial Services and Markets Bill

Baroness Sheehan Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

[Baroness Sheehan (LD)]

I find the noble Lord’s contributions really very valuable. But on supply and demand, for him to label us people who just do not want fossil fuels is so incorrect. We need more energy, but it does not have to come from fossil fuels. The fossil fuel industry is supported to an extent.

[Lord Lilley (Con)]

By whom?

[Baroness Sheehan (LD)]

It has been supported by Governments, through subsidies, through tax breaks, through decommissioning tax reliefs—any number of routes for support exist. So I say to the noble Lord: please do not try to categorise the noble Baronesses who have spoken on this issue as people who do not like fossil fuels. What we do not want is for fossil fuels to be needlessly supported in the future when they are patently no longer able to support themselves.

[Lord Lilley (Con)]

I agree with the noble Baroness. I do not want to support fossil fuels. If she looked at the tax revenue levied on the production and consumption of fossil fuels, she would see that it is enormous. To describe that as a subsidy or support is very strange. But to the extent that there is anything that is a subsidy, I am with her: let us remove it, but that is not what these amendments do. They simply aim to make it more expensive to invest in fossil fuels. I do not know whether the noble Baroness, Lady Castle—whatever it is; bouncy castle—is upset at being described as being against fossil fuels. I would have thought that she would be positively flattered. I do not know whether the noble Baroness, Lady Drake, is offended at being told that she is trying to discourage the production of fossil fuels; I thought she was. I am simply saying let us stick to the CCC’s recommendations of phasing out demand and we can leave the supply side to look after itself. We should not pretend that we know better than the industry what is likely to prove excessive or insufficient.

[Baroness Sheehan (LD)]

Before the noble Lord sits down, perhaps I could say a little about stranded assets; I think we have had this exchange before. If stranded assets transpire—from where I am sitting, I think that is inevitable—what assurance can he give that the cost of those stranded assets will not be socialised?

[Lord Lilley (Con)]

Clearly, the Government ought to deal with that problem. These amendments do not deal with that problem. If there is a problem, if the noble Baroness thinks that BP or Shell will go bankrupt and be unable to pay for the liabilities it incurred, we should take steps to deal with that situation. I do not think it is likely but if she thinks it is that serious, she should table amendments that would deal with that, but these amendments do not. They simply make it more expensive to invest in things which we are going to continue consuming, according to the Government’s own plans and the CCC’s own projects and recommendations, in considerable quantities until 2050.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I welcome this chance to continue this Committee’s important debate on amendments concerning green finance. As I stated in a previous Committee session, the Government are committed to fostering sustainable finance in the UK and will shortly publish an updated green finance strategy to that effect.

I will speak first to Amendment 168 from the noble Baroness, Lady Worthington. It is of course correct that all models have their limitations in depicting the real world but the Bank of England’s models have considered the views of experts in the field; they therefore do not need to be directed to do so. The scenarios used in the climate biennial exploratory scenario, or CBES, were formed by the Network for Greening the Financial System, an international network of central banks in which the Bank of England plays a prominent role. The scenarios have been produced in partnership with leading climate scientists, leveraging climate-economy models that have been widely used to inform policymakers—not to mention being used by and continuing to be used by the Intergovernmental Panel on Climate Change. These scenarios are updated continually by the Network for Greening the Financial System, which also ran a public survey welcoming feedback on its most recent iteration of climate scenarios.

It is also not the case that CBES is the PRA’s only tool to manage climate risk. It is actively using its position as a supervisor to ensure that firms are not materially undercapitalised for climate risks, setting out its expectations in its supervisory statement published in 2019. Furthermore, the PRA is an active member of two of the leading international standard setters: the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors. The Bank is actively participating in both forums to ensure that the regulatory frameworks for the banking and insurance sectors address potential gaps in the management of climate-related financial risks. This work will flow through to our domestic framework and at the same time ensure international co-operation on what is fundamentally a global issue.

I now turn to Amendment 199 in the name of my noble friend Lord Randall of Uxbridge, which is supported by other noble Lords in this Committee. The Government agree that the financing of illegal deforestation is a serious global issue that must be tackled. However, this amendment would involve implementing a new and untested regulation that would impose a broad supply chain rule on all regulated financial services firms. It would currently be very difficult, time-consuming and expensive for UK financial services firms to ascertain whether firms or products that they invest in are exposed to forest risk commodities in compliance with local laws.

In introducing this amendment, the noble Baroness, Lady Boycott, referred to the provisions in the Environment Act 2021. These provisions will apply to the supply chains of large UK corporates. However, UK-based banks and fund managers engage in lending and investment activities with companies in jurisdictions across the globe, not just commercial activity in the UK. There are currently no consistent, equivalent disclosure requirements to those that will be set out under the Environment Act 2021 in jurisdictions across the globe. Given that, capturing the activity of all of their customers and supply chains would not be as simple as adding an extra stage of disclosure to the regime set out in the Environment Act 2021, as had been suggested. However, I assure noble Lords that the Government are committed to addressing this issue and will work with the financial services sector and those with expertise in tackling deforestation to consider how we can make further progress.

[Baroness Sheehan (LD)]

Before the Minister moves on to another amendment, I put a question to her on Amendment 199 on deforestation. I hope she is coming to answer it.

[Baroness Penn (Con)]

Not just yet. Was it about the letter?

[Baroness Sheehan (LD)]

The question was about the regulations under Section 17 of the Environment Act 2021 that are supposed to be forthcoming. I asked the Minister when she thought they might be ready.

[Baroness Penn (Con)]

I will have to get back to the Committee on that point. I had picked up the noble Baroness’s other point, which was also referenced by the noble Lord, Lord Tunnicliffe, on the letter from Sir Ian Cheshire on this issue. I looked closely at his report and the recommendations in it. I am happy to place a copy of that letter and my response to it in the Library so that all noble Lords have access to them.

I was going to add something about the importance, in seeking to address this issue, of co-ordinating action internationally. This is necessary to reduce the financing of illegal deforestation and not simply drive it into other jurisdictions.

The noble Lord, Lord Tunnicliffe, referenced the work by Sir Ian Cheshire’s task force and its references to the Taskforce on Nature-related Financial Disclosures, the TNFD. The Government accept that that will not solve this problem on its own but it is important to recognise it as an important building block in creating an international solution. As I have pointed out, other jurisdictions do not have disclosure regimes. The TNFD is an attempt to create a global standard on nature-related disclosures that could be an ingredient in making progress in this area. The UK is the largest financial backer of the TNFD. We support its work to develop a global framework for reporting on nature-related impacts, dependencies and risks, within which deforestation is being considered. Once the task force launches its final recommendations in September 2023, the Government will consider bringing these standards into the UK disclosure framework.

Finally, on deforestation, in response to Sir Ian and the noble Lords who raised it today, as I set out, we are looking at what we can do further in this area. If noble Lords would like to meet to take those discussions forward, I would be very happy to do that.

[Baroness Sheehan (LD)]

Before the Minister moves on, could I reiterate the strength of feeling across the Committee on deforestation? It is not just about the 12% of global carbon dioxide that is released by burning and cutting down forests; it is also about the destruction of the carbon sink. It is a double whammy. This is an issue that we can and must solve. We have a report by the Government’s own appointed head of the GRI, Sir Ian Cheshire, who clearly lays out how we move forward on this. I wonder why the Government will not accept the findings of their own reports.

[Baroness Penn (Con)]

I say to the noble Baroness that I absolutely agree. I appreciate the point that the issues concerning deforestation are about not just nature and biodiversity but our ability to tackle climate change. That is why we are such strong supporters of the TNFD’s work, for example. She mentioned Sir Ian Cheshire’s report. I said to the Committee that I have read that report and looked at it very carefully. I do not think that we are in disagreement in wanting to find solutions to this problem. Sir Ian’s report also sets out that work needs to be done to ensure that the solutions that we identify are effective. For example, he refers to ongoing work in other jurisdictions such as the EU and the US on disclosures that would be building blocks towards making the progress that we all want to make. The Government do want to make further progress on this issue and I understand the strength of feeling, so I commit to this Committee to take those discussions further and see where we can build consensus on it.

[Baroness Sheehan (LD)]

I thank the Minister. On behalf of the noble Lord, Lord Randall, I accept the meeting. I know that he cannot be with us today, sadly. The final point that I leave with the Minister is that Sir Ian Cheshire was very clear in his letter about why he thought the UK should be acting. It is because, as a financial sector, we really matter. We may have 1% of the global emissions footprint but, in terms of the deforestation footprint and the money that passes through London, it is substantial.

Financial Services and Markets Bill

Baroness Sheehan Excerpts

Committee stage
Monday 13th March 2023 Grand Committee

[Lord Sharkey (LD)]

My Lords, Amendment 213 addresses the provision of sharia-compliant student finance, of which there is currently none. This matters because Islam forbids interest-bearing loans and that prohibition can be a barrier to our Muslim students going on to attend our universities.

This is not a new problem, nor the first time the issue has been raised in this House. The problem became clear in 2012 when tuition fees were significantly increased and it became worse when maintenance grants were replaced by maintenance loans. In 2014, the Government published a report on the consultation they had undertaken. It attracted 20,000 responses, a record at the time. The Government acknowledged that the lack of an alternative finance product to the conventional interest-bearing student loan was a matter of major concern to many Muslims.

The report also identified a solution: a takaful, a well-known and frequently used non-interest-bearing, sharia-compliant financial product. The Government explicitly supported the introduction of such a product. That was nine years ago, and we still have no takaful. In 2013, Prime Minister Cameron promised action. He said:

“Never again should a Muslim in Britain feel unable to go to university because they cannot get a student loan—simply because of their religion.”


But nothing has changed. There is still no available sharia-compliant student finance. In fact, it now looks further away than ever.

The Muslim community and parliamentarians in both Houses have continued to press. Last September, the right honourable Sir Stephen Timms wrote to the then Secretary of State for Education to ask whether delivering sharia-compliant student finance was still a government commitment. He got a reply saying that it was. Sir Stephen wrote again in October to the new Secretary of State, the right honourable Gillian Keegan MP, asking whether government policy had changed—there was quite a lot of change around at the time.

Ms Keegan confirmed that the provision of a sharia-compliant student finance product remained a government commitment and that the Government were considering whether and how the ASF could be delivered as part of the lifelong learning entitlement. She noted that the consultation on the LLE had concluded last May and promised to provide a further update on ASF as part of the Government’s response to that consultation.

The Government published their response to the LLE consultation last Tuesday. The whole response runs to 71 pages, yet ASF gets no mention in the document’s ministerial foreword and only two substantive paragraphs right at the end of the response. This does not seem a proportionate reaction, either to the gravity of the issue or to the overwhelming number of individual respondents who asked for sharia-compliant student finance, by far the largest group of respondents. The question about sharia-compliant student finance attracted 851 unique individual responses; the average number of unique individual responses to all the other questions in the consultation was 30.

The first substantive paragraph confirms the Government’s commitment to the ASF but says, without any explanation, that it will not be delivered with the 2025-26 launch of the LLE. The second paragraph says:

“The Government is procuring advice from experts in Islamic finance and will be working with the Student Loans Company … to better understand timescales for delivery of an ASF product under the LLE. Our aim is that learners will be able to access ASF as part of the LLE as soon as possible after 2025. An update on ASF will be provided by late 2023.”


This is miserable stuff. It makes it clear that, in the past nine years, there has been no serious thinking or planning for ASF. It does not explain why ASF has to be linked to the LLE at all or why it cannot be launched simultaneously with it. It also makes no hint of an apology to the Muslim community for condemning at least four more cohorts of Muslim students to choose between faith and education.

If we interpret the Government’s vague timings generously, the ASF will arrive in the academic year 2026-27. That is four academic years away and means an additional 16,000 qualified Muslim students not going on to university. It will have taken 16 years for the Government’s firm, clear and repeated commitment to be realised. The problem remains as it was 11 years ago. This is deeply unsatisfactory and obviously has gravely disadvantaged our Muslim community. It is easy to see how the Government’s inaction over such a serious issue over such a very long timescale could look like discrimination against our Muslim community, especially since the Government seem not to have engaged with the community or explained the very long delay and lack of a target date.

Before last Tuesday, Universities UK and 68 Muslim organisations and prominent individuals had written to the Minister, pressing for speedy action and a firm date for ASF. Since then, there has been widespread disappointment and dismay at the very long further delay and the continuing lack of a firm date. The Muslim Council of Britain, UUK, the CEO of Islamic Finance Guru, the NUS and others have all written to me expressing their disappointment at the Government’s response. It is deeply distressing and shameful that the Government, despite their firm promises, should continue to treat our Muslim community in this offhand, almost contemptuous way.

It is very hard to avoid the conclusion that the Government are making a fundamental error—moral, social and political—in putting Muslim students right at the back of the queue. Will the Minister talk to her colleagues in the Department for Education to ask them to arrange an urgent meeting with interested parliamentarians and Muslim community groups? This would allow explanation of the further delay and of the work programme, and an exploration of the possibility of setting an earlier and firmer date for the introduction of the ASF.

All this has gone on for far too long. I hope the Minister will be able to give a substantive and encouraging reply. I beg to move.

[Baroness Sheehan (LD)]

My Lords, I support my noble friend Lord Sharkey’s amendment. I should declare that, as a Muslim woman, I have a number of relatives who will be, and are being, affected by this. Not every Muslim feels unable to take out student loans as they are currently structured but there is a significant minority. It is usually women affected because they always come at the bottom of the list of who will be financed without a loan through private means. I urge the Minister, particularly given all the conversations we had last week about International Women’s Day, to consider this.

I will not detain the Committee long; my noble friend Lord Sharkey gave us chapter and verse on the Government’s position and prevarication on this issue, which, we are told, they have been able and willing to support for over a decade now. The Higher Education and Research Act 2017 allows the Government to introduce a student finance product consistent with Muslim beliefs regarding interest-bearing loans. However, as my noble friend said, the Government have yet to launch such a product. In February last year, as part of the conclusion of their review of post-18 education and funding, the Government said that they were still considering whether and how to deliver sharia-compliant alternative student finance and whether they would do so as part of the lifelong loan entitlement.

We have a situation where, not only are 18 and 19 year- old Muslims—predominantly girls—unable to access higher education but it now looks as though, with the LLE, they will not be able to access post-18 further education either. That will curtail their life chances, their ability to contribute to the life of this country and the financial contribution that they make to their families.

[Baroness Bennett of Manor Castle (GP)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Sheehan, who has highlighted the gender aspects of this debate, and the noble Lord, Lord Sharkey, who has been a consistent champion on this issue in your Lordships’ House. I wish to make a couple of comments additional to what has already been said, while offering support for this amendment to push the Government to take action.

It was Green Party conference at the weekend, and I found myself discussing again and again how the public, who once thought that when the Government announced something that meant it would happen, are increasingly aware of the legislative process, and even the role of your Lordships’ House, because it is taking so long between government announcements and something actually happening. That is true of the announcement of a bottle deposit scheme for England, but there has been an even longer stretch between the promise of sharia-compliant finance, particularly for student loans, and the delivery.

The last figures that I saw showed that 9% of higher education students in the UK were Muslim. Extending loans for lifelong learning into further education makes it very likely that the percentage of students affected by the lack of sharia-compliant loans will increase. It is not as though the Government have not been reminded of this again and again. I note, again, that it was in July 2021, during the passage of what became the Skills and Post-16 Education Act, that we debated this. We were promised, “Yes, it’s going to happen; it’ll come”, but, yet again, we have just had a report from the Government which shows that there has been no progress. That is simply not good enough.

We often debate in your Lordships’ House how to get trust in government and the system. One way is to deliver on your promises in a reasonable and timely manner, particularly the things that really should not be that difficult, of which sharia-compliant loans is a case in point.

Financial Services and Markets Bill

Baroness Sheehan Excerpts

Committee stage
Thursday 23rd March 2023 Grand Committee

The fact that we are able and willing to take new powers is evidenced in the Bill: Clause 65 gives His Majesty’s Treasury the power to regulate cryptocurrencies, as we have discussed, and recently HMT gave the FCA powers to regulate funeral plans, so we are not seeing a completely deregulatory agenda. Here, we are talking about a possible funeral plan for the whole planet: it is definitely appropriate to enable regulation in this market. A world-first, smart regulatory regime for voluntary offsets has the potential to bring investors to the UK and build confidence in a product that has all too often been perceived as the wild west of greenwashing. I am open to alternative drafting suggestions, but I ask the Minister to take note of the ask from insurers, pension funds, voluntary market participants and other financial operators and commit to taking a power to create a form of regulated market as a mark of robust quality. This could be a game-changer and the UK could lead in this area. I beg to move.

[Baroness Sheehan (LD)]

My Lords, I thank the noble Baroness, Lady Worthington, for tabling this amendment. I totally agree with its necessity, which is why I have added my name to it. If we are to meet our statutory net-zero targets, carbon offsetting will become ever more important as we decarbonise and reach those emissions that are so hard to abate and the residual emissions that the noble Baroness spoke about.

Let me say at the outset, however, that carbon offsetting is not a solution to climate change. There is only one way to avoid catastrophic climate change, and that is to stop adding to the blanket of greenhouse gases in the upper atmosphere that is already at a higher concentration than at any time since records began. Just for the record, the May peak of carbon dioxide in 2022 was a record 421 parts per million. The highest recorded over the previous 800,000 years for which we have records was just under 300 parts per million. This increase has happened in a blink of a geological eye, over just the last 150 years since the start of the Industrial Revolution. This Committee is not the time or place to go into the impact on our planet, save to say that catastrophic events are happening at a faster pace than even the most pessimistic predictions by scientists.

As we know, the biggest contributor to greenhouse gases is the burning of fossil fuels. The second biggest is deforestation. Putting an end to both these practices is well under way but is not going fast enough. I hope that more will be done through this Bill before it becomes an Act, because it deals with the money that fuels the release of those greenhouse gas emissions.

Until decarbonisation measures bite—and resistance to them is strong; we have seen that in some of the contributions to this Committee—carbon off-sets are one tool we have to mitigate the harm of climate chaos and the destruction of nature. The market demand for off-sets is exponential and the scope for fraud in the voluntary carbon market is massive. Greenwashing is rife. I will give one example: the recent chastisement of HSBC by the Advertising Standards Authority for misleading people with some of its claims to be carbon neutral. However, we need a functioning market to off-set hard-to-eliminate sources of greenhouse gases, which will leave residual emissions. It is the role of government to enable regulators to act, which is why this amendment is necessary and why I added my name to it.

Industry is also asking government to play its part. I will quote a substantial part of the recent report by Scottish Widows, Nature and Biodiversity: the Pensions Imperative, because it says it far better than I can:

“With companies potentially needing to put billions of pounds into offsets to meet their net zero commitments, the biggest barrier to date is the opacity of the voluntary carbon market. This breeds mistrust, particularly as a number of bad actors have been exposed in the past. What could really shift the dial here is the establishment of a UK regulator for carbon offsets. This could set quality standards that corporations looking to do the right thing could trust, enabling them to allocate money with confidence in these offsets having additionality and really delivering on those climate and nature goals”.


Finally, when I was a member of the Lords Select Committee on Science and Technology, we produced a report entitled Nature-Based Solutions. The committee heard evidence from a cross-section of practitioners in the carbon credits sector, from both the science and financial communities. As the noble Baroness, Lady Worthington, said, we heard from the science community how difficult it is to quantify and monetise nature-based solutions. From the financial community, we heard that it needs a regulatory framework so that everyone can work on a level playing field and so that the market is less like the wild west—which it currently is.

I will conclude by quoting a conclusion of that report:

“We recommend that the Government provides clear regulatory standards for emerging carbon markets to ensure that any off-sets that are claimed are genuine”.


However,

“these markets will only deliver the desired results if they are properly regulated and verified to prevent inaccurate claims of carbon off-setting. Carbon and nature credits must be for benefits that are additional, measurable, and permanent”.

For carbon credits to have the impact we all want, they must have good governance backed by government.

[Baroness Bennett of Manor Castle (GP)]

My Lords, it is a pleasure to follow the noble Baronesses, Lady Worthington and Lady Sheehan, and to offer Green support for this amendment, which is obviously urgently needed. I essentially agree with everything that the two noble Baronesses said, particularly the point made by the noble Baroness, Lady Sheehan, that off-sets are essentially a con that should not be used to trade off against continuing fossil fuel emissions. None the less, we are where we are and they are certainly going to happen.

The complexity is really well illustrated by a recent report by HSBC, which found that $246 billion-worth of hydroelectricity depends on water provided by threatened tropical cloud forests. We think about where the funding, support and credits should go, but to maintain that electricity supply, surely the people producing the electricity should fund that. This is also a carbon store. It is a real demonstration of the way that, as the Treasury’s own Dasgupta report illustrated, the economy is a complete subset of and entirely dependent on the environment, which we are fast trashing.

The problems with the current “wild west” system have been clearly demonstrated already. In a paper this week in the journal, Frontiers in Forests and Global Change, the Berkeley Carbon Trading Project presented a study of nearly 300 carbon off-set projects, representing nearly 11% of global carbon off-set projects to date. It found that the projects were systematically overcrediting their results and delivering extremely dubious carbon off-sets. Apparently respected registries did not follow standards to make sure that projects were having a real and tangible impact on carbon levels. A particular area of difficulty was whether the projects would have happened anyway, whether or not the extra carbon credit was claimed.

I will make one final point. The noble Baroness, Lady Worthington, sought ways in which the Government might see this as an advantage. In this wild west, there is a need for extensive due diligence for any financial body to be able to claim that it has genuine, honest carbon credits that will deliver over the long term—because the climate emergency is of course a long-term project and not just for one year or five years. There is a significant cost for any company going into this and wishing to protect its reputation. If it is a regulated sector, that will make it a great deal easier for people to do due diligence and to rely on it, and not to have to do the work themselves at considerable cost, facing considerable complexity and carrying considerable risk.

The need for this amendment is obvious. The problems with off-setting both carbon and biodiversity are very clear. We should not be where we are, but we are where we are, and the amendment offers one way forward that would be good for the financial sector as well as for the planet.

Financial Services and Markets Bill

Baroness Sheehan Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

[Lord Randall of Uxbridge (Con)]

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.

[Baroness Sheehan (LD)]

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.

--- Later in debate ---

[The Lord Privy Seal (Lord True) (Con)]

This has been a 13-minute speech on Report—

[Baroness Sheehan (LD)]

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.

[Lord Livermore (Lab)]

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.