Draft Financial Services and Markets Act 2023 (Prudential Regulation of Credit Institutions) (Consequential Amendments) Regulations 2025 Draft Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025

Gareth Davies Excerpts

Tuesday 2nd December 2025 General Committees

[Gareth Davies (Grantham and Bourne) (Con)]

It is always a great pleasure to see you in the Chair, Mrs Harris. I will follow the Minister’s lead by starting with the ESG ratings order before moving on to the draft regulations.

The Minister usefully and clearly set out the Government’s view of the ESG ratings order and what it aims to achieve. I want to ask two questions in particular, straight out of the gate. First, although she referred to this slightly in answering the hon. Member for Dorking and Horley, could she go into more depth about the approaches taken in other jurisdictions—particularly the United States and the EU? What are the specific implications for our competitiveness? She mentioned that she is open to alignment with other jurisdictions, and she specifically said that she is open to allowing the ratings of overseas ratings providers to be recognised in this country. But will she address the specific point about competitiveness and where the order stands in the global ecosystem of ESG ratings regulation? It would be helpful to understand that.

Secondly, I understand that in the responses to the consultation concerns were raised about charities being granted an exemption. Is the Minister concerned that charities, and particularly household names, might publish ESG scores against certain companies and sectors that investors take seriously, despite there being a lack of transparency on how those scores were reached? I have taken a particular interest as that legitimate concern stood out from the consultation.

As the Minister considers those answers, it is useful for us to step back as we think about ESG to ensure that, as we scrutinise the draft order, we talk about the overall effectiveness of ESG in supporting the interests of savers and investors in the country. My view, having led an ESG team in my previous life—I think this view is shared by a lot of savers and investors in the industry— is that investment managers should always act with the aim of delivering sustainable returns for investors. From the teacher who has paid into their pension their whole life to the entrepreneur who has just sold their business and invested all their money, many people from all walks of life entrust their money to investment firms and portfolio managers, and they rightly expect financial professionals to uphold their fiduciary responsibilities.

In recent years, however, many, including me, have expressed the view that the rise of ESG has allowed and encouraged some fund managers to impose their own values on investment portfolios, thereby potentially impacting the returns achieved for thousands of investors. Of course, where individuals have enough money for a separate account, or where other retail investors choose to invest in a dedicated ESG fund, that is their choice. They may well pay a premium for not investing in certain industries and be comfortable with that.

[Chris Coghlan]

The shadow Minister makes an interesting point about the personal views of some fund managers. What is his view on including defence stocks in ESG portfolios, given the change in the geopolitical situation?

[Gareth Davies]

If the hon. Gentleman will allow me, I will come on to that point. It is a very hot topic right now, in terms of our national security, and I think there are implications when it comes to ESG ratings and the overall ESG approach that many fund managers take.

As I was saying, the overall picture is that there is a risk that everyday savers might miss out on returns because of the values and ideals pursued by a particular fund or fund manager, without their expressed wishes necessarily being taken into account. If we accept, as many do, that this is a problem for funds, it follows that it extends to those who provide ESG ratings, too. Therefore, more transparency, which this measure achieves, could and should help to mitigate the risk for savers.

At a broader level, I have made very clear my personal opinion that ESG has gone too far towards values-driven investing, while neglecting to include our collective national, strategic and economic interest. At a time when the world is increasingly geopolitically unstable, and with an aggressive Russia at the door of Europe, is it really responsible or ethical to shun investment in defence companies?

I believe this mindset undermines our national security effort, but it also means that savers and investors could miss out on better returns. The FTSE 100 index is up around 19% for the year to date, compared with shares in Rolls-Royce, which are up 77%; shares in BAE, which are up 38%; and shares in Babcock, which are up 118%. Those companies form the bedrock of the British defence industry. Over the past year, they would have delivered better-than-average investment returns for savers, but so many savers have been excluded from investing in such companies, perhaps without their knowledge.

Similar national importance could be attached to oil and gas companies and investments. Even the Climate Change Committee has been clear that the consumption of oil and gas will be needed for years to come as part of our energy security. Yet just last week, the National Energy System Operator warned that Britain could face gas shortages by 2030 if the industry—

[The Chair]

Order. While I appreciate the shadow Minister’s thoughts, could he please keep his speech within the context of our debate?

[Gareth Davies]

I am grateful for your guidance, Mrs Harris. This is related to ESG, which is about environmental, social and governance principles, and accordingly an investment approach and ratings. I was talking about defence as part of the “S”, and oil and gas as part of the environment.

[The Chair]

Order. I have to be guided by the Clerk, who fears that we may be going out of scope. I would appreciate it if the shadow Minister kept his remarks to the task in hand.

[Gareth Davies]

I will end my point by simply suggesting that it is not serving investors or the country well by being excluded from oil and gas companies or defence stocks as part of an ESG strategy that they perhaps did not know about.

I now turn to the draft regulations, which revoke assimilated EU law relating to financial services and replace it with rules set by the Bank of England and the PRA. This is part of an ongoing process to repeal and replace assimilated EU financial services law following our departure from the European Union. The purpose of the draft regulations is largely to revoke the relevant parts of the assimilated prudential regime, as set out in the capital requirements regulation, and replace them with the PRA rules, as the Minister set out.

As the Minister made clear, the draft regulations make consequential technical amendments to UK legislation for the purpose of legal coherence. In practice, any references to revoked CRR provisions will be read as references to the corresponding PRA rules. Where no PRA rule exists, the amendments will help to avoid gaps in the legal framework, with which I think we can all agree. This instrument continues the process begun under the previous Government, as the Minister said, and therefore the Opposition do not oppose it.

[Lucy Rigby]

I welcome the consensus on the draft regulations. Four principal points were raised in relation to the draft order. The first was on the international position, and the recommendations we are putting in place in this draft order are in line with the IOSCO and OECD recommendations. The EU framework has been legislated for, but it will not come into force until 2026. In many areas of financial services, we have the ability to put in place an overseas recognition regime—an ORR. We do not yet have the ability to do that in relation to this, but we hope to take the power in the next financial services Bill to enable us to bring forward exactly this kind of measure where we wish to do so. The shadow Minister might be aware that Hong Kong, Singapore and Japan have codes of conduct of this nature.

In relation to charities—this is a good point and was considered—the scope of the regulated activity set out in the draft order is designed to be proportionate to the risk of harm. As such, charities will be excluded from regulation where a rating is provided on an occasional or one-off basis, or where there is no remuneration or other financial benefit provided to the charity. As I said, this approach, informed by consultation, ensures that the regulation is risk-based and proportionate while avoiding loopholes.

The shadow Minister also mentioned defence. The Chancellor has stated very clearly her view that supporting the defence industry, and indeed Ukraine, is consistent with ethical investing. The regulation will allow investors to more fairly evaluate ESG risks and opportunities related to defence companies. I should make it clear that we have engaged extensively with the defence sector, and we think there is quite limited evidence that defence firms have struggled to access finance on ESG grounds.

Briefly, the fiduciary duty is important and, as the shadow Minister knows, it has been much discussed. The Pensions Minister will address it further in subsequent stages of the Pension Schemes Bill.

[Gareth Davies]

I am very grateful to the Minister for outlining the Government’s position on defence stocks. I wonder whether she could do the same for oil and gas.

[Lucy Rigby]

The point in relation to oil and gas is exactly the same as that for defence. There is no conflict between what we are doing here and investment in those areas. If anything, it will be helpful across the board. Fiduciary duty was the final point raised, so I will leave it there.

Question put and agreed to.

DRAFT FINANCIAL SERVICES AND MARKETS ACT 2000 (REGULATED ACTIVITIES) (ESG RATINGS) ORDER 2025

Resolved,

That the Committee has considered the draft Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025.—(Lucy Rigby.)