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The Economic Secretary to the Treasury (John Glen)
It is a pleasure to serve under your chairmanship, Sir Edward. I congratulate my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) on leading this debate, even if he acquired it from my hon. Friend the Member for Kensington (Felicity Buchan). I wish him well in his new role on the Treasury Committee, subject to the approval of the House later this evening. I thank him for the constructive contributions that he has made during my tenure, including on this subject.
Let me start with a simple statement of fact: the Government have high ambition to transform the UK financial sector and align it with net zero. We are taking bold action to deliver on that. As my hon. Friend mentioned, we launched two record-breaking green gilts this year in September and October, and announced new sustainability disclosure requirements for businesses across the economy to report their impact on the planet. We are starting to see real results. London was ranked the leading hub globally for green finance this year in a leading index run by Z/Yen, overtaking Amsterdam. I do not want to be complacent, but I think we have made significant progress already, specifically on green finance.
Dr Dan Poulter (Central Suffolk and North Ipswich) (Con)
I thank my hon. Friend the Minister, for giving way and I congratulate my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) on securing this debate. On the issue of those reporting requirements, as has been said companies clearly have indirect as well as direct impacts through their supply chains. Is it only direct impacts that will have to be reported, or will the indirect impacts of company supply chains also have to be acknowledged?
John Glen
I thank my hon. Friend for his intervention. I shall come in a few moments to address the details of the reporting requirements, the mechanisms for enforcing them and their extent. If I have not adequately scrutinised his point and given him the right response, I will right to him—but I hope I will cover it fully in a moment.
Z/Yen said that London was
“propelled up the table by the government implementing measures to stimulate Britain’s green finance sector”
and that it
“has the best sustainability standards in the world”.
As my hon. Friend the Member for Thirsk and Malton mentioned, at COP26 the Chancellor announced that the UK would go further and become the world’s first net zero-aligned financial centre. That is easier said than done. In fact, delivering this will require the Government and private sector to work hand in glove—I welcome the UK private sector’s leadership on this. At COP26, we heard that organisations with $130 trillion of assets globally have now made a net zero commitment. These are big numbers with big implications; it is critical that the claims that firms make about their green performance are credible and backed up with real action.
I will now turn to the title and substance of today’s debate. It is absolutely clear that we need a robust approach to greenwashing. We have heard that phrase a lot over recent years, but I would define greenwashing as when businesses, or investment funds, make misleading or unsubstantiated claims about the environmental performance of their products or activities. That can lead to the wrong products being bought—undermining trust in the market—and to misallocation of capital intended for sustainable investments. In other words, it has the potential to be a significant problem at a time when we are trying to make a sincere and credible transition that is verifiable.
The Treasury Committee report on decarbonisation and green finance, published in June, was also clear that
“‘greenwashing’ is detrimental to good consumer outcomes and to the achievement of... net zero”.
As interest in environmental, social and governance investing increases—which it is, rapidly—it is only right that there should be more attention given to, and more scrutiny of, the claims that firms make. It is for all those reasons that the Government have sought to be on the front foot on tackling greenwashing.
I will take the Chamber through the three areas of action: disclosures, mainstreaming climate into financial regulation, and transition plans. On disclosures, as I mentioned previously, it is the Government's intention to propose legislation, I hope in the next Session, to implement economy-wide sustainability disclosure requirements. This will see financial services firms, real economy corporates and investment funds reporting information on the risks they face from climate and environment, and those that they create. A key element of SDR will be reporting against the UK green taxonomy, which my hon. Friend the Member for Thirsk and Malton has mentioned. The taxonomy will set a robust standard for when economic activities can be considered environmentally sustainable. It is specifically designed to tackle greenwashing by creating a common understanding of which activities, and which investments, can actually be considered green. There is one other aspect on disclosures. Asset managers, asset owners and investment products will all be required to substantiate any sustainability claims they make in a way that is accessible to clients and consumers. All of this will create much-needed transparency in the market and ensure that firms cannot claim things without backing them up.
Our second area of action as a Government has been mainstreaming climate change in the UK’s financial regulation. In March, the Chancellor set out new remit letters to the Financial Conduct Authority and Prudential Regulation Committee, which included climate change for the first time. In November, the FCA published its new environmental, social and governance strategy, and the themes of trust and transparency are core to the FCA’s plans in this area. I am also aware that market participants are increasingly reliant on third-party ESG data and rating services to make decisions, which is why the Government are considering bringing these firms into the scope of FCA regulation and will report back next year.
I also want to address transition plans. Industry leadership on climate change, particularly through net zero commitments, has been impressive, but commitments need to become concrete action. That is why the Chancellor announced at COP26 that the UK would move towards making the publication of transition plans mandatory in the next 12 months. A transition plan should set out an organisation’s high-level carbon targets, its interim milestones and, most importantly, the actionable steps it plans to take. That will improve transparency around how those headline commitments translate into action.
My hon. Friend the Member for Thirsk and Malton asked me a number of questions about which businesses will have to report, when those requirements will come into force and how reporting will help us reach net zero, and I will take those in turn. We will ensure that any burden on business is proportionate and provides useful information for investors’ decision making. Exact details of organisations and products in scope will be determined by the relevant regulators and Government Departments following consultation. Anticipated timings are set out in the roadmap that we published in October.
The UK’s approach ensures that the SDR will come into force in a sequenced, co-ordinated manner, so that reported data flows from corporates to the financial sector, investors and financial market participants make sense, are logical and are scrutinisable. The “Greening Finance” road map, published by the Government in October, sets out the indicative path to introducing integrated sustainability disclosure requirements across the whole economy. The implementation of legislative and regulatory measures will be subject to the parliamentary timetable that I referenced earlier.
In terms of the impact of reporting on the UK getting to net zero, high-quality corporate sustainability reporting is clearly foundational to investors having the information that they need to make well-informed investment decisions. Any action to align capital investment with the transition to net zero is contingent on financial markets having access to the right and relevant information, and identifying which companies are successfully managing their climate-related risks and opportunities. Fixing that information gap is the first phase of the UK’s approach, and getting market participants to act on the information is the second phase, which will ensure that financial flows across the economy shift to align with that net zero commitment. There has been a concerted attempt across Government to ensure that we are very clear about what that journey needs to look like, and more will flow from the legislation next year. I hope that addresses my hon. Friend’s points.
The Government are taking determined action to tackle greenwashing and maintain trust in the growing market for sustainable finance. I thank my hon. Friends the Members for Thirsk and Malton, and for Central Suffolk and North Ipswich (Dr Poulter) for their well-informed contributions and challenges. I hope that this has been a helpful exchange for my hon. Friend the Member for Thirsk and Malton. I will consider his points carefully, as I always do, and take forward any elements to which I have not responded.
Question put and agreed to.