Financial Services Bill

Baroness Jones of Whitchurch Excerpts

Report stage
Wednesday 24th March 2021 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I will follow my practice of trying to be brief and selective on Report. We have had absolutely brilliant speeches and I do not intend to repeat them.

Perhaps I can start by being helpful to the noble Baroness, Lady Noakes, and I speak as a fairly weather-worn commercial banker who dealt extensively with loans and risk. She will understand, therefore, that the PRA, as the regulator, in dealing with capital adequacy issues, looks at the loans that sit as assets on the bank’s books, but of course it does not stop there. It looks through that to the operational activities—to the activities and investment of the company to which the loan is made. That is why the terminology “investment” pins exactly what this amendment is intended to do, which is to make sure that the PRA does that look-through to investment. I do not think that any member of the PRA would have the slightest difficulty in understanding what this amendment is guiding them to carry out. They would see that it has genuine precision in it. I do not have a problem with the wording; the wording says what it should, it says what it means and it says what the PRA would understand and follow through.

Very briefly, I thank the Minister for the two “have regard” amendments that he has embedded in this group. To “have regard” to the climate change target of 2050 is a step forward, but we have to recognise that it is very light-touch and will not scare the horses. The noble Baroness, Lady Noakes, captured that rather well when she said that the two “have regard” amendments will do no harm. I do not think they change the landscape, but they give a little hint of a change in direction and I welcome that change in direction.

Like others, I am very frustrated that we have a PRA that is going to do stress tests to test the sufficiency of banks’ capital buffers to deal with the financial instability caused by climate change, but then seems to have taken almost the equivalent of a vow of passivity and will not then follow through and implement the consequential adjustments to capital adequacy ratios that would come from that exploration and examination of the buffers. I really do not understand going through the process and then saying, “But we will not learn from or implement the consequences of that work”.

I sometimes think, as I listen to the speeches, that there is a sense that this requirement to look at capital adequacy ratios is somehow novel or revolutionary. I sit on the Economic Affairs Committee and last week, we were privileged to hear from the noble Lord, Lord Turner of Ecchinswell. I hope I have pronounced that correctly. We were looking at quantitative easing issues and therefore it was a discussion of central banks, but the issue of climate change came up. I thought what he said was quite helpful in understanding how normalised the approach of challenging this issue through capital adequacy ratios is now becoming. He said that any role of central banks in relation to climate change is very much secondary to the fiscal and regulatory authorities—the same issue that I think was raised with reference to quotes from the noble Lord, Lord King—but that is an important statement. It is secondary to the fiscal and regulatory authorities because, of course, the relevant regulatory authority is the PRA. He went on to give an illustration by referring to coal:

“If banks go on lending to coal companies, they may end up with stranded assets on which they will make a loss. That will be bad for their capital ratio. I think that it is reasonable for the PRA to set higher capital ratios for anybody who is still lending to coal.”


I do not want to suggest that he was willing to go further than coal, but he was using it as an illustration. I think most of this House would very happily accept that that language needs to be extended across the full range of fossil fuels, certainly in requiring the PRA to do a review. So, I wanted to underscore that this is a normalised approach; this is where we will go, and where we will end up. Given that we have described climate change, absolutely correctly, as an emergency, a delay in getting to that appropriate application of capital adequacy is really serious.

I wanted to pick up the point made by the noble Baroness, Lady Noakes—that most loans are short or medium term. They are, but they are supporting longer-term projects. Of course, the duration of financing the project itself—the project they enable, the project they empower, the project they drive—has a much longer-term application. So, the fact that the loan itself is short term does not mean that it can be set aside as though it had no longer-term implications. It is merely the first step in an ongoing process, and once the process is started it is almost impossible to stop. Loans might be short term because people think they might get better terms and conditions or pricing in the future. The short-term issue is not applicable here; the urgency issue is.

We know that we face an emergency and that how we act in the future will have to be more draconian and dramatic, and have far greater collateral damage, than if we act early. It is crucial that the issues raised in Amendment 3—getting in place the plan, pattern and process for using capital adequacy ratios to tackle the financial instability that will come from allowing climate change-related activities to continue and grow—be dealt with now, and rapidly. If the Government do not recognise what we have been describing here and commit to this review of the whole issue of capital adequacy and climate change, I very much hope that my noble friend Lord Oates will press his amendment. The message is absolutely critical.

[Baroness Jones of Whitchurch (Lab) [V]]

My Lords, I am grateful to the noble Lord, Lord Oates, for leading this debate this afternoon, and to all noble Lords who have spoken. We had a detailed debate in Committee on the need for the regulators to take a more systematic and urgent approach to their climate change obligations. I do not intend to repeat the general arguments, not least because the Minister accepted the need to embed our climate change goals in the financial services sector. The point of difference remained, how deep and how fast. Since that time, we have had a useful meeting with the Minister and we were pleased to hear that he had accepted our arguments concerning the need for the regulators to have regard to the Climate Change Act. The Government’s amendments, tabled today, reflect that concession and we consider this to be a considerable step forward. I thank him for his work in making that happen.

Since then, the Minister has also facilitated the sending of two letters from the PRA and FCA setting out their work on sustainable finance, to which a number of noble Lords have referred. It is useful to have their current commitments restated in this way and we are pleased that they have engaged with us on the subject. It is also helpful that they have set their work in an international context, as we know that we cannot solve this issue alone. However, I would say to the regulators, and indeed to the Treasury, that what is lacking in these letters is the urgency and reprioritisation that the climate change emergency demands. As we discussed in Committee, many individual financial institutions are already ahead of the game and are implementing dynamic green initiatives. We have heard great speeches from the Chancellor and others on the importance of the issue, but why are the regulators not being more ambitious, to ensure that everybody meets the standard of the best? As a result, today we have tabled further amendments to spell out in more detail how systemic finance-related climate risks should be embedded in the policy agenda going forward.

I have added my name to Amendment 3 in the name of the noble Lord, Lord Oates. It addresses the need for the PRA to review the risk weighting applied to investments in existing and new fossil fuel exploitation and production. The noble Lord has explained the case for that amendment extremely well today. We agree that the current regime does not adequately reflect the high-risk exposure of such investments. Clearly, institutions with over-exposure to carbon-intensive investments are not acting prudentially and their capital requirements should reflect this. As we discussed before, as the policy agenda moves rapidly away from fossil fuels and towards renewables, there is a considerable risk of the assets being stranded. The capital adequacy requirements need to reflect this risk more accurately.

The Minister will know that the Basel Committee conducted a survey of regulators in April of last year to stocktake their supervisory initiatives on climate change financial risk. This seems to run counter to the point that the noble Baroness, Lady Noakes, was making—I listened carefully to what she was saying about the comparative responsibilities of regulators and banks—because the Bank of England and the PRA were both respondents to the survey. In fact, only six out of the 27 replies factored the mitigation of climate-related risk in to their prudential capital requirements so far, but there was some criticism in the conclusions of the survey as a result of that. So, were the UK regulators in the good minority or the bad majority in the outcome of that survey, and are their responses to it in the public domain? Does he also accept that, without the necessary adjustments made in Amendment 3, investments will continue to focus disproportionately on outdated oil and gas activities that run counter not only to investments but to the interests of the UK economy as a whole? This point was well illustrated by the noble Baroness, Lady Sheehan. This is why we would particularly welcome the involvement of the Climate Change Committee, in order to provide the wider perspective of the longer-term UK interests, rather than the narrow short-term interests on which investment decisions are too often made. I therefore hope that the Minister will be able to give us the assurances we seek in this regard.

I have also added my name to Amendment 22, in the name of the noble Baroness, Lady Hayman, for which she made a very powerful case. We believe it essential that the Government set out how they will actively ensure that climate change considerations are reflected in the regulators’ statutory objectives. This amendment would provide a framework for systematically assessing and reporting on climate change financial risk. It would ensure that all government guidance is linked in order to provide a coherent and entire picture on managing climate change—an improvement on the current piecemeal reporting structure. I therefore hope that the Minister will be able to give us the assurances we seek on this issue. It would also be helpful if he could spell out what future formal reporting mechanisms would be put in place to achieve this.

Moving on to Amendment 23, at Committee and again today, the noble Baroness, Lady Hayman, has made a compelling case that the FCA needs a senior executive to oversee and deliver the climate change agenda. Like her, we were pleased to see in the FCA’s letter that a dedicated director of environmental and social governance standards is being recruited to lead on this work. We welcome this appointment and believe it represents a real step forward.