Financial Services Bill

Lord Sharpe of Epsom Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

[Baroness Hayman (CB) [V]]

My Lords, it is always fascinating to follow the noble Baroness, Lady Noakes. I certainly do not have her level of expertise in financial institutions but, listening to her, I worried that the phrase that the noble Lord, Lord Oates, used about the battle between urgency and complacency was actually rather relevant. We have a very short period of time in which to change the dynamics of what is happening to our world through climate change. I am sure that these amendments could be better drafted, and we may need her technical knowledge and experience to help us find the correct levers to do what Amendments 28, 31 and 32 set out to do, but, frankly, we cannot afford simply to say that this will not work. We have to find ways that will work, which is why I am interested in, and listened carefully to, the powerful and compelling case made by the noble Lord, Lord Oates, in introducing these amendments.

We have to find a way in which to make explicit and transparent the risks contained in continuing investment in existing fossil fuel projects or new ones, and that funding new fossil fuel projects is essentially of the highest risk and should be funded out of equity if it is to go ahead. The risks relate not only to continuing investment contributing to climate change, which itself creates systemic risk through increasing emissions, but to the certainty of these assets becoming stranded, as the noble Lord, Lord Oates, said. That is not in the long term—we are talking about the reasonably predictable future.

A recent report by Finance Watch, Breaking the Climate-finance Doom Loop, highlighted that to limit warming to 1.5 degrees we can emit only a further 500 gigatonnes of CO₂. There are currently fossil fuel reserves which, if all were extracted, would emit 3,000 gigatonnes. If we are to have any hope to meet what are not just the aspirations of what the noble Baroness calls the “green lobby” but are actually our national and international treaty obligations, we have to change. Despite the fine words that have been spoken since Paris, $2.7 trillion in funding has been provided since that agreement to the oil and gas industry, with UK banks contributing significantly.

Financial institutions are in the process of quantifying climate-related financial risks, but it is widely recognised that this will take considerable time. Rather than waiting until the middle of the decade when we have made progress in quantifying the risks via the TCFD and climate-related financial risk disclosures, we could start to make changes to the existing capital requirements regulation now, to reflect what we all know are risky investments, even if we do not know the exact quantified risk. Prudential regulations are designed for just such a situation, to regulate markets and ensure long-term stability.

We have to make it very clear what the risks are, because there is danger of interpretation of risk from the transition from brown to green being considered in the light of it being a sudden cut-off of one and a change to the other, so that people avoid any change. We need a measured and adjusted transition. To do that, we need to be aware of risks on all levels.

Finally, I will say a word or two on taxonomy: how we actually define green and brown. In previous Committee debates, the noble Earl the Minister said

“we need to be able to define what we mean by ‘green’.”—[Official Report, 24/2/21; col. GC 225.]

He commented that it will take time to analyse the risks and produce the taxonomy. It is important that we recognise that that taxonomy needs to include a definition of what is a brown asset as well as what is green. We need to look at how we drive investment away from brown, as well as directing it to green.

The New Economics Foundation recently wrote to the Chancellor, saying that

“limiting the taxonomy to green activities will not necessarily encourage a move away from financing activities that undermine climate goals. We equally need the taxonomy to classify carbon-intensive and other unsustainable activities. Importantly, the taxonomy design should not be decided behind closed doors. There must be transparency and public consultation to ensure that a wide range of expertise and perspectives from across civil society and academia feed into the UK’s Green Technical Advisory Group.”

It would be very good to understand government thinking on this issue and on the timing of the work of the green technical advisory group, and I hope that the noble Earl will comment on this when he winds up or, if that is not possible, write to me in the future.

[Lord Sharpe of Epsom (Con)]

My Lords, I refer to my interests in the register. It is a pleasure to follow the noble Baroness, Lady Hayman, and my noble friend Lady Noakes, who spoke eloquently on the capital requirements. I was planning to do the same, but she has said much of what I was planning to say, so I shall confine myself to a brief question about Amendment 31.

Amendment 31 refers to

“existing fossil fuel production and exploitation.”

I wonder whether all the possible consequences have been considered. The noble Lord, Lord Oates, spoke eloquently on mining, and I, too, claim mining ancestors: my great-grandfather was a coal miner in Seaton Burn in Northumberland. The noble Lord also mentioned stranded and abandoned communities. I wonder whether the amendment, as drafted, would also apply to companies that are actively engaged in the complex process of decommissioning existing facilities, particularly those in the North Sea. In many cases, those are the same companies that are involved in exploitation and exploration. Again, my noble friend Lady Noakes spoke very eloquently about hypothecation when it comes to lending to some of these types of companies. With that in mind, were the potential regional effects of rationing capital to these businesses considered, because that is the likely net effect of the amendments? I suppose that that would have particular reference to and relevance in Scotland.

I am sure we all hope for a world free from fossil fuels, but I am 100% confident that, regrettably, we will need them for a while yet—although it is probably worth stating that they have other uses apart from just being burned. As my noble friend Lady Noakes also pointed out, it is fair to say that financial institutions have a refined—no pun intended—approach to assessing fossil fuel-related risk and are perfectly capable of valuing stranded assets. The proof of that is to be found in the valuation of companies such as BP and Royal Dutch. If, as the amendments imply, we would prefer no lending at all to fossil fuel companies—which is a perfectly legitimate point of view—should we not just say that and agitate for a multinational agreement to that effect, perhaps at COP 26, rather than introduce it via the back door through amendments such as these?

[Baroness Ritchie of Downpatrick (Non-Afl) [V]]

My Lords, I am not a financial expert, nor was that my academic background, nor do I have family involved in the fossil fuel industry, because Northern Ireland did not have a mining base. However, it is quite clear to me that the Financial Services Bill is silent on the climate emergency and carbon issues. Therefore, I favour the amendments in this group in the names of the noble Lord, Lord Oates, and other colleagues.

A recent Bank of England publication states:

“Climate change poses different risks to the stability of the financial system, particularly for the insurance and banking sectors.”


It states that there are physical, transition and liability risks from climate change. Climate change means that we may face more frequent or severe weather events, such as flooding, droughts and storms. Examples of those recent weather events that have been linked to human-driven climate change include the heatwave and droughts in China in the summer of 2013 and the more recent flood events in the UK. Such events bring physical risks that impact on our society and have the potential to affect the economy, and our financial services sector. If these events happen more frequently, people will become more reliant on insurance to cover the costs of damage to their houses and cars.

Transition risks can occur when moving towards a less polluting, greener economy. Such transitions could mean that some sectors of the economy face big shifts in asset values or higher costs of doing business. One example is energy companies. If government policies were to change in line with the Paris Agreement, two-thirds of the world’s known fossil fuel reserves could not be burned. This could lead to changes in the value of investments held by banks and insurance companies in sectors such as coal, oil and gas.

Liability risks come from people or businesses seeking compensation for losses that they may have suffered from the physical or transition risks from climate change.

It is important to tackle climate change and protect the environment. This is very important in the financial services sector; I think the Chancellor of the Exchequer referred to that in the recent past. As I said, there is no reference in the Bill to climate or the ecological emergency, notwithstanding that the UK Government have the chair of COP 26 this year. There is no mention of green finance, climate risk disclosure or the critical role that the financial services industry will have to play if we are to tackle climate change.

How do the Government intend to deal with this matter from a legislative point of view? It is recognised as a clear priority by the Chancellor, although the Minister who took the Bill through the other place did not see any direct correlation between financial services regulation and the impact and risk of climate change. Parliament should determine that role and ensure that these amendments are made to this legislation. The amendments, which I support, would require the Prudential Regulation Authority to have regard to climate-related financial risk when setting capital adequacy requirements, and would ensure that credit rating agencies have to take climate risk into account in setting credit ratings, with particular relevance to fossil fuel exposures. I think of the fact that the Government wish to pursue a new coal mine in Cumbria.

Do the Government not see the benefit in these amendments to have regard to climate-related financial risk when setting capital adequacy requirements? If not, could they specify what their position is? Will they not admit that there is a direct correlation between the climate change emergency, fossil fuels and financial services regulation? Perhaps the noble Earl could provide us with answers when he winds up.