Environmental, Social and Governance Developments

Alexander Stafford Excerpts

Monday 23rd October 2023 Commons Chamber

[Alexander Stafford (Rother Valley) (Con)]

As the founding chairman of the all-party parliamentary group on environmental, social and governance, I am delighted to have secured the first ever debate on environmental, social and governance developments in the UK in this place. I refer the House to my entry in the Register of Members’ Financial Interests and to the all-party group’s interests as well.

ESG is a set of characteristics that can be used to assess the non-financial elements of an investment or business decision. In its simplest form, ESG is a way to take into account potential risks and rewards that might not be obvious from a balance sheet. Everyone, in their own way, incorporates ESG criteria into each and every economic decision, even if unknowingly.

For instance, the property developer does not buy land next to a crumbling cliff; a family might choose not to go to a particular shop because they have heard that it treats its employees badly; or a woman might change jobs to work for a firm that is fighting the gender pay gap. ESG is simply the use of non-financial criteria in decision making—a way for investors, companies and individuals to get a bigger picture of the impact of their investments, which will help them better understand the risks and, more importantly, the rewards.

Recently, there has been much debate about ESG, as it has risen in prominence. The number of ESG assets under management has grown by more than 150% since 2015, with global ESG assets expected to exceed £41 trillion or about four times the value of all the assets held in the UK. They will also account for a third of all assets under management by 2025. This scale-up has been met with some concern about ESG perhaps having some underlying political current. This is wrong. In its true form, ESG is simply an investment strategy—one that, like all investment strategies, aspires to low risk and high return. ESG is not a political stance, a way of life or a mantra for investors, although of course in some situations it is unfortunately used wrongly to pursue certain political agendas. In others, it is seen as shorthand for ethical or impact investing. However, it is neither.

In this debate, I will be sticking to our definition of ESG as an investment strategy and hoping to make the case to Government for why we should be encouraging it, what problems we have to overcome and how best to claim the crown, and the associated benefits, as the world leaders of ESG investing.

[Jim Shannon (Strangford) (DUP)]

I commend the hon. Gentleman for securing this debate. Does he agree that if we create a science-based and world-beating taxonomy, businesses that can show alignment with the UK green taxonomy will automatically be in alignment with international taxonomies, which should ensure that there is no divergence, which should subsequently enhance our capacity? Does he further agree that Government and the Minister have a role to play in assisting businesses to achieve that potential, so that all of us in the United Kingdom of Great Britain and Northern Ireland can gain and everybody can be a winner?

[Alexander Stafford]

I thank the hon. Member for intervening; it is always a pleasure when he joins such debates. He mentioned the Minister, who I know has a good, keen, personal interest in ESG, having worked in the field prior to coming to this place. The hon. Member is completely right about the green taxonomy. We need a robust taxonomy—I will come to that later—but it is a shame that we are behind where we should be with the green taxonomy. We need to be careful to ensure that our green taxonomy is robust and world leading. One of the many benefits of leaving the European Union is that we can define what we want and how we want it ourselves. By having a UK green taxonomy, we can ensure that we are world leaders in the UK, including in Northern Ireland especially, which I know has a high level of financial services.

Let me go back to the meat of my speech. It is not the case that those investing along ESG lines do not want to see good done for planet and people—they do. For example, we know that ESG investors are sometimes willing to pay higher fees and to see lower returns than their more returns-focused peers. The Wall Street Journal reported earlier this year that ESG funds could charge up to three times more. I do not exclude those types of companies and investors from this discussion. Rather, in holding the first ever debate on ESG in the House, I hope that more discourse will lead to more action.

It is clear that using non-financial metrics, and thereby factoring in all the data available to make the most rational, informed investment decision possible, will lead to financial returns. For example, more ESG-aligned employers will be able to hire better candidates for less—something known as taking a green cut, which is the attitude that up to 48% of younger people were recently reported as taking. Equally, improving environmental ratings through technology can lead to huge efficiency savings for companies. For example, some studies have shown that using low-energy lighting has a payback of less than 12 months, which is a win for the company’s bottom line and its sustainability standards. This reflexive impact of ESG is known as “double materiality”, which is how a business is affected by changing conditions—be they climate, social, or governance—and what that company is doing to contribute to or militate against those changes. That is becoming more and more important for investors to factor in.

There are also huge financial benefits to be gained from embracing ESG for the whole country, including Northern Ireland. The UK is already home to the oldest and most trusted conventional financial centre. That is coupled with the City of London’s commitment to sustainability, topping the Global Green Finance Index. Therefore, with a little extra effect, we will secure a home for ESG investors inside our border.

ESG’s recent rise in popularity has caused some growing pains. Primarily, the lack of universal frameworks and metrics mean that trust in ESG is at an all-time low, as we have seen in anti-ESG proposals approved by boards globally. In ESG investing, as in all business, trust is paramount. Just as an investor must be sure that their investment is sound, and that they will not suddenly find themselves out of pocket, an ESG investor needs to be sure that any claims to sustainability are true.

We have a rich history of accounting for financial accuracy in this country, with the Domesday Book perhaps being the earliest example—in that case, the new, or relatively new, King William checking that his investment was as profitable as he had thought. That invasion of 1066 did not come cheap. It took 800 years, and a parliamentary Select Committee to develop something closer to modern accountancy practices, but the UK is now an oasis of bookkeeping and verifiable investing. Fraudulent financial claims can be easily spotted and shut down. Why then, is the same not the case for fraudulent ESG claims?

One of the main causes of the problem is that much of what ESG seeks to account for is intangible and therefore incalculable with our current frameworks. How, for example, might a company begin to calculate its effect on biodiversity? What metric can an investor look for to see an investment’s diversity score? This problem is not insurmountable. Twenty years ago, as major economies were waking up to the true effects of increasing carbon emissions and climate change, the issue of how to count carbon seemed similarly difficult. Today, after much trial and error and leadership from the UK, we can quickly and easily calculate the carbon footprint of any business, person, or product.

Developing frameworks to help business understand, quantify and account for non-financial factors is difficult but very important. Proper frameworks are the first lines of defence against a full breakdown in trust in ESG reporting and investing. They will also help to stop so-called greenwashing, where a product or investment is marketed as being more sustainable than it is. Despite the name, this applies across all three ESG objectives. Such distrust is made worse by some ESG advisers and ratings agencies, whose business plans seem to depend on being able to sell five-star ESG ratings to the highest bidder, without giving any proof of them whatever—a veritable wild west of the ESG world. Of course, many of these businesses are doing comprehensive evaluations of the products, but given the difficulty that an investor would have in distinguishing the good ratings from the bad, it is hardly the confidence-inspiring boost that they need.

I know that the Treasury is well aware of the concerns, and I am pleased that there was a consultation held earlier this year on how best to introduce regulation on ESG ratings. This is a good and necessary step, but we are in danger of winning the battle but losing the war if we delay any further. I urge the Minister to speed up this regulation as much as possible.

We can go further than regulation, however, and set up the frameworks we need to allow any investor or company to understand quickly and easily the ESG impacts of their investments. A taxonomy—essentially a classification of what is and what is not allowed—would do just that, and the Treasury’s plan to develop a UK green taxonomy is exactly the right step. This taxonomy, as well as its social and governance cousins, would clearly outline investments that are sustainable—and therefore could be marketed as such—and those that are not. Given that the EU’s version of a green taxonomy is dead in the water—it is a bureaucratic nightmare that is no longer fit for purpose—we can make our own decisions here.

We are lucky that, thanks to Brexit, we have been given the chance to design our own robust taxonomy, one that could and should lead the world and entrench the UK as the true home of sustainable finance. Sadly, we have seen our taxonomy delayed and delayed and delayed. I was pleased to see the UK green taxonomy mentioned in this year’s green finance strategy update, but on the original timeline we should already be halfway through the legislative process by now.

--- Later in debate ---

[Mr Deputy Speaker (Sir Roger Gale)]

I am not sure whether the hon. Gentleman is aware, but one of the arcane practices is that because the Adjournment debate started before 10 o’clock, we had to move the motion again at 10. The hon. Gentleman has the Floor.

[Alexander Stafford]

Thank you for that guidance, Mr Deputy Speaker, and for explaining some of the wonderful aspects of this House.

I ask the Minister whether he will ensure that investors have a framework to separate the sustainable from the spurious, and whether he will take this chance to outline the full timetable for the taxonomy. He will have plenty of time to do so, as we have more time for this Adjournment debate. I look forward to a full and detailed timeline of when we will get this taxonomy. I am willing for him to intervene now if he so wishes. Clearly he does not.

Perhaps another, less discussed difficulty facing ESG is imbalance. The heavy focus has been on environmental considerations as being the most important, often at the cost of social and governance factors. Let me refer to one recent example of the consequences of failing to take that holistic approach. Dame Alison Rose is clearly a champion for socially sustainable business, particularly around gender equality. She is a torchbearer for women in business, having smashed the glass ceiling to become the first woman to lead a major UK bank. However, despite her very strong credentials in social sustainability and the progressive environmental policy of NatWest Group as a whole, under her leadership there was a clear failure in governance when discussing a customer’s private banking details with a journalist—I think that we all know the gentleman I am referring to.

I am sure that all Members will agree that it is right that Dame Alison resigned over that abject failure of governance, but I also know that many will join me in expressing our disappointment that the further empowering of women in business and entrepreneurship will suffer because of that failure of governance. Excelling in one area does not absolve someone from indiscretions in others. The E, S and G cannot and should not be separated; a failure in one is a failure in them all. Clearer metrics and frameworks, both within each strand of ESG and encompassing all three elements, will allow for better reporting and therefore better understanding for investors and companies. That will, in turn, return the trust that ESG has been lacking.

It is easy to oversimplify the true impact of more data and disclosures, and we cannot ignore the practical implications of such policies, particularly on smaller businesses and individual investors. Since the turn of the millennium there has been a 647% increase in ESG regulations, alongside miles of other red tape in all shapes and sizes. The disclosure burden on investors and businesses is bigger than at any previous point, leading to whole sectors and teams devoted to auditing every aspect of a business. The EU’s own research indicates that its disclosure requirements will cost large firms upwards of €100,000 a year in paperwork alone.

Likewise, the UK green taxonomy, when it is eventually published, will join about 30 other environmentally focused taxonomies across the globe, each needing different types of disclosures. Large companies may be able to absorb that, but it is a potentially lethal issue for small and medium-sized enterprises, which make up 99% of British businesses and have a far more limited staffing and budgetary ability to process those types of disclosures. In pushing for more comprehensive reporting frameworks, we should not bury small businesses under piles of paperwork.

Over the course of my time chairing the all-party parliamentary group, I have been delighted to meet many small businesses that want to integrate ESG into their practices. Many of them, however, have expressed to me their nerves about how to keep up with a continually changing regulatory landscape, and the addition of further disclosures hangs like a dark cloud, so how do we achieve better ESG reporting without overburdening businesses and, perhaps more importantly for those businesses, why should they engage in this space? How do we make ESG work for businesses rather than making businesses work for ESG?

In this debate, I have mostly spoken about ESG as a risk management tool that investors can use as part of their normal investment analysis. There are, however, many upsides for both businesses and the UK as a whole. I have already outlined how a business might utilise ESG to increase efficiency or improve its workforce. For the UK as a whole, though, SMEs are the perfect vehicle for public policy objectives to be achieved without the need for public sector financing or burdensome legislation.

The all-party parliamentary group’s latest report—on women in business, to be published tomorrow—is perhaps a good example. It is a sad fact that women are still under-represented in business today. That is not only a social problem; it also represents a £250 billion gap in our economy. Luckily, as in other areas, the private sector is far ahead of policymakers here. Thanks to private firms and independent groups, the UK has one of the highest levels of female representation on boards in the world; it is beaten only by countries that have legislated to force companies to adhere to quotas. Top-down government can make serious strides, but the home straight will always require us to rely on great British businesses. We cannot let them down.

ESG adds value to business, but it cannot become a barrier. Many Members will, like me, have heard concerning reports about some companies, particularly those involved in defence, being excluded from access to investment and capital on ESG grounds. As the Government’s defence Command Paper points out, there is no contradiction between investing along ESG principles and the defence industry.

I have already spoken about the concerning anti-ESG movement, much of it stemming from the view that a movement for divestment in such contentious businesses is because of a political stance. Again, I argue that that is a mischaracterisation of ESG. Instead, and like the Government, I believe that ESG allows investors to factor in the environmental, social and governance impacts of these firms into their decision-making process and helps firms to take action that will result in better returns. These factors should not be unduly taken out of context for political reasons.

Governments need to create an environment where businesses can disclose problem areas without the fear of backlash, so long as they are responsible. Good investors can be a driving force behind companies cleaning up their acts. We must continue to ensure that all businesses have access to the capital they need from reputable, interested investors. We have seen continued protests as part of an environmental campaign, calling for businesses to divest away from oil and gas. But that would actually be detrimental to the world’s overall climate ambitions.

Once contentious industries such as oil and gas, defence, tobacco or alcohol can no longer rely on investment from large, public companies that are open and clear about their business ethos, they will most likely leverage finance from less savoury investors. It is in our interests to engage, not divest, and make sure that trusted investors retain a hand on the wheel of these industries, to steer them to a more sustainable and better future.

The issue is not just about a handful of industries. When faced with challenges that may bring public and investor backlash, all firms need to feel secure that they are able to disclose bad practices and work to rectify them, rather than quietly divesting of the malpractice. I will give one example: the International Labour Organisation estimates that there are nearly 50 million modern slaves across the world today. It is almost impossible, therefore, for any large company not to use modern slavery at some point in its supply chain. As much as 20% of worldwide cotton production stems from slave-labour—Members in the Chamber today could be wearing slave-manufactured clothing.

What should a responsible clothing business do if it discovers that it has been accidentally buying slavery-produced goods? Should it quietly switch suppliers and hope that the next one does not have the same problem, or should it work with the supply chain to end the practice of slavery? Divestment for fear of repercussions will not solve environmental, social or governance problems, and companies should not be penalised for bringing accidental wrongdoings to light.

Making ESG work for businesses requires that they should be able to show investors what they are doing to tackle poor business practices without fearing that they will be left without access to capital. The frameworks we build must include room for transitional sustainability improvements, allowing investors and companies to own up to their failings and work to improve them, rather than divesting and passing the problem along.

Having outlined why we should be encouraging ESG, what problems we face in doing so and how it can help business, investors and the UK as a whole, we must now ask what real action we can take to achieve this. I have in this debate referred consistently to frameworks or metrics, which will give certainty and clarity, but what form should they take? Any framework needs to be credible, useable and, importantly, international. What is more, we need to act quickly to ensure that the UK is the go-to place for ESG. Will the Minister be sure to look into speeding up the publication of frameworks and regulations designed to restore trust in ESG?

The importance of credibility in a framework was confirmed by the EU’s recent green taxonomy failures. As Members will know, the EU decided to include natural gas in its green taxonomy, effectively allowing any product using energy derived from fossil fuels to claim it was “green.” That is perhaps the most serious and egregious example of greenwashing, and it completely undermines any pretence that the EU’s taxonomy can be relied upon to build the trust that I have been so clear we need. Our own framework, and certainly our own green taxonomy, must not have the same problem. Can the Minister assure me that any framework will be science-led, and that ensuring trust will be a key consideration in the design of those frameworks? We may be delayed in our green taxonomy, so ours may not be the first, but let us make it the best. Let us learn from the mistakes made by other countries so that the UK is the gold standard.

Going further, if the UK is to be the ultimate home for ESG, we need to create metrics for ESG criteria that are currently unquantifiable. Much of the work that has already taken place has gone into fleshing out areas with existing data, but in order to ensure that greenwashing cannot happen across any element of ESG, we need to drive forward progress on creating standardised metrics for areas such as biodiversity, community impacts, management structures and so much more. To ensure that the UK is truly world-leading, will the Minister be sure to speak to his colleagues at the Department for Environment, Food and Rural Affairs and the Department for Work and Pensions to create cross-governmental taskforces that will be able to create those types of framework?

Usability is also vital. As I have mentioned, particularly in reference to SMEs, burdening investors and businesses with extra regulation should not be the objective of any Government, let alone a robust Conservative Government. Any framework must allow for companies to disclose failures and work hard to redeem themselves. Companies’ work to achieve better results should be what they are judged by, rather than their failures. To encourage businesses to use ESG to their advantage along the lines that I have described, and so that the UK can leverage the firepower provided by our booming private sector, will the Minister ensure that making the UK an ESG hub will not have negative impacts on businesses and investors? We must look after SMEs.

Today’s supply chains, employees and financial flows span the world. It is our duty as policymakers to help British businesses and investors benefit from being part of the global economy. When it comes to ESG, that will mean working with the frameworks of our international partners and using our Brexit freedoms to design a system that allows for international co-operation. The Government’s signal earlier this year that we will be adopting wholesale the international financial reporting standards created by the International Sustainability Standards Board is a great start and will ensure that we remain international players, but I want us to be international leaders, especially as the EU will continue to build its own full disclosure system. Can the Minister confirm that we will continue along this path whenever possible?

ESG is not going away, and the UK should not be concerned about or discouraging of it. I must again pay tribute to the Government for already being proactive in creating a welcome environment for ESG, of which I know the Chancellor is already a keen advocate, but if we are to become the global home for ESG, we must move faster and do ever more. I hope that this place sees many more debates on the topic, and that we continue to open lines of communication and inquiry on one of the fastest growing sectors across the UK. As a home for ESG, we have strong foundations, but before we can fully welcome ESG inside, we must make sure that the structure is solid, or it risks total collapse.

[The Exchequer Secretary to the Treasury (Gareth Davies)]

I congratulate my hon. Friend the Member for Rother Valley (Alexander Stafford) on securing the debate, not least because, amazingly, it is the House’s first dedicated debate on this subject, which is remarkable—it will certainly not be the last. I know that he cares a great deal about this subject, not only as the chair of the APPG on ESG, but from his career. He speaks with great authority and knowledge of the subject, and I am grateful to him for the opportunity to set out the Government’s position on the important issues that he raised.

My hon. Friend will be aware of our steadfast commitment, enshrined in law, to reach net zero greenhouse gas emissions by the year 2050. We already lead the world on tackling climate change: we have decarbonised faster than any other major economy since 1990, reducing our emissions by nearly half while growing our economy by some two thirds. Renewables have gone from less than 7% of our electricity supply in 2010 to 48% in the first quarter of this year, which is fantastic progress. However, as the Prime Minister has said recently, we will not stop there. The Chancellor has set out his view that the UK’s green industries are key to creating growth across this United Kingdom and our whole economy, and the Prime Minister’s announcements have outlined how the Government are working to unblock key barriers to investment and decarbonisation.

Growing the sustainable finance sector to support the transition to net zero is a major priority for this Government, and in March we published our green finance strategy. The strategy sets out the policies, regulatory changes and frameworks that we will be focusing on and taking forward in the next two to three years, helping businesses to have more certainty. It includes, for example, our commitment to deliver a useful and usable UK green taxonomy—an important evidence-based classification tool that will clearly define what is meant by “green” so that the market knows where to channel investment. As the hon. Member for Strangford (Jim Shannon) rightly highlighted, that supply of relevant and reliable information will help guide us all in financing activities that actually support our net zero and environmental objectives, while making clearer where damaging greenwashing is taking place.

Businesses that claim to be delivering green outcomes while doing no such thing not only continue to damage our environment, but damage our collective efforts to reduce the impact on the natural world by undermining the efforts of their competitors and the confidence of the public. This is clearly something that we need to tackle. The Competition and Markets Authority has led a crackdown on greenwashing advertising; the green taxonomy will go much further, making it easier to test and verify claims across the board. I can tell my hon. Friend the Member for Rother Valley that our next step towards delivering that taxonomy—something that he has directly asked for—is direct consultation, as he would expect. That consultation will take place this autumn, ensuring that we gain market views. It is right that we do so, as that will help build trust in the process and build on lessons learned in other parts of the world.

[Alexander Stafford]

I am pleased that my hon. Friend is speaking so passionately from the Dispatch Box about the importance of building up trust. Does he agree that if we get this wrong, ESG greenwashing could be the next payment protection insurance scandal—something that everyone signed up for decades ago, for which we are still paying the price even now? If we get this wrong, we will face huge financial disadvantages and penalties down the line, so we must get the taxonomy right.

[Gareth Davies]

One of the reasons why we are looking at a UK taxonomy and being clear that we want to introduce one is to ensure that there is great transparency and clarity for investors; that, when they buy an investment product, they know what they are getting. One of the things that has historically been lacking in the market is an understanding of what fund managers mean by “green”, so investors are put at a disadvantage and at risk of not purchasing what they believe to be a green product. We will see how that consultation goes, but I assure my hon. Friend that it will take place this autumn.

On a global scale, the markets for ESG ratings and data are rapidly developing, and they are increasingly relied on by investors to guide their decision making. The growth of the integration of ESG into the investment process is expected to continue across all jurisdictions. However, ESG ratings providers currently fall outside the regulatory perimeter. This raises the risk of harm with unrated ratings, which often lack transparency, directing capital flows towards some companies and projects, and away from others. We are therefore exploring action to address these growing ESG investment trends, to ensure that this activity is robust, and that it protects UK markets and, ultimately, consumers. Alongside the updated green finance strategy, the Treasury has published a consultation seeking views for a potential future regulatory scheme for ESG ratings providers. The consultation closed on 30 June, with 94 responses received from industry, and we are reviewing those responses to inform the next stages of our work.

Any potential regulation would be aligned with recommendations made by the International Organisation of Security Commissions on how ESG data and ratings providers could improve their activities, such as improving transparency and mitigating conflicts of interest. It would also seek to be aligned with other jurisdictions, including those of Japan, Singapore and the EU, which are putting forward initiatives in this space. More transparent ESG ratings would build confidence in these products and the wider sustainable investment market, as investors would be better able to understand how their money is put to use.

Since the UK is at the forefront of international efforts on this issue, we have the opportunity to shape the approach of other jurisdictions. If they are to follow us, it is incumbent on us to set a good example, so we must recognise and address where ESG principles are misapplied. As my hon. Friend has pointed out, we have seen concerns around banking raised recently. We have been clear that, as a matter of public policy, it is wrong to remove someone’s bank account simply because of their political views. Free speech and the legitimate expression of differing views are essential British principles, just as much as is ESG.

Let me conclude by saying that I hope that, in the time I have been given, and in the time we had listening to my hon. Friend, he and other hon. Members can now appreciate that this country has built a sustainable finance market, product set and industry of which we should all be proud. We are one of the world’s great democracies, a country that advocates for the fair and considerate treatment of the environment and the people of this world, and one that practises what it preaches. We are determined to carry that on, making conscientious decisions that work for our country, supporting our finance industry to play an important role in our economy and, of course, in society.

Question put and agreed to.