Financial Services and Markets Bill

Baroness Drake Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

This amendment is a logical next step to Schedule 17 to the Environment Act 2021, which, if secondary regulations are ever brought forward after over a year of delay, will ban the import of certain goods produced on illegally deforested land. This amendment would allow us to future-proof UK financial regulation so it delivers a liveable planet and a workable food system, with all the attendant benefits for global economic stability. Inaction allows these deforesting companies to continue turning a profit by undermining the basis for future prosperity. It goes absolutely in the face of everything in the Dasgupta review. I look forward to the Minister’s response, and will be testing the opinion of the House on this.

[Baroness Drake (Lab)]

My Lords, I declare my interests as trustee of DB and master trusts. I will speak to Amendment 93. Government Amendment 4 is welcome because it recognises the necessary direction of travel on disclosure requirements on sustainability, but the problem is that it is not sufficient. It gives the Treasury the power to issue a policy statement on SDRs and to require the regulators to report against this, but the FCA does not have the powers to actually implement SDRs. As Amendment 93 proposes, there is a need to give the FCA the power to publish guidance on how asset managers must consider the long-term consequences of any decision; consider the impact of climate, nature and society on their investments; consider the impact of their investments on climate and nature; and publicly report on their considerations.

It is interesting that the explanatory statement accompanying the published government amendment states that it supports

“the regulation of disclosure requirements relating to sustainability”

by requiring the FCA not only to have regard to Treasury policy but to inform a policy statement by the Treasury. It is difficult to see how the FCA could optimally inform Treasury policy if it does not set guidance on expected content and open reporting by asset managers on the impact of their investment decision-making.

Confusion among fiduciaries about the extent of their duty to consider such impacts is not limited to occupational pension schemes; it runs across the length of the investment chain. The FCA has broad powers to issue guidance under Section 139A of the Financial Services and Markets Act 2000, but there is still an ambiguity. Amendment 93 gives the FCA the explicit power to issue guidance on the disclosure of considerations of sustainability impacts as a core part of the investment managers’ duties. This is not inconsistent with the existing duty on trustees, in Regulation 2 of the occupational pensions investment regulations, to report on how they have complied with the Section 35 duties of the Pensions Act 1995.

The proposed FCA guidance is not legally binding: regulated firms would be free to diverge from it, but there is an expectation that they would need to explain why they have done so. There is a need to apply the guidance to contract-based personal pension schemes as well, to avoid the risk of regulatory arbitrage between a weaker FCA regime and a more robust TPR disclosure regime.

The concept of fiduciary duty borne by those responsible for the best interests of pension scheme members is evolving, and, as we heard, the Government’s updated green finance strategy of 2023 includes a commitment to review pension trustees’ fiduciary duties and stewardship activities. That trustees must act in the best interests of scheme members must not be a principle in doubt or, indeed, overridden. The key issue is what “acting in savers’ best interests” means in law for fiduciaries, and the extent to which it includes stewardship and ESG engagement. If fiduciaries ignore the impacts of investment strategies on society, climate and nature, or vice versa, those major externalities will eventually impact them at a later date.

In seeking more productive investment by the finance sector, the Government should acknowledge that pension funds are not the only decision-maker or the beginning and end of the problem; asset managers have an equally key role to play in managing impacts and considering the long-term consequences. Amending FCA regulation powers to guide open reporting on these matters will encourage investment away from environmentally and socially damaging activities, and towards supporting efficient transition to net zero, nature protection and healthy societies, in a way that is in the savers’ best interests and that supports the successful transition of the wider economy.

Guidance from regulators is required along the length of the investment chains as risks become more acute. Pension schemes contract with fund managers to manage assets. If schemes are expected to consider the sustainability of their investments, they need fund managers to support them by undertaking that activity too. Trustees’ ability to discharge their ESG and stewardship responsibilities to greatest effect has a dependency on how regulators expect asset managers to discharge their duties. Expectations placed on pension funds and asset managers are a complement to, not a substitute for, government policies on efficient transition to a sustainable economic future. Government regulations that perversely drive greenwashing or green asset bubble risk are equally unsustainable.

The Government want to see more productive investment by the financial sector, but mandating how citizens’ private assets are invested would displace trustee fiduciary duty with state control of private assets, inviting litigation and risking impacting public attitudes to private saving. But, in giving the FCA power to guide the content and require open reporting on sustainability, Amendment 93 can assist confidence in aligning members’ best interests with increasing productive investment. I commend it to the House.

[Lord Naseby (Con)]

My Lords, I welcome Amendment 4. Having listened to my noble friend on the Front Bench in Committee and subsequently, I know that she played a major role in this absolutely vital amendment coming forward.

The noble Baroness, Lady Wheatcroft, was quite right. Let us reflect on two key areas where we desperately need the SDR policy statement. First, in terms of the energy market, is the national grid. Today, all sorts of decisions have to be made by the energy market, whether on nuclear, solar or whatever else. People in that market want to know at what point the national grid will be in a position to be connected to them—that is absolutely key to sustainability.

Secondly, in my judgment, the public in general are confused and have no understanding of what they should do about making their contribution to net zero with the condition of their property. Some of us had a good briefing on that situation from the building society movement today. We must address this. But the principle is here, and I thank my noble friend on the Front Bench for how it has come forward.

I declare an interest as a trustee of the Parliamentary Contributory Pension Fund. Noble colleagues will not be members of it unless they have been in the other place or are ministerial colleagues. Nevertheless, I can assure anybody who knows anything about that particular area that, in my judgment, our fund—given the care and attention paid by its chairman and the members in terms of the time put in freely and the trouble that is taken to ensure that we listen to asset managers, question asset management and challenge the advisers we have—is aware of government policy, whatever it may be. Yes, we welcome guidance and particular in- depth information. But—and this is a very big “but” in capital letters—our primary duty is to the membership and the beneficiaries, and we must never forget that. We are not there to take risks, unless we really have to take them, and we debate these issues.

All I will say in relation to the forestry dimension is that I do not welcome that particular one more than any other. I want concrete material that is of benefit to those who are the beneficiaries. With that, I do not think that I need to say any more.