Economic Activity of Public Bodies (Overseas Matters) Bill

Baroness Drake Excerpts

Committee stage
Tuesday 14th May 2024 Lords Chamber

Moved by

[Baroness Drake]

27: The Schedule, page 12, line 26, after “financial”, insert “risk, impact and”
Member’s explanatory statement
This amendment seeks to allow decision-makers in public bodies to consider the financial risk and impact associated with, for example, the delivery of contracted goods and services and the investments in the Local Government Pension Scheme, without falling foul of the prohibition.

[Baroness Drake (Lab)]

My Lords, in moving Amendment 27, I shall speak in support of Amendments 45 and 46A in this group.

Part 2 of the Schedule allows exceptions for certain types of consideration from the prohibition in Clause 1. Amendment 27 seeks to expand on those exceptions by adding financial risk and impact alongside financial value and practical utility as considerations that decision-makers can have regard to without violating the prohibition. This would allow considerations of material financial risk and impact when making investment decisions in the local government pension scheme and public procurement decisions without falling foul of the prohibition.

The current wording of the Bill, which explicitly accepts consideration of financial value but not consideration of financial risk and impact, leaves investment decisions informed by such considerations exposed to legal challenges, alleging that they are influenced by political or moral disapproval. The LGPS has no trustees, but it does have decision-makers who carry judiciary-like duties requiring consideration of financial risk and impact, as recognised by the Law Commission; government legislation; statutory guidance from the Secretary of State; the Financial Markets Law Committee; and the expectations of the Pensions Regulator. All investments and divestments have territorial considerations and country-specific factors.

The Minister advises that the Government intend the word “value” to cover financial risk and impact, but relying on the exception of consideration of financial value does not suffice to address the problem of the potential for legal challenge. Financial risk and impact encompass wider consideration for informed decision-making, particularly long-term investments held by pension schemes. Financial value, financial impact and financial risk are referenced by financial services and government legislation; they are related, but separate. Financial value is narrower, often linked to the price of an investment or asset reflecting market view at a point in time.

Considering material financial risk an impact inherent in any investment is fundamental to making informed decisions on the likelihood of achieving financial goals. The chilling effect of a widely drawn prohibition, the very narrow wording of the exceptions for certain considerations and the fear of legal uncertainty and litigation risk undermining the effective fulfilment of judiciary and public duties. Banning public bodies from imposing their own direct or indirect boycotts, disinvestment or sanctions campaigns may be a manifesto commitment, but the manner of its implementation should not give rise to legal uncertainty or perverse consequences when considered through the lens of the public good. Unfortunately, this Bill has those consequences.

Litigation risk will come not only from traditional domestic organisations that lobby for particular social or non-financial considerations to be embedded into LGPS decision-making. The real concern emerging is that the Bill opens up the potential for legal challenge from proxies for Governments abroad or bodies corporate with particular commercial interests in areas where no formal sanctions or other restrictions are in place. Such challenges may be made not in good faith but, rather, from the sectoral, commercial or national interest of those raising the challenge. Anyone under this Bill with sufficient interest could seek judicial review as to whether an investment decision, influenced by consideration of financial risk or impact, was influenced by political or moral disapproval. Similar reasoning applies to those who make procurement decisions in the interests of the taxpayer.

Explicitly accepting financial risk and impact considerations from the prohibition is necessary if decision-makers are to meet their current statutory obligations or duties to illustrate. The DWP’s recent Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 made it clear that decision-makers should cover the level of risk in relation to the intended investment of the assets. They are obliged to consider the risk in the investments in addition to their value.

The local government pensions scheme is a statutory occupational pension scheme, subject to Secretary of State oversight and statutory guidance. The Local Government Pension Scheme (Management and Investment of Funds) Regulations, which cover investment strategy statements, refer to and set requirement for both value and risk. Investment strategy must include how risks are assessed and managed. Following the Law Commission report, Fiduciary Duties of Investment Intermediaries, the Government introduced statutory guidance to require the LGPS to publish its policy on how social, environmental and corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments and to consider any factors that are financially material to investment performance—considerations which Amendment 46A, in the name of my noble friend Lord Collins, rightly seeks to protect.

Indeed, recent guidance published by the DWP on its website advises decision-makers to

“integrate financially material ESG factors into their decisions”

on investment and stewardship

“and seek the best possible risk-adjusted returns for the duration of their investments”.

Regulation again requires the LGPS to have a policy on how it exercises stewardship. The Bill, by not excepting financial risk and impact considerations from the prohibition, exposes the scheme to litigation in exercising those stewardship duties, as a result of any statements, views, conversations, votes cast, et cetera, during the engagement with the companies that it invests in. That undermines effective stewardship activities.

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[Baroness Neville-Rolfe (Con)]

I can reassure the noble and learned Lord that lawyers have been involved in drafting the Bill, as he can probably imagine. I tried to set out quite clearly at the beginning why we felt that the wording we got was right; that included financial impact. I have subsequently clarified the point about motivation and financial risk.

In the excitement, I have lost my place. I was asked about the effect of removing Clause 12, and was hoping to be able to answer the noble Lord. Removing the clause would mean that the ban would not apply to the fund investment decisions of administering authorities of LGPS. The administering authorities are local authorities, which are clearly a core part of the state and are therefore public authorities for the purposes of Section 6 of the Human Rights Act. That is why they are the only pension funds captured by the Bill. We have seen clear examples of local authorities attempting to engage in BDS activity in the past. It would not be appropriate to apply the ban to funds administered by private entities, such as the Universities Superannuation Scheme.

As I have argued before, council tax payers should be able to expect their local councils to exert time and effort on solving local issues, rather than spending time thinking about boycotts of foreign states when, as the noble Lord has said, the beneficiaries expect the responsible authorities to concentrate on returns and the ongoing viability of their investments in the interests of the beneficiaries. If the Bill were to stand without Clause 12, councils coming under pressure to develop their own policies on divisive international issues would be pushed towards an LGPS loophole to implement BDS campaigns.

The priority for these funds should be to provide stability and good long-term returns for the hard-working local government officials who are their members. We now know that this includes the noble Lord, Lord Warner, the noble Baroness, Lady Janke, and others. The Bill helps the administering authorities not to be distracted from this important purpose, and to focus on returns in a responsible, long-term way. For these reasons, I ask noble Lords not to press their amendments and not to oppose the question that Clause 12 stand part of the Bill.

[Baroness Drake (Lab)]

My Lords, I thank everyone for participating in this debate, particularly those who supported my amendment.

I should make it clear that I have not actually challenged the manifesto commitment; lots of others do, but I have not. I have challenged that the manner of its implementation introduces legal uncertainty and perverse consequences: inviting a wider range of legal challenges and judicial review. It would seem good business to address that.

The Minister says that she hopes I am assured by the Government’s assurances, but it is not me who needs the Government’s assurances; I am not a decision-maker in the Local Government Pension Scheme or in public procurement. Most people know that I am a trustee, but I am not in a local government pension scheme. It is those with the concerns—I know they have them—and the decision-making responsibility who are not reassured by these statements, and were not reassured by the statement of the Secretary of State.

We can stand on these Benches and argue between ourselves as to what “financial” does or does not embrace —I can bore you with 30 years of experience and what legal guidance I have had as a trustee—but that does not matter. We have an uncertainty; we are resting on a government statement that it is not uncertain, but we are already uncertain as to whether it includes impact. We could simply address the issue and put “financial risk” as one of the explicit considerations that need not necessarily fall foul of the Bill. I have not heard a single good reason today why such a simple tweak could not address this issue. I have had wider discussions on a whole range of things. It is not only me but people I have spoken to—who will be engaged in decision-making—who believe it opens up the range for judicial review and legal challenge, and feel it has legal uncertainty. It seems to be good sense, when you are looking at a fund of £360 billion, that when those concerns are expressed, you address them.

The Bill creates a whole new machinery that allows the checking of the integrity of local government pension scheme investment decisions against a new set of criteria. That has opened up new grounds for judicial review and given opportunities or succour to possibly bad-faith actors. Legal proceedings could demand to know all the details of exchanges and engagement in discharging stewardship duties, to see whether an investment decision fell within an accepted category. In a £360 billion local government pension scheme, I would want to nail that. If I was a government department and was going to introduce that machinery—which suddenly introduces a whole new set of criteria for investment decisions—I would want to nail down the range of areas under which local government pension scheme decision-makers could be attacked.

There is uncertainty. I quote from the Financial Markets Law Committee report, which the Government have endorsed and think is a good idea. It says that

“investment decisions have all become more challenging in the context of sustainability and the subject of climate change … Today it is sometimes easier to state the duties than it is to apply them”.

Well, the Bill makes it even more difficult to apply them. It brings a whole new range of criteria and invites legal uncertainty at the same time, because we cannot agree on the definition of “financial value”, but if we added a tweak, such as risk and impact, we could nail some of this. As has been said, why can we not just lock it down and get rid of some of this uncertainty?

We have some guidance on impact. I cannot bring every reference document that I would bring to the table if I was sitting in a negotiating room, but we have very new guidance from the DWP, on its website, on social factors and the impact. These are not the only factors, but it gives a meaning to “impact”:

“the impact of social factors on an investment”

or the “impacts of an investment”. It is a pretty wide range. In fact, on ESG, the statutory guidance to local government says that it can consider any factor that is financially material to investment principles. So we can track from the Government’s own publication what impact means. The Minister referred to having government lawyers; they will have drafted some of those documents.

The explanatory statement to Amendment 46A says that its intention is for there to be the ability to carry on applying ESG factors in the way they have traditionally been applied. We know what that means in local government, because it is set out very clearly in statutory guidance.

On the issue of territorial matters, I tried to give an extreme example—passive funds. Anybody who is a trustee knows what passive funds are. On the logic of this, unless we put “risk” in very clearly, if you have a passive fund that does climate transaction benchmarks, you might be liable to someone saying, “Well, there was a company or a country in there that was screened out; did you individually interrogate the way in which that passive fund that you invested in was screened out?”. I know that is extreme, but this is the situation we get into unless issues such as impact and risk—clearly legitimate factors to take into account, as set out in statutory guidance from the relevant department to LGPS—can unequivocally be taken into account.

The noble Baroness, Lady Altmann, spent a lot of time referring to the Local Government Pension Scheme as a statutory pension scheme; it is not a trust-based scheme. Absolutely—I mentioned that because I wanted to set out that I understood that distinction because it is not relevant to the point I am making. It is not relevant to the point that it is ambiguous and uncertain under the terms of this legislation.

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[Lord Gascoigne (Con)]

I ask the noble Baroness to be brief.

[Baroness Drake (Lab)]

I will say my last sentence.

[Lord Collins of Highbury (Lab)]

The rules say “normally brief” but I think the Committee would like to hear from my noble friend on this important issue.

[Lord Gascoigne (Con)]

With respect, I am not stopping the noble Baroness; I am just asking her to be brief.

[Baroness Drake (Lab)]

I will accept the constraint.

Finally, I take the point about lawyers having been involved in drafting this. I do not mean to be rude but in the area of investment and pension decisions, the road is littered with government-cleared legislation and regulation that has ended up being problematic or challenged in the courts and having to be revisited. I do not think we can rely wholly on that argument.

I think my amendment is being overblown. It is very clear that there is a problem, and that those engaged in this decision-making feel that there is a problem. The Government are opening up areas of legal uncertainty. We can nail it with a couple of words. I beg leave to withdraw the amendment.

Amendment 27 withdrawn.