Baroness Northover
Main Page: Baroness Northover (Liberal Democrat - Life peer)
Lord Harrison
My Lords, the UK corporate governance framework is built on the principle that shareholders exercise oversight of company boards. The publication last year of the UK stewardship code marked a recognition that this ownership role needed to be taken more seriously by the institutional investment community. Indeed, I believe the code should include oversight of environmental, social and governance issues, not simply because it is the right thing to do or because these issues have a material impact on company returns, but also because it translates into a competitive advantage for business. Sadly, shareholder scrutiny does not always work, as in the case of the BP oil spill due to lax safety standards. Two months before that disaster, a shareholder resolution on tar sands—a similar method of oil extraction to deep-water drilling—which was put forward to increase disclosure of the risk involved, was rejected by 90 per cent of shareholders. As the noble Lord, Lord Freud, commented in a recent debate,
“some pressure on the BP board by its shareholders in relation to environmental issues, might have been especially valuable to the company”.—[Official Report, 15/3/11; col. GC 28.]
I later asked a question of the noble Lord, Lord Freud, along similar lines. He indicated that the Government had no ideas for new regulations in the current climate but they are open to creative ways of improving the quality of disclosure. So I ask the Minister: are the Government continuing to explore non-regulatory ways to encourage better reporting by pension funds, and what assessment, if any, have the Government made of the adequacy of the reporting at present? We need to improve matters.
The UK stewardship code encourages fund managers to disclose their voting records and the Government have confirmed that it is important that all institutional investors disclose their voting. Voting and engagement on social and environmental issues is an important part of an investor’s toolkit for managing risk that could affect savers and yet, after years of voluntary codes, only 64 per cent of fund managers and 21 per cent of pension schemes publicly disclose their voting standards. The Government have reserve powers to make voting disclosure mandatory. Are they thinking about it and under what circumstances might they contemplate it? Are they open to ideas of improving the quality of pension funds’ disclosures on the management of environmental and social risks? Perhaps the Minister could tell us.
Another, besetting problem is the short-term approach to these matters. As Paul Abberley, CEO of Aviva Investors, recently put it:
“If you are investing in a company with a long-term time horizon, it very much matters to know about sustainability issues, but if you are taking a time horizon of an average holding of six weeks, you might take the view that there may be a time bomb ticking but it is unlikely to go off in my holding period”.
I am very pleased that Vince Cable, the Secretary of State, has announced a review of economic short-termism and published a call for evidence on a long-term focus for corporate Britain. In addition, he has appointed Professor John Kay to oversee that with questions such as how best to ensure that the timescales over which companies and fund managers operate match the interests of clients and beneficiaries. Equally, how do you establish the most effective means of boosting transparency for clients, underlying beneficiaries and companies themselves?
Another worry is the misinterpretation of the fiduciary duty. The FairPensions report, Protecting Our Best Interests: Rediscovering Fiduciary Obligation—I am pleased to acknowledge the help from FairPensions for this debate—was published in March 2011 and received a good hearing from Ministers Ed Davey and Steve Webb. I wonder whether the Government will respond to this, to encompass and clarify. Howard Pearce of the Environment Agency pension fund argues that,
“all pension funds will need to adopt a climate change-proofed financial investment strategy in the future to enable them to fulfil their fiduciary duties”.
However, fiduciary duties should demand an enlightened approach to social and environmental issues, but we all know that too often they are invoked to justify the reverse. Pension fund members are told that their fund cannot be concerned with stopping climate change because it has a fiduciary duty to maximise returns. On closer analysis, that seems daft.
I am a great supporter of narrative reporting. I think it is an improvement on what we have had before in company reports. Nevertheless, we have problems relating to unreliable information. Many investors say that the lack of verification makes it difficult for them to rely on narrative reports, which can be misleading or present a rose-tinted view of the world. The OFR included an enhanced audit, requiring a higher standard of verification than is currently the regime. Sometimes it is up against incomplete information. Many companies focus on peripheral corporate citizenship activities undertaken during the year, such as volunteering—I am wholly in favour of volunteering—rather than on key social and environmental risks to their core business such as water, security and scarcity. No official guidance has been published on what constitutes an adequate report. Perhaps the Minister can comment on that.
A third problem is inadequate enforcement. The regulator has judged that two-thirds of annual reports fall short of legal requirements in relation to principal risk, yet in 2008-09 it did not take enforcement action against a single company. The regulator is not resourced to take active enforcement action and generally responds only to complaints from investors and NGOs. In the light of that, I ask the Minister whether the Government can confirm that they still intend to bring forward proposals specifically to drive up the quality of social and environmental reporting, as indicated in the coalition agreement. Do the Government accept that better reporting will achieve their objective only if investors have confidence in it? Do they therefore agree that any new reporting regime must contain improved mechanisms for guaranteeing the reliability of information, whether through enhanced audit or more robust enforcement? I declare an interest as the vice-chairman of the All-Party Group on Corporate Governance.
In conclusion, I ask the Minister whether she can put the matter in this frame. Sometimes we worry about the introduction of legislation but, to my mind, and in my assessment of it, we have to create a view that consideration for environmental and social and corporate governance is not a chore but a cheerleader for a better approach to what a company is doing. It can enhance its competitiveness within the market if it complies not only in a tick-box way, but with verve, inspiration and interest. I ask the Minister whether, when they think about it deeply, her Government are capable of leading the charge of encouraging companies to take this more positive attitude, which I think will carry with it the appropriate approach to something which is very important to investors, to shareholders and to pension fund holders for the future. I am very grateful to all those who are to contribute to this debate. I look forward to the Minister's reply.
Baroness Northover
I remind noble Lords that this is a time-limited debate. When the clock shows “3”, noble Lords will have had their time.