Financial Services Bill

Baroness Sheehan Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

[Baroness Sheehan (LD) [V]]

My Lords, it is a pleasure to follow the noble Baroness, Lady Ritchie of Downpatrick. I found myself nodding at her every point. I pay wholesome tribute to my noble friend Lord Oates for the manner in which he introduced this series of amendments and the comprehensive nature of his speech. These amendments get to the nub of the issue.

In 1989, I left a comfortable job in advertising and went back to university, to bolster my chemistry degree and get a better understanding of the scientific evidence and facts behind the litany of dreadful things that seemed to be happening to the planet. The main issues of concern in those days were acid rain, the ozone hole, species loss and radiation in the environment, especially following the Chernobyl disaster in 1986. Another issue causing grave concern was what was then referred to as global warming. I wanted the facts. Specifically, I wanted to know to what extent climate change was anthropogenic.

When I left Imperial, I was in no doubt that the warming planet was due to the accumulation in the upper atmosphere of greenhouse gases, caused by the burning of fossil fuels since the start of the industrial age. The science was incontrovertible then, 30 years ago, and the ball was firmly in the political court. Over three decades later, to my utter frustration, when push comes to shove—and actions not words are needed—the political will appears lacking. I therefore welcome these amendments, especially Amendments 31 and 32, for their clarity of purpose.

I will say a few words about Amendment 28 in the names of my noble friends Lord Oates and Lady Kramer, and the noble Baroness, Lady Bennett of Manor Castle, the purpose of which is to place a requirement on the PRA, when setting the capital adequacy requirements of a credit institution, to have regard to its exposure to climate-related financial risk. It invokes the Task Force on Climate-Related Financial Disclosure and our domestic commitments through the Climate Change Act 2008, as amended in 2019. In my view, the amendment is pretty uncontroversial if you think that we are facing a climate emergency and I hope that the Minister will sympathise with its aims.

In Committee last Wednesday, the noble Lord, Lord Sharpe of Epsom, took me to task when I welcomed Amendment 48’s aim to bring forward the TCFD’s implementation by two years. He rightly said that the methodology to quantify the metrics was complicated and not yet in place. However, a huge amount of work is being done on the issue by UN agencies, EU agencies and the OECD, to name but a few.

I am heartened by the way that we met the challenge of developing and deploying not one but myriad vaccines in the space of a year. It is not much short of a miracle. That was made possible by global collaboration and working at speed, putting aside some artificial barriers to manufacturing by paying upfront to cover the risk of failure. In short, huge challenges were overcome because we faced a global crisis of mammoth proportions. Of course, the issue of scaling up manufacturing capacity to meet global demand remains, not least in developing countries, but that is now an issue of political will. With climate change, we are dealing with a global emergency that has the potential to dwarf the pandemic, so I say to the noble Lord, Lord Sharpe of Epsom, that necessity is the mother of invention. We can do this if there is a will.

I welcome the intentions of Amendment 136A, but it is a little broad and detracts from the central theme of tackling the climate crisis. ESGs are now pretty well established and cover a range of factors that move companies in the right direction, which is to be welcomed. But it is a slow process—it is not compulsory—and they do not explicitly signal climate-related financial risk, which I would like to see.

In conclusion I will say a few words about Amendments 31 and 32. The question to which I would like an answer is: who will pay the cost to society of climate change? The answer is that we as society will pay these costs. But such social costs are not built into the price of oil, gas, coal, gas fires, electricity, natural gas heating, petrol or diesel. As a result, the corporations most responsible do not pay directly for their pollution. That also leaves few incentives to limit greenhouse gas emissions, so problems such as climate change go unabated. I support these amendments as they not only are a shorthand way of building the massive social cost of carbon into investment decisions but also recognise climate-related investment risk.

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, it is a great pleasure to follow the noble Baroness, Lady Sheehan, who has made powerful points. A little more than a year ago, we faced the Covid emergency and the Government moved very fast with multiple rules and regulations. The world has moved very fast and science has moved very fast. That is a demonstration of how fast the world can change in an emergency—and we are all in agreement that we are in a climate emergency.

Given that I agree with many of the comments already made on this group of amendments, I aim not to repeat them all but perhaps to take us a little bit forward. To briefly outline, I am speaking on Amendments 28 and 42 in the names of the noble Lord, Lord Oates, and the noble Baroness, Lady Kramer, as well as my name. I also express my support for the principles and direction of Amendments 31 and 32 in the name of the noble Lord, Lord Oates. In his expansive and effective introduction, the noble Lord presented a strong case for the detail contained in these amendments.

With Amendment 136A, the noble Lord, Lord Holmes of Richmond, is heading in the direction of an amendment of mine discussed last week. I spoke about introducing acknowledgment of our international obligations on biodiversity. This amendment heads in the direction of thinking in terms of the sustainable development goals, and that kind of system thinking is very much what we need. It goes a lot further than simply looking at the climate emergency. I would like to see us go further than where we are at. The full SDGs are a big step that we need to take at some point very soon.

The noble Lord, Lord Sharpe of Epsom, noted that there are other uses for fossil fuels than energy generation or transport. Many of those uses are, of course, the production of plastics, which are creating a whole different set of crises in our plastic-choked world: a pollution crisis and a crisis in the impact on animal life and quite possibly on human health.

It is pretty clear that we are already in a carbon bubble. We know from an organisation as radical as the International Energy Agency that we have to leave at least three-quarters of our known fossil fuel reserves in the ground to avoid catastrophic runaway climate change. Yet we still see money being lent, sometimes by the UK Government—the chair of COP 26—to develop and even explore new reserves. This clearly is not the way forward.

To build on what others have said, rather than simply repeat it, I refer noble Lords to an article by Semieniuk et al in volume 12, issue 1 of the journal WIREs Climate Change, published in January/February 2021, entitled “Low-carbon Transition Risks for Finance”. In the conclusion of that article, the authors say:

“Asset stranding combines with other transition costs, notably unemployment, losses in profits, and reductions in real incomes from price changes that generate significant risks for portfolio losses and debt default. Financial actors might become unable to service their own debt and obligations, creating loss propagation within the financial network. The adverse impacts of credit tightening and lack of confidence as well as the direct impact of transition costs to the macroeconomy, could lead to a general economic crisis with further risks for finance.”


They continue:

“Targeted financial policies, however, can dampen some transition risks by direct regulation of the financial sector.”


This element of the conclusion relates in some ways very closely to the debate we will be having tomorrow on the National Security and Investment Bill, but it is worth noting that, with a different cause at its base, it could be taken as a pretty fair description of what happened in the 2007-08 global financial crash.

I referred to that article, at least initially, not primarily for its conclusion but for the detailed calculations and models in its body. I suspect that one answer that we might hear from the Minister in responding to this group is that something needs to be done, but not quite yet—the Augustinian approach mentioned by the noble Baroness, Lady Hayman, in our debates last week. However, the article demonstrates that thorough work has been done and is available to the department to act now. As the noble Lord, Lord Oates, and the noble Baronesses, Lady Hayman and Lady Sheehan, all referenced, we are in a state of extreme urgency—a climate emergency.

However, the noble Baroness, Lady Noakes, gave me a further reason to draw on that conclusion. She said that she relies on the banks in calculating and pricing risk. She said, “Banks do not lend in situations where default is likely.” Well, we all know how that worked out in 2007 and 2008. The noble Baroness also said, “Carbon debt financing could be driven out of the City of London.” If we look at the costs we bore from risky lending and risky actions by the financial sector in 2007 and 2008, we see that that could indeed be a very good thing for our financial security. I do not believe that we would see a direct migration of financing shifting out of the City of London and going to other places. If the British Government were to take this action and become world-leading, as they so often tell us they want to be, that would have an impact on other financial markets around the world. Other people would say, “Well, if London is doing that, perhaps we should have a look at it, too.”

Let us look at the best possible outcome: we entirely prevent a carbon bubble financial crash. One problem, of course, is that you do not get credit for stopping things that never happened, but perhaps we would know that we had done the right thing. Even if we managed only to significantly reduce the size of that carbon bubble crash, we would indeed be world-leading. We are ready to take action: this is an emergency and so we have to take action. I commend these amendments to the Committee.