Financial Services and Markets Bill

Baroness Sheehan Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

[Baroness Sheehan (LD)]

I find the noble Lord’s contributions really very valuable. But on supply and demand, for him to label us people who just do not want fossil fuels is so incorrect. We need more energy, but it does not have to come from fossil fuels. The fossil fuel industry is supported to an extent.

[Lord Lilley (Con)]

By whom?

[Baroness Sheehan (LD)]

It has been supported by Governments, through subsidies, through tax breaks, through decommissioning tax reliefs—any number of routes for support exist. So I say to the noble Lord: please do not try to categorise the noble Baronesses who have spoken on this issue as people who do not like fossil fuels. What we do not want is for fossil fuels to be needlessly supported in the future when they are patently no longer able to support themselves.

[Lord Lilley (Con)]

I agree with the noble Baroness. I do not want to support fossil fuels. If she looked at the tax revenue levied on the production and consumption of fossil fuels, she would see that it is enormous. To describe that as a subsidy or support is very strange. But to the extent that there is anything that is a subsidy, I am with her: let us remove it, but that is not what these amendments do. They simply aim to make it more expensive to invest in fossil fuels. I do not know whether the noble Baroness, Lady Castle—whatever it is; bouncy castle—is upset at being described as being against fossil fuels. I would have thought that she would be positively flattered. I do not know whether the noble Baroness, Lady Drake, is offended at being told that she is trying to discourage the production of fossil fuels; I thought she was. I am simply saying let us stick to the CCC’s recommendations of phasing out demand and we can leave the supply side to look after itself. We should not pretend that we know better than the industry what is likely to prove excessive or insufficient.

[Baroness Sheehan (LD)]

Before the noble Lord sits down, perhaps I could say a little about stranded assets; I think we have had this exchange before. If stranded assets transpire—from where I am sitting, I think that is inevitable—what assurance can he give that the cost of those stranded assets will not be socialised?

[Lord Lilley (Con)]

Clearly, the Government ought to deal with that problem. These amendments do not deal with that problem. If there is a problem, if the noble Baroness thinks that BP or Shell will go bankrupt and be unable to pay for the liabilities it incurred, we should take steps to deal with that situation. I do not think it is likely but if she thinks it is that serious, she should table amendments that would deal with that, but these amendments do not. They simply make it more expensive to invest in things which we are going to continue consuming, according to the Government’s own plans and the CCC’s own projects and recommendations, in considerable quantities until 2050.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I welcome this chance to continue this Committee’s important debate on amendments concerning green finance. As I stated in a previous Committee session, the Government are committed to fostering sustainable finance in the UK and will shortly publish an updated green finance strategy to that effect.

I will speak first to Amendment 168 from the noble Baroness, Lady Worthington. It is of course correct that all models have their limitations in depicting the real world but the Bank of England’s models have considered the views of experts in the field; they therefore do not need to be directed to do so. The scenarios used in the climate biennial exploratory scenario, or CBES, were formed by the Network for Greening the Financial System, an international network of central banks in which the Bank of England plays a prominent role. The scenarios have been produced in partnership with leading climate scientists, leveraging climate-economy models that have been widely used to inform policymakers—not to mention being used by and continuing to be used by the Intergovernmental Panel on Climate Change. These scenarios are updated continually by the Network for Greening the Financial System, which also ran a public survey welcoming feedback on its most recent iteration of climate scenarios.

It is also not the case that CBES is the PRA’s only tool to manage climate risk. It is actively using its position as a supervisor to ensure that firms are not materially undercapitalised for climate risks, setting out its expectations in its supervisory statement published in 2019. Furthermore, the PRA is an active member of two of the leading international standard setters: the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors. The Bank is actively participating in both forums to ensure that the regulatory frameworks for the banking and insurance sectors address potential gaps in the management of climate-related financial risks. This work will flow through to our domestic framework and at the same time ensure international co-operation on what is fundamentally a global issue.

I now turn to Amendment 199 in the name of my noble friend Lord Randall of Uxbridge, which is supported by other noble Lords in this Committee. The Government agree that the financing of illegal deforestation is a serious global issue that must be tackled. However, this amendment would involve implementing a new and untested regulation that would impose a broad supply chain rule on all regulated financial services firms. It would currently be very difficult, time-consuming and expensive for UK financial services firms to ascertain whether firms or products that they invest in are exposed to forest risk commodities in compliance with local laws.

In introducing this amendment, the noble Baroness, Lady Boycott, referred to the provisions in the Environment Act 2021. These provisions will apply to the supply chains of large UK corporates. However, UK-based banks and fund managers engage in lending and investment activities with companies in jurisdictions across the globe, not just commercial activity in the UK. There are currently no consistent, equivalent disclosure requirements to those that will be set out under the Environment Act 2021 in jurisdictions across the globe. Given that, capturing the activity of all of their customers and supply chains would not be as simple as adding an extra stage of disclosure to the regime set out in the Environment Act 2021, as had been suggested. However, I assure noble Lords that the Government are committed to addressing this issue and will work with the financial services sector and those with expertise in tackling deforestation to consider how we can make further progress.

[Baroness Sheehan (LD)]

Before the Minister moves on to another amendment, I put a question to her on Amendment 199 on deforestation. I hope she is coming to answer it.

[Baroness Penn (Con)]

Not just yet. Was it about the letter?

[Baroness Sheehan (LD)]

The question was about the regulations under Section 17 of the Environment Act 2021 that are supposed to be forthcoming. I asked the Minister when she thought they might be ready.

[Baroness Penn (Con)]

I will have to get back to the Committee on that point. I had picked up the noble Baroness’s other point, which was also referenced by the noble Lord, Lord Tunnicliffe, on the letter from Sir Ian Cheshire on this issue. I looked closely at his report and the recommendations in it. I am happy to place a copy of that letter and my response to it in the Library so that all noble Lords have access to them.

I was going to add something about the importance, in seeking to address this issue, of co-ordinating action internationally. This is necessary to reduce the financing of illegal deforestation and not simply drive it into other jurisdictions.

The noble Lord, Lord Tunnicliffe, referenced the work by Sir Ian Cheshire’s task force and its references to the Taskforce on Nature-related Financial Disclosures, the TNFD. The Government accept that that will not solve this problem on its own but it is important to recognise it as an important building block in creating an international solution. As I have pointed out, other jurisdictions do not have disclosure regimes. The TNFD is an attempt to create a global standard on nature-related disclosures that could be an ingredient in making progress in this area. The UK is the largest financial backer of the TNFD. We support its work to develop a global framework for reporting on nature-related impacts, dependencies and risks, within which deforestation is being considered. Once the task force launches its final recommendations in September 2023, the Government will consider bringing these standards into the UK disclosure framework.

Finally, on deforestation, in response to Sir Ian and the noble Lords who raised it today, as I set out, we are looking at what we can do further in this area. If noble Lords would like to meet to take those discussions forward, I would be very happy to do that.

[Baroness Sheehan (LD)]

Before the Minister moves on, could I reiterate the strength of feeling across the Committee on deforestation? It is not just about the 12% of global carbon dioxide that is released by burning and cutting down forests; it is also about the destruction of the carbon sink. It is a double whammy. This is an issue that we can and must solve. We have a report by the Government’s own appointed head of the GRI, Sir Ian Cheshire, who clearly lays out how we move forward on this. I wonder why the Government will not accept the findings of their own reports.

[Baroness Penn (Con)]

I say to the noble Baroness that I absolutely agree. I appreciate the point that the issues concerning deforestation are about not just nature and biodiversity but our ability to tackle climate change. That is why we are such strong supporters of the TNFD’s work, for example. She mentioned Sir Ian Cheshire’s report. I said to the Committee that I have read that report and looked at it very carefully. I do not think that we are in disagreement in wanting to find solutions to this problem. Sir Ian’s report also sets out that work needs to be done to ensure that the solutions that we identify are effective. For example, he refers to ongoing work in other jurisdictions such as the EU and the US on disclosures that would be building blocks towards making the progress that we all want to make. The Government do want to make further progress on this issue and I understand the strength of feeling, so I commit to this Committee to take those discussions further and see where we can build consensus on it.

[Baroness Sheehan (LD)]

I thank the Minister. On behalf of the noble Lord, Lord Randall, I accept the meeting. I know that he cannot be with us today, sadly. The final point that I leave with the Minister is that Sir Ian Cheshire was very clear in his letter about why he thought the UK should be acting. It is because, as a financial sector, we really matter. We may have 1% of the global emissions footprint but, in terms of the deforestation footprint and the money that passes through London, it is substantial.