Financial Services and Markets Bill

Baroness Sheehan Excerpts

Committee stage
Thursday 23rd March 2023 Grand Committee

The fact that we are able and willing to take new powers is evidenced in the Bill: Clause 65 gives His Majesty’s Treasury the power to regulate cryptocurrencies, as we have discussed, and recently HMT gave the FCA powers to regulate funeral plans, so we are not seeing a completely deregulatory agenda. Here, we are talking about a possible funeral plan for the whole planet: it is definitely appropriate to enable regulation in this market. A world-first, smart regulatory regime for voluntary offsets has the potential to bring investors to the UK and build confidence in a product that has all too often been perceived as the wild west of greenwashing. I am open to alternative drafting suggestions, but I ask the Minister to take note of the ask from insurers, pension funds, voluntary market participants and other financial operators and commit to taking a power to create a form of regulated market as a mark of robust quality. This could be a game-changer and the UK could lead in this area. I beg to move.

[Baroness Sheehan (LD)]

My Lords, I thank the noble Baroness, Lady Worthington, for tabling this amendment. I totally agree with its necessity, which is why I have added my name to it. If we are to meet our statutory net-zero targets, carbon offsetting will become ever more important as we decarbonise and reach those emissions that are so hard to abate and the residual emissions that the noble Baroness spoke about.

Let me say at the outset, however, that carbon offsetting is not a solution to climate change. There is only one way to avoid catastrophic climate change, and that is to stop adding to the blanket of greenhouse gases in the upper atmosphere that is already at a higher concentration than at any time since records began. Just for the record, the May peak of carbon dioxide in 2022 was a record 421 parts per million. The highest recorded over the previous 800,000 years for which we have records was just under 300 parts per million. This increase has happened in a blink of a geological eye, over just the last 150 years since the start of the Industrial Revolution. This Committee is not the time or place to go into the impact on our planet, save to say that catastrophic events are happening at a faster pace than even the most pessimistic predictions by scientists.

As we know, the biggest contributor to greenhouse gases is the burning of fossil fuels. The second biggest is deforestation. Putting an end to both these practices is well under way but is not going fast enough. I hope that more will be done through this Bill before it becomes an Act, because it deals with the money that fuels the release of those greenhouse gas emissions.

Until decarbonisation measures bite—and resistance to them is strong; we have seen that in some of the contributions to this Committee—carbon off-sets are one tool we have to mitigate the harm of climate chaos and the destruction of nature. The market demand for off-sets is exponential and the scope for fraud in the voluntary carbon market is massive. Greenwashing is rife. I will give one example: the recent chastisement of HSBC by the Advertising Standards Authority for misleading people with some of its claims to be carbon neutral. However, we need a functioning market to off-set hard-to-eliminate sources of greenhouse gases, which will leave residual emissions. It is the role of government to enable regulators to act, which is why this amendment is necessary and why I added my name to it.

Industry is also asking government to play its part. I will quote a substantial part of the recent report by Scottish Widows, Nature and Biodiversity: the Pensions Imperative, because it says it far better than I can:

“With companies potentially needing to put billions of pounds into offsets to meet their net zero commitments, the biggest barrier to date is the opacity of the voluntary carbon market. This breeds mistrust, particularly as a number of bad actors have been exposed in the past. What could really shift the dial here is the establishment of a UK regulator for carbon offsets. This could set quality standards that corporations looking to do the right thing could trust, enabling them to allocate money with confidence in these offsets having additionality and really delivering on those climate and nature goals”.


Finally, when I was a member of the Lords Select Committee on Science and Technology, we produced a report entitled Nature-Based Solutions. The committee heard evidence from a cross-section of practitioners in the carbon credits sector, from both the science and financial communities. As the noble Baroness, Lady Worthington, said, we heard from the science community how difficult it is to quantify and monetise nature-based solutions. From the financial community, we heard that it needs a regulatory framework so that everyone can work on a level playing field and so that the market is less like the wild west—which it currently is.

I will conclude by quoting a conclusion of that report:

“We recommend that the Government provides clear regulatory standards for emerging carbon markets to ensure that any off-sets that are claimed are genuine”.


However,

“these markets will only deliver the desired results if they are properly regulated and verified to prevent inaccurate claims of carbon off-setting. Carbon and nature credits must be for benefits that are additional, measurable, and permanent”.

For carbon credits to have the impact we all want, they must have good governance backed by government.

[Baroness Bennett of Manor Castle (GP)]

My Lords, it is a pleasure to follow the noble Baronesses, Lady Worthington and Lady Sheehan, and to offer Green support for this amendment, which is obviously urgently needed. I essentially agree with everything that the two noble Baronesses said, particularly the point made by the noble Baroness, Lady Sheehan, that off-sets are essentially a con that should not be used to trade off against continuing fossil fuel emissions. None the less, we are where we are and they are certainly going to happen.

The complexity is really well illustrated by a recent report by HSBC, which found that $246 billion-worth of hydroelectricity depends on water provided by threatened tropical cloud forests. We think about where the funding, support and credits should go, but to maintain that electricity supply, surely the people producing the electricity should fund that. This is also a carbon store. It is a real demonstration of the way that, as the Treasury’s own Dasgupta report illustrated, the economy is a complete subset of and entirely dependent on the environment, which we are fast trashing.

The problems with the current “wild west” system have been clearly demonstrated already. In a paper this week in the journal, Frontiers in Forests and Global Change, the Berkeley Carbon Trading Project presented a study of nearly 300 carbon off-set projects, representing nearly 11% of global carbon off-set projects to date. It found that the projects were systematically overcrediting their results and delivering extremely dubious carbon off-sets. Apparently respected registries did not follow standards to make sure that projects were having a real and tangible impact on carbon levels. A particular area of difficulty was whether the projects would have happened anyway, whether or not the extra carbon credit was claimed.

I will make one final point. The noble Baroness, Lady Worthington, sought ways in which the Government might see this as an advantage. In this wild west, there is a need for extensive due diligence for any financial body to be able to claim that it has genuine, honest carbon credits that will deliver over the long term—because the climate emergency is of course a long-term project and not just for one year or five years. There is a significant cost for any company going into this and wishing to protect its reputation. If it is a regulated sector, that will make it a great deal easier for people to do due diligence and to rely on it, and not to have to do the work themselves at considerable cost, facing considerable complexity and carrying considerable risk.

The need for this amendment is obvious. The problems with off-setting both carbon and biodiversity are very clear. We should not be where we are, but we are where we are, and the amendment offers one way forward that would be good for the financial sector as well as for the planet.