Bank of England and Financial Services Bill [HL]

Baroness Worthington Excerpts

Tuesday 15th December 2015 Lords Chamber

Moved by

[Baroness Worthington]

16: Before Clause 18, insert the following new Clause—
“ReportingFinancial sustainability report
(1) Within twelve months of the coming into force of this Act, the Treasury must prepare and publish a report containing the matters specified in subsections (2) and (3).
(2) The report must contain an assessment of how the following aspects of financial regulation contribute to or hinder the United Kingdom’s long-term sustainable economic growth—
(a) rules governing the admission of securities to recognised growth markets,(b) rules governing the admission of securities to the Official List, and(c) the time horizon of the Bank of England’s financial stability monitoring activities.(3) The report must make recommendations for the development, via the regulation of financial services, of uniform, consistent and clear standards for the disclosure of climate-related financial risk, in order to provide information to lenders, insurers, investors and other financial intermediaries.
(4) In this section—
“long-term sustainable economic growth” means economic growth that is resilient to risks arising from long-term fundamental change, such as climate change, technological change and demographic change;“recognised growth market” has the meaning under section 99A of the Finance Act 1986;“Official List” has the meaning under section 74(1) of the Financial Services Markets Act 2000;“the Bank of England’s financial stability monitoring activities” means activities undertaken by the Bank of England in order to meet the objectives set out in section 2A of the Bank of England Act 1998.”

[Baroness Worthington (Lab)]

My Lords, in Committee we considered three issues relating to the wider sustainability of financial services in the UK and the way they are regulated and overseen partly by the Bank of England, and by other bodies. In tabling this amendment at Report, I have endeavoured to capture the three topics that we discussed previously in one overarching obligation or requirement on the Treasury to report back to the House on these important issues.

Since Committee, two very important events have served to illustrate the importance of wider sustainability, and climate change in particular, in relation to our financial services. The first is the appalling flooding throughout the North of England and the impact that has had on our businesses, homes and financial services. The second is the signing into law of the climate change agreement in Paris, which clearly sets the world on a path towards rapid decarbonisation in order that we can stay within the new goal of a limit of well below 2 degrees centigrade, aiming for 1.5 degrees. This has been virtually universally accepted as an historic moment which will have significant ramifications.

On financial services and our economy, it is clear that we will need to adapt to oversee an orderly transition from a relatively carbon-intensive system to one in which we are no longer adding anthropogenic carbon dioxide emissions to the atmosphere. The Treasury and the bodies which report to it can have a significant role in helping to bring about that orderly transition.

I will briefly mention the three issues the amendment touches on, the first of which is that we should consider the way we list various entities on our growth markets. It is clear that the Government intend to encourage investment in growth markets—they have indeed introduced a host of tax benefits to the companies listed in our growth markets—but these are relatively unregulated. The nature of those markets is that they can attract companies with a relatively short outlook—a desire to raise capital in London without thinking more broadly or in the longer term. A number of companies listed in our growth markets, including the AIM market, are in the extractive fossil fuel industries, which I would be hard pressed to classify as growth industries that the Government should be seeking to encourage investment in. We have asked that a report should look at these aspects and consider whether there is more that needs to be done to oversee the way in which these growth markets are attracting capital and rewarding investment.

The other important issue that we would like to be reported on is disclosure. I am grateful to my noble friend Lord McFall and the noble Lord, Lord Deben, who is not in his place, who spoke on this so eloquently in Committee. This topic is gaining in prominence. Indeed, in Paris, the Governor of the Bank of England, Mark Carney, announced that Michael Bloomberg will assist him in the FSB in looking into the whole issue of disclosure at an international level. I have spoken directly with the Minister about this, and I know that the Treasury view is that this should be conducted at an international level. I do not disagree with that, but in the spirit of leadership, which we showed so clearly in Paris, it is appropriate that the UK should lead at home on these issues and not simply rely on international, multilateral processes. We are, of course, one of the largest financial centres in the world; we have a number of extractive and energy industries listed here, raising capital here and operating from here, and it is incumbent on us to work out what more can be done to ensure that we speed this orderly transition to a cleaner economy.

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[Lord Bridges of Headley]

My Lords, I am sympathetic to the intent of the amendment, and it is important that the Government consider how they can ensure that economic growth is resilient to risks arising from long-term fundamental changes. As the noble Lord, Lord Teverson, said, it is not just about climate change; there are technological and demographic changes, all of which could have significant implications for the global financial system. It is also important for the Government to understand and adopt best practices for the disclosure of climate-related financial risk. I agree with the noble Baroness, Lady Worthington, and she is right to raise this issue. However, as I hope I shall explain, the amendment is unnecessary and I hope noble Lords will agree with me.

The current legislation already provides for the statutory framework for the Financial Policy Committee to consider long-term systemic risks such as those listed in the amendment. Indeed, at its meeting of March 2015, the FPC discussed precisely one of those risks—to financial stability. This is evidence that the FPC considers risks across the breadth of time horizons and will continue to identify long-term as well as more immediate risks. The Bank is also taking action on longer- term systemic risks through other channels. The issue of climate change, for instance, has been added to the Bank’s One Bank Research Agenda. Requiring the Treasury to produce an additional report on sustainability would mean unnecessary duplication of work.

On the topic of admission of securities to growth markets, the UK’s financial markets are obviously crucial to the efficient allocation of capital that supports jobs and growth, including to unquoted companies where the Government allow certain tax exemptions to improve access to the finance necessary for companies to expand. AIM, as the biggest SME growth market in the UK, plays an important role in providing funding opportunities beyond bank finance for unquoted SMEs which cannot fulfil the requirements of the main market at this stage of their life cycle.

Turning to the specific issue of disclosing climate-related financial risks, at the Paris climate change conference the Governor of the Bank, in his capacity as chair of the Financial Stability Board, announced that the FSB is establishing a task force on climate-related financial disclosures—the point the noble Baroness mentioned. This announcement follows the “Breaking the Tragedy of the Horizon” speech given by Governor Carney at Lloyd’s of London earlier this year. The newly established task force, under the chairmanship of Michael Bloomberg, will develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders.

It is our firm belief that climate change as a global phenomenon can be tackled most effectively through co-ordinated international action. As the noble Baroness mentioned, to date a lack of co-ordination on the topic of disclosure initiatives has resulted in an estimated 400 different climate-related disclosure schemes. There is a real risk that this inconsistency makes it challenging for investors and other stakeholders to judge climate-related risks effectively.

The Financial Stability Board, as the authoritative forum for considering potential financial stability risks, provides the ideal international setting in which climate-related financial risk disclosures should be discussed, standards agreed and recommendations made. This Government are therefore fully supportive of the work of the FSB task force and have instructed government officials to engage fully in this international debate to ensure that the long-term financial risks associated with climate change are given full consideration.

This amendment requires the reporting of recommendations on standards for the disclosure of climate-related financial risk within 12 months of the coming into force of the Act. Considering that the task force is scheduled to complete its work within a year, this suggested timetable risks pre-empting the work of the task force already under way.

This is not to say, however, that domestic action does not have a role to play in improving climate-related risk disclosure. In fact, regulations made under the Companies Act 2006 already require all quoted companies to report on their greenhouse gas emissions. I submit that between our considerable spending commitments, our stance in international negotiations and our leadership in mobilising the financial system to help combat climate change, the Government are at the very forefront of efforts to understand and address the full range of financial risks that long-term fundamental change, such as climate change, could pose. I therefore, with respect, ask the noble Baroness to withdraw her amendment.

[Baroness Worthington]

My Lords, I am grateful to the Minister for his response. I am not entirely satisfied that this issue has been looked at in sufficient detail by the Treasury. I am grateful to the Minister for his answer in response to the FSB, but in London now we have some of the brightest and best minds in the financial services sector and we can begin to address this problem ahead of our international efforts.

In particular, I am interested in how we are regulating unlisted companies. The Minister is correct to point to the disclosure requirements on listed companies, but we are giving substantial tax incentives to a fairly unregulated part of the financial sector upon which a large part of our economy relies, and more scrutiny is needed on that sector in particular.

However, at this stage, I am happy to withdraw the amendment, and I hope that this debate and this topic of conversation will continue in this House and in the other place. I beg leave to withdraw the amendment.

Amendment 16 withdrawn.