Economic Activity of Public Bodies (Overseas Matters) Bill

Lord Collins of Highbury Excerpts

Committee stage
Tuesday 14th May 2024 Lords Chamber

[Baroness Noakes (Con)]

My Lords, the noble Baroness, Lady Drake, explained her Amendment 27 with great clarity, but I am afraid that I do not agree with her analysis of the problem, nor do I agree with the analysis of the noble and learned Lord, Lord Thomas of Cwmgiedd, for reasons which I will now explain.

Financial matters have been my stock in trade for well over half a century, since I left university. I have been trying to work out what these additional words, “risk” and “impact”, would add to the concept of financial value. The term financial value is not a term of art in my world, the accountancy world, but I think that it means something along the lines of the worth of something expressed in money terms. What something is worth can mean what it is realised for in a market transaction, or what it is worth in terms of the financial benefits it is evaluated to or expected to bring. I believe that neither “risk” nor “impact” add anything to the meaning of financial value.

I start with risk. Risk will affect value, so any determination of what something would fetch in a market or what benefits it would bring would of course take account of the risks when doing the calculations of financial value. This is just 101 of calculating things in financial terms. That is effectively why the DWP documents refer to risk. They do not refer to documents about risk as an adjunct to financial value; they are just encouraging the identification of risks, because that is a normal part of a balanced evaluation. While I do not think that the word risk does any particular harm to the concept of financial value, I do not think that the word is necessary.

I have struggled a bit more with working out what financial impact means. The only thing I could come up with was something like the evaluation of the net costs or benefits to be obtained from what is being acquired, but I cannot see what financial impact adds to the meaning of financial value. In this case, it would be positively confusing to add financial impact alongside financial value, because it might encourage somebody to litigate on the basis that there was a difference between financial value and impact, as Parliament clearly meant something other than financial value by the concept of financial impact. That would be a failure on our part to create certainty in our legislation.

I would also like to comment on Amendment 46A, from the noble Lord, Lord Collins, which is in this group. I expect he will be speaking to it a little later. I could not understand why the noble Lord has chosen UN-related documents to refer to when trying to put what he calls “established investment principles” into the Bill. The UK Government have already announced a series of actions that they have implemented in relation to the UN guiding principles on business and human rights, much of it already in legislation and unaffected by the Bill. In response to those principles, the relevant parts of our legal system are already in place, and we do not need to refer to a UN document to get any further on investment principles; they have already been interpreted by the UK Government.

Furthermore, we already have a perfectly good Stewardship Code in the UK, issued by the Financial Reporting Council, which deals with ESG matters. I do not believe the Bill alters that at all, so long as ESG principles do not acquire a territorial dimension.

[Lord Collins of Highbury (Lab)]

There was a little throwaway remark there: that ESG principles will not involve territorial matters. There are many examples where it could be quite a big influence.

[Baroness Noakes (Con)]

The noble Lord picks me up when I used a bit of shorthand. I really mean the contents of Clause 1 and the moral disapproval in relation to territorial consideration. I was just trying to say that ESG principles are unaffected; they are in the UK system of corporate governance and stewardship, and they are unchanged by this Bill, except where those principles are used in the way described in Clause 1.

The UN principles of responsible investment are not even issued by a UN body: it is a private body that issues them. Those principles have no standing whatever in the UK, except to the extent that UK-based signatories sign up to them. In my view, it is a rather odd thing to be putting into the Bill to define investment principles.

The UN Human Rights Council, which owns this territory, is, like most of the UN, including the General Assembly, pretty anti-Israel. I have an underlying concern that using these UN-affiliated principles—to use a shorthand—is just another way of allowing divestment decisions in relation to Israel by the back door. I am sure that the noble Lord, Lord Collins, does not intend for that to be the effect of his amendment, but I have a fear that it will be the outcome of it.

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[Lord Collins of Highbury (Lab)]

When I speak to my amendment, I will make the case for it. I would actually put the noble Baroness’s arguments on their head: if the purpose of the Bill was to stop BDS campaigns, it should have been about that. Our problem—and my noble friend’s problem—is that it is going to be much broader in scope, and will include things that this Government want to achieve. That is why these amendments are quite important.

[Baroness Noakes (Con)]

I accept that this goes beyond the narrow BDS campaign that has been focused on Israel. Nevertheless, it is a concern for a number of us that the Bill will be effective as regards its impact on actions by UK public authorities towards dealings with Israel, which is why I raised it.

To finish, my concern on this score was underlined by the action of the UN human rights special rapporteur on the Occupied Palestinian Territories. This person wrote to the Local Government Pension Scheme in 2021 with a “request for action”, which included divestment from companies that are involved in the Occupied Territories. Here we have someone associated with the UN Human Rights Council telling our Local Government Pension Scheme to carry out divestment activities. That is why this whole area is so concerning.

[Lord Collins of Highbury (Lab)]

How does the noble Baroness think that that advice—I have not seen it—compares with the advice of her own Government in relation to the Occupied Territories?

[Baroness Noakes (Con)]

I think we discussed this briefly on the previous day of Committee. The Government highlight the risks associated with dealings in relation to the Occupied Territories but do not call for divestment. Very explicitly, that is not the case.

[Lord Collins of Highbury (Lab)]

Is not the noble Baroness making my point? It is a risk which the Government have highlighted in their own policy on the Occupied Territories. They are illegal, and have no legal status, and that investment could be at risk. The noble Baroness should make up her mind about what she is arguing.

[Baroness Noakes (Con)]

The issue of risk is a separate issue, dealt with in the amendment of the noble Baroness, Lady Drake. I was talking about later amendments which seek to apply UN principles to local government pension schemes. This is a fairly large group, and I think we have got a little cross-wired on which issues affect which part.

To conclude, I know that the noble Lord, Lord Davies of Brixton, has tabled a stand-part debate on Clause 12, which is in this group. I hope he is not serious about taking local government pension schemes out of the Bill. The actions of the special rapporteur in our domestic affairs are proof enough that we need local government pension schemes firmly within the Bill.

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[Baroness Janke (LD)]

My Lords, I also belatedly declare my interest as a beneficiary of the Local Government Pension Scheme.

[Lord Collins of Highbury (Lab)]

My Lords, the noble Lord, Lord Wallace, suggests that we are using the Bill to address a problem that has not happened, which prompts me to say that there are genuine concerns that it might happen. I come back to the point that I made in one of the interventions: the concern that we all have about this Bill is that its scope goes well beyond the concerns and the remedy in the manifesto. The noble and learned Lord, Lord Thomas, and my noble friend are quite right to point out the litigation risks.

My noble friend also raised what I have repeatedly said: that this legislation can have a chilling effect that we do not want. We have a Government making all kinds of guidance. On the local government pension funds, we have specific regulations. All pension funds have a fiduciary duty. Noble Lords have raised the point about the duties of people responsible for making these decisions. The Bill will make those duties even more complex. When things become even more complex, people avoid doing the right thing. That is one of the important considerations.

I want to repeat what my noble friend Lord Davies mentioned. Talking as an old-fashioned trade unionist, I say that members’ pensions and pension funds are their deferred wages, yet there is an idea that somehow those do not belong to them and are not their responsibility. Most of the members primarily want those funds protected for their future security. They do not want political and moral considerations to play a part. They want them to be covered by the points that my noble friend Lady Drake has mentioned. No matter what is said by the noble Baronesses, Lady Altmann and Lady Noakes, this could impact the ability of those responsible for managing these funds to make decisions that take into account risk and other considerations to protect those funds. That comes from the potential for them to be challenged.

I have read some of the briefings on this. The ESG point is quite an important one. Many funds and investment pools in local government pension schemes work individually and collectively to improve corporate behaviour and long-term value of the funds, including through engagement in shareholder action at their AGMs. This is reflected in the statutory guidance that my noble friends have been referring to about administrating authorities formulating a policy to deal with their stewardship responsibilities. It is likely that engagement of this type would be undermined by the Bill.

I again come back to the point made by the noble Baroness, Lady Noakes. When seeking to address behaviours by a company that involve significant financial, legal and reputational risk, there are many occasions when this will have geographical implications. We have seen, for example, the briefings on the use of tax havens by companies and the use of surveillance equipment. We have heard of the Uighur internment camps where bonded labour is encouraged by public authorities, particularly the kafala system. We will come on to another group on employment law, but the definition of the exceptions is very narrowly drawn in this Schedule. The Bill is unlikely to allow decision-makers to consider those behaviours.

It is unclear whether decision-makers in the LGPS could be accountable for screening selection decisions made by global equity funds where country-specific risks have been considered. That is an important point. My noble friend Lord Davies is absolutely right. As a trade unionist all my working life, I have seen the responsibilities of those who look after these pension funds. They should be common throughout. Why are we differentiating between local government workers and something beyond local government workers? Why should we have these different standards? It is really important that everyone who takes that responsibility of oversight, as a trustee or in management of the schemes, has those same principles of fiduciary duty and taking risks into account.

[Baroness Altmann (Con)]

What is the noble Lord’s view, given this fundamental difference between local authority pension schemes and all other pension schemes except unfunded ones? They do not belong to the Pension Protection Fund, have no protection in that regard whatever and do not pay a levy to the Pension Protection Fund. Therefore, ultimately does he believe that these would not be and are not in any way underwritten by Government and Parliament? Why would they be excluded?

[Lord Collins of Highbury (Lab)]

My noble friend Lord Davies responded to that point. The reality is that there is nothing explicitly guaranteeing them. The Pension Protection Fund is not that old. I remember companies going bust and shareholders and other people getting the money and workers losing their pensions. You have only to look at Mirror Group Newspapers to see what can happen there. We want a common duty and responsibility. This Bill undermines that. That is the point that my noble friend Lord Davies was making. It is also the point that my noble friend Lady Drake is making. There are common principles. We do not want the creation of uncertainty when trying to implement a manifesto decision. I have repeated my plea to the Minister to sit down with us and work out a better way of implementing this manifesto commitment. This Bill is not doing that job and I have yet to meet a member of the Conservative Party who believes that it does. We need to sort this out.

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[Baroness Neville-Rolfe (Con)]

I will cover that later in my response. There is a point about territoriality, which we will come on to address.

Additionally, the drafting of the guidance referenced in the speech from the noble Baroness, Lady Drake, does not change our view of the scope of this exception. I agree with my noble friend Lady Noakes’ assessment that the amendment could cause some confusion. If we were to accept it, it might raise questions about what considerations relevant to “financial value” and “practical utility” actually capture if they do not capture risk assessment.

I know that the noble Baroness will be disappointed that the Government are unable to accept her amendment, but we did not brush it aside and looked carefully at what she said at our helpful meeting. However, I hope that she is reassured by the Government’s position that the Bill’s current drafting adequately addresses her concerns, with that clarification.

Before I turn to other amendments, I will address the noble Baroness’s point about the impact of judicial review on LGPSs. I will provide a fuller response to the detail in the later group that was referred to in the debate. The Government believe that it is right that companies that have been the target of boycotts and divestment campaigns can challenge these decisions through the courts. There are safeguards in place to prevent undue or nuisance claims. None the less, the number of examples of administering authorities participating in BDS campaigns is relatively small; therefore, we do not anticipate a large burden on the courts.

Amendment 45, tabled by the noble Baroness, Lady Blackstone, would remove management decisions from the Bill’s definition of “fund investment decision”, with a view to ensuring that the ban does not apply to the stewardship activities of administering authorities of LGPSs. I confirm, as we agreed at our meeting, that stewardship activity would be an example of a management decision.

It is right that the ban applies to stewardship. Otherwise, administering authorities could, as part of the stewardship of their investments, ask companies in which they have invested to engage in boycotts and divestment campaigns. If this was allowed, campaigners would be emboldened to lobby local government pension funds to ask companies in which they invest to boycott and divest. These campaigns distract local administering authorities from their core duties and could contribute to community tensions. We believe that allowing this kind of activity would undermine the ban.

The Bill contains an exception to the ban for considerations that a decision-maker considers relevant to the financial value or practical utility of an investment. Therefore, it would not prevent public authorities asking companies in which they invest to consider matters that they consider may affect the long-term value of their investments.

I understand that the noble Baronesses, Lady Blackstone and Lady Janke, are concerned that this position conflicts with the Government’s wider policy on stewardship. We do not consider this to be the case. This is an extremely narrow Bill that will place restrictions only on the ability of the LGPSs’ administering authorities to make territorial considerations in their investment decisions that are influenced by moral or political disapproval of foreign state conduct. LGPSs’ administering authorities will still be able, through effective stewardship, to exert a positive influence on investee companies to promote strong governance, manage risk, increase accountability and drive improvements in the management of environmental, social and corporate governance issues.

Administering authorities are ultimately responsible for setting the investment strategy of their funds, having taken proper advice. This includes setting their asset allocations to achieve a diversified portfolio of investments which overall is suitable to meet liabilities, as well as setting their approach to responsible investment, in line with statutory guidance. The Bill will support administering authorities to remain focused on their core duties, protecting the long-term financial interests of beneficiaries.

Amendment 46A, tabled by the noble Lord, Lord Collins, would provide that a pension fund in scope of the ban can make territorial considerations influenced by moral or political disapproval of foreign state conduct when making decisions in line with certain investment guidelines published by the UN. The Bill will apply only to campaigns that target countries and territories specifically, and therefore will not prevent the adoption of ESG requirements that are not specific to a country, such as modern slavery requirements. For example, to address the point made by the noble Baroness, Lady Janke, the Bill will in no way prevent the LGPS administering authorities divesting from fossil fuels, as long as this policy is applied to all countries and territories consistently. Similarly, the Bill will not prevent the administering authorities divesting from companies implicated in human rights abuses, provided the policy is applied to all countries, rather than identifying particular countries or territories.

The Bill will not prevent LGPS administering authorities making a decision in line with guidelines published by the UN, as long as this does not entail the public authority having regard to a territorial consideration in a way that indicates moral or political disapproval of foreign state conduct. For example, the Bill will not prevent public authorities having a policy to comply with all UN sanctions or UN Security Council resolutions, as that is not a territorial consideration. However, the policy must be genuinely non-country specific—

[Lord Collins of Highbury (Lab)]

Can the Minister specifically address the contribution from the noble Lord, Lord Hannay, in relation to territorial extent? I have in mind, because it was raised in other groups and discussions, companies that attempted to have factories or investments in the Occupied Territories and might then have withdrawn from those investments. I want her to focus on that. If a company decides that it will open a plant in the Occupied Territories and will not have the benefit of legal protection under international law, and it would be contrary to the advice the Government have given, and if a local government pension scheme then said, “Well, that company is putting our investment at risk and therefore we will disinvest”, would that be legal under the Bill?

[Baroness Neville-Rolfe (Con)]

I can confirm that LGPSs will be allowed to divest from, say, the settlements or Israel if the sole reason is that the investment is financially risky. It is if it is caught by the flavour of the Bill that we run into a problem—

[Lord Collins of Highbury (Lab)]

It is important for clarification because the Government’s own advice says “It’s risky because it’s not legal and therefore won’t have that international law protection”. So it is very good if the Minister is being absolutely clear in relation to the Occupied Territories.

[Baroness Neville-Rolfe (Con)]

Perhaps I could just finish on the other points. It makes perfect sense to ensure that, when having regard to ESG requirements, these are applied consistently by LGPS administering authorities and do not single out particular countries or territories—because it is the latter that will breach the ban, as I think we all now understand.

The Bill allows for a number of exceptions, including considerations relating to labour market misconduct, modern slavery and human trafficking. Therefore, the Bill will in no way prevent the administering authorities adhering to modern slavery guidance.

Finally, I turn to the proposition from the noble Lord, Lord Davies of Brixton, that Clause 12 should not stand part of the Bill—

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[Baroness Drake (Lab)]

I will say my last sentence.

[Lord Collins of Highbury (Lab)]

The rules say “normally brief” but I think the Committee would like to hear from my noble friend on this important issue.

[Lord Gascoigne (Con)]

With respect, I am not stopping the noble Baroness; I am just asking her to be brief.