Corporate Governance and Accountability

Lord German Excerpts

Tuesday 5th July 2011 Lords Chamber

[Lord German]

My Lords, I declare my interest as a trustee of a pension fund, and I want to speak exclusively about the investment in pension funds. It is there, of course, where people are investing their money day in, day out, month in, month out, preparing for the world in which they want to live when they retire. That is why social and environmental issues are going to be extremely important for them. However, the chain of command, as it were, between the investment itself—from the pension fund investors right through to the people who manage the money on their behalf—is very long indeed. It is very difficult to see transparency through that route. That is why I think it is important that these issues should be discussed and understood right throughout that long chain.

Since 2000, pension funds have had to state the extent to which they take into account social, environmental and ethical considerations. However, much of the reporting has been very much a tick box, where people would tick a small box or put in a straight statement, which would not give enough information to the person whose money was going into that investment fund. We believe that, from the disclosure of information, you get more empowerment and that the person who is putting their funding in is getting more empowerment for their money. We have had years of voluntary codes, yet only 64 per cent of fund managers and 21 per cent of pension schemes publicly disclose their voting records so that the investors in that company can see them. Obviously, investors have a right to know and understand, but disclosure is only the first step to empowerment in the part-ownership that they have in the company.

The Government have reserve powers, which they have taken, to make voting disclosure mandatory if voluntary disclosure does not generate sufficient improvement. Of course, the coalition agreement contains a commitment to,

“reinstate an Operating and Financial Review to ensure that directors' social and environmental duties have to be covered in company reporting and investigate further ways of improving corporate accountability and transparency”.

I know that the Government have consulted on this and are intending to launch a further consultation in July; but could the Minister tell us where the direction of travel is on this particular part of the coalition agreement and where it is likely to end up?

There are three key problems that I think we need to address in this whole area of pension funds. The first one is unreliable information; that is, the lack of verification, making it difficult for investors to rely on reports that look through rose-tinted spectacles. Secondly, there is the problem of incomplete information, with many companies focusing on corporate citizenship activities, such as volunteering, rather than on key social and environmental risks to their core business. Could the Minister tell us, in winding up, whether she intends to bring forward proposals specifically to drive up the quality of social and environmental reporting, as indicated in the coalition agreement?