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Greenwashing in Finance

Volume 705: debated on Tuesday 14 December 2021

[Sir Edward Leigh in the Chair]

[Relevant documents: Thirteenth Report of the Treasury Committee, Session 2019-21, Net Zero and the Future of Green Finance, HC 147; and the Government Response, Session 2021-22, HC 576, and Oral evidence taken before the Treasury Committee on 8 December 2021, Work of the FCA, HC 146.]

I beg to move,

That this House has considered tackling greenwashing in finance.

It is a pleasure to serve under your chairmanship, Sir Edward. I am grateful to my hon. Friend the Member for Kensington (Felicity Buchan), who has passed responsibility for this debate to me as she is unable to attend. Subject to the House’s confirmation this evening, I am happy to say that I will replace her on the Treasury Committee, where she has done such fine work.

On the face of it, greenwashing sounds pretty trivial. The Treasury Committee provides a lot of very interesting information on the subject in its report of April 2021. Chris Cummings of the Investment Association described it to the Committee as

“finding something that looks a bit green and promoting it as a green success story”.

People may say, “Well, companies do that all the time, don’t they? They exaggerate their marketing claims and it doesn’t sound like too big a problem.” But, unchecked, it is a massive problem because finance has a huge role to play in decarbonising our whole economy, not just the financial part of it.

I will give some useful examples of greenwashing. BP got into trouble a year or two ago for promoting its green credentials by saying that it was putting solar panels on all its service stations. The reality, however, is that at that time BP was 96% focused on oil and gas exploration in its investment and economic activity. I very much hope—and I am sure that this will be the case—that BP will decarbonise its organisation over the coming years. Nevertheless, its claim can clearly be described as greenwashing.

McDonald’s said that it had moved from plastic to paper straws. However, the paper straws were not recyclable, and neither were many of the containers used in its products. Coca-Cola claimed to be one of the most environmentally friendly organisations on the planet, yet it is the No.1 plastic polluter on the planet. We need to ensure that there is clear evidence about which companies are green and which are not.

Of course, all these companies form part of the investment strategy for many of the important fund managers for which the UK is famous. Tracker funds are particularly popular among investors, particularly unsophisticated investors. A couple of years ago The Guardian reported on an environmental, social and governance-related tracker fund that included two of the world’s largest oil and gas companies. We must ensure independent verification of claims of green credentials.

On the positive side, the fact that companies are making these claims at least gives cause for hope that this issue is important to the investor community. If people think there is a market for this, if we can get the independent criteria right for the future, and if green credentials can be easily and objectively ascertained, there will be a lot of cash flow.

Indeed, that is what happened when the Government introduced their green bonds, which were hugely over-subscribed. That was great and it shows that people are keen to invest in things that can contribute to decarbonisation and a cleaner planet. Indeed, the experience has been similar in just about every jurisdiction and nation that has offered opportunities to invest in green companies and funds, with schemes being over-subscribed.

People choose what to invest in based on their principles. They are keen to support this part of the economy, so they want to be sure that they are investing in something that is green. The difficult with greenwashing, however, is that the investment might not be green; if independently verified, that would result in significant disappointment. Fund managers and finance houses invest cash on behalf of others in these companies. Many people make such investments because they want to contribute to decarbonisation, so it is tremendously important that the cash flows to the right companies—namely, those that are green and that are transitioning to a greener position.

The other big issue is risk. If somebody had invested in one of the top four US coal producers back in 2010, the current market capitalisation of those companies would mean that the value of that investment had reduced by 99% over the past 11 years. There is a big risk in investing in something that might become a stranded asset because of our transition to a greener environment. The difficulty, of course, is that it is the smaller, less sophisticated investors who are more likely be caught in that trap.

In evidence to the Treasury Committee only this week, Charles Randell, chair of the Financial Conduct Authority, said that the marketing of green funds and investment opportunities was open to scammers to hijack. Therefore, while people think they are doing the right thing by investing in the right areas, others are piggybacking on that to create new opportunities to scam the general public.

The UK has a huge role to play in financing the transition to a green zero-carbon future. It is one of the leading financial centres in the world, managing about £10 trillion in assets, contributing about £132 billion to our annual economic activity and about 7% of our GDP. Its role in this area, providing the finance for decarbonisation, is hugely important. That is why this conversation is hugely important,—because we need the cash flow to go to the right places for decarbonisation. The finance sector has a huge role to play, so we need to ensure that those are bona fide green investments.

Although the UK is a world leader in finance generally, it is too early to say that we are a world leader in green finance. We are doing many things that are moving in the right direction, but it is too early to say that, certainly according to the conversations I have had with people from the City, and there will be independent verification of that as we go along. We need to ensure that we take the right steps in future to make sure that we are a world leader not just in finance but in green finance. It is too early to say that today.

The UK Government have done much good work in this area, with the green bonds I referred to earlier and the UK Green Investment Group, which will pump-prime investment into green technologies. Indeed, the Chancellor has set out that the UK will become the world’s first net zero-aligned financial centre, which is very welcome.

There is clearly big UK demand. In evidence to the Treasury Committee, the FCA chief executive said that in the coming years about 33% of fund manager investments would be into ESG, which is very welcome news. However, according to a recent investor survey, 80% of investors quoted the lack of disclosure and consistent definitions of green as a drawback to their ability to invest in the right areas. We need clarity so that fund managers and consumers clearly understand what is properly green and what is just greenwashed—in other words, that people get what they think they are buying.

The Government’s work on green taxonomy—how investments are categorised in different corporations—is welcome. They have set up the green technical advisory group to look at that. There will be climate-related financial disclosures by 2023 for the largest companies and more information by 2025. Some of the larger pension funds are already required to provide that information in their annual reports. There are also mandatory transition plans. All of those things are good UK domestic innovations, but this stuff needs to be international, not just national. Our broad rules are based on what happens in the EU, but the Government have set out that we are going to move on from there and set up a more challenging regime that is more pertinent to the UK domestic situation.

The EU has already set out its position in some areas and has completed its first phase of setting standards, but there are questions about whether it is aligned to the 1.5° warming target. Also, according to the criteria, gas is potentially permanently allowed rather than seen as a transition fuel, and nuclear is also included. Is that based on science or has this been the subject of lobbying by certain sectors? Such questions need to be answered.

The key is to make sure that the measures by which we judge green investments are standardised and harmonised internationally, with proper data and metrics behind them so that we do not compare apples with pears. We need to be able to tell whether they are proper green investments. There are different kinds of green investments. For example, there are investment funds that invest purely in green technologies such as renewables, and others that invest in ones that are transitioning from one technology to the other, which could be just as important as the green technologies themselves.

I am interested to hear the Minister’s perspective on this, but I am not entirely clear on who will draw up the rules. As I have said, I am sure that the green tech advisory group will be charged with a lot of the responsibility, but I would appreciate more information on whether the FCA and the Treasury will be working together on this.

I have some questions for the Minister. We have worked together on lots of different things and I look forward to talking to him about this issue in the coming days, weeks and months. Who will do the standardisation and harmonisation? When will it happen? What will it cover in terms of labelling the standards themselves and the benchmarks? Will those standards include scope 3 emissions, meaning not just the scope 1 direct emissions from the organisations but those from their supply chain and customer base? Will the criteria be measured against the 1.5° target? There are mandatory transition plans for our largest FTSE 100 companies by 2023; when will the rest of the economy be required to look at those mandatory transition plans?

Finally, I have a word of caution about unintended consequences. We want to minimise the risk of stranded assets. We need to make sure that companies and fund managers have a glide path so that they understand the transition period, adjust for the future, make strategic investments and not be left high and dry by a sudden change in policy. It is incredibly important that we take businesses with us. Even businesses that are considered brown today may be green tomorrow, and they need to be given the right period of time to decarbonise, because they too could be a very important part of our future decarbonisation plans and strategy.

It is a pleasure to serve under your chairmanship, Sir Edward. I congratulate my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) on leading this debate, even if he acquired it from my hon. Friend the Member for Kensington (Felicity Buchan). I wish him well in his new role on the Treasury Committee, subject to the approval of the House later this evening. I thank him for the constructive contributions that he has made during my tenure, including on this subject.

Let me start with a simple statement of fact: the Government have high ambition to transform the UK financial sector and align it with net zero. We are taking bold action to deliver on that. As my hon. Friend mentioned, we launched two record-breaking green gilts this year in September and October, and announced new sustainability disclosure requirements for businesses across the economy to report their impact on the planet. We are starting to see real results. London was ranked the leading hub globally for green finance this year in a leading index run by Z/Yen, overtaking Amsterdam. I do not want to be complacent, but I think we have made significant progress already, specifically on green finance.

I thank my hon. Friend the Minister, for giving way and I congratulate my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) on securing this debate. On the issue of those reporting requirements, as has been said companies clearly have indirect as well as direct impacts through their supply chains. Is it only direct impacts that will have to be reported, or will the indirect impacts of company supply chains also have to be acknowledged?

I thank my hon. Friend for his intervention. I shall come in a few moments to address the details of the reporting requirements, the mechanisms for enforcing them and their extent. If I have not adequately scrutinised his point and given him the right response, I will right to him—but I hope I will cover it fully in a moment.

Z/Yen said that London was

“propelled up the table by the government implementing measures to stimulate Britain’s green finance sector”

and that it

“has the best sustainability standards in the world”.

As my hon. Friend the Member for Thirsk and Malton mentioned, at COP26 the Chancellor announced that the UK would go further and become the world’s first net zero-aligned financial centre. That is easier said than done. In fact, delivering this will require the Government and private sector to work hand in glove—I welcome the UK private sector’s leadership on this. At COP26, we heard that organisations with $130 trillion of assets globally have now made a net zero commitment. These are big numbers with big implications; it is critical that the claims that firms make about their green performance are credible and backed up with real action.

I will now turn to the title and substance of today’s debate. It is absolutely clear that we need a robust approach to greenwashing. We have heard that phrase a lot over recent years, but I would define greenwashing as when businesses, or investment funds, make misleading or unsubstantiated claims about the environmental performance of their products or activities. That can lead to the wrong products being bought—undermining trust in the market—and to misallocation of capital intended for sustainable investments. In other words, it has the potential to be a significant problem at a time when we are trying to make a sincere and credible transition that is verifiable.

The Treasury Committee report on decarbonisation and green finance, published in June, was also clear that

“‘greenwashing’ is detrimental to good consumer outcomes and to the achievement of... net zero”.

As interest in environmental, social and governance investing increases—which it is, rapidly—it is only right that there should be more attention given to, and more scrutiny of, the claims that firms make. It is for all those reasons that the Government have sought to be on the front foot on tackling greenwashing.

I will take the Chamber through the three areas of action: disclosures, mainstreaming climate into financial regulation, and transition plans. On disclosures, as I mentioned previously, it is the Government's intention to propose legislation, I hope in the next Session, to implement economy-wide sustainability disclosure requirements. This will see financial services firms, real economy corporates and investment funds reporting information on the risks they face from climate and environment, and those that they create. A key element of SDR will be reporting against the UK green taxonomy, which my hon. Friend the Member for Thirsk and Malton has mentioned. The taxonomy will set a robust standard for when economic activities can be considered environmentally sustainable. It is specifically designed to tackle greenwashing by creating a common understanding of which activities, and which investments, can actually be considered green. There is one other aspect on disclosures. Asset managers, asset owners and investment products will all be required to substantiate any sustainability claims they make in a way that is accessible to clients and consumers. All of this will create much-needed transparency in the market and ensure that firms cannot claim things without backing them up.

Our second area of action as a Government has been mainstreaming climate change in the UK’s financial regulation. In March, the Chancellor set out new remit letters to the Financial Conduct Authority and Prudential Regulation Committee, which included climate change for the first time. In November, the FCA published its new environmental, social and governance strategy, and the themes of trust and transparency are core to the FCA’s plans in this area. I am also aware that market participants are increasingly reliant on third-party ESG data and rating services to make decisions, which is why the Government are considering bringing these firms into the scope of FCA regulation and will report back next year.

I also want to address transition plans. Industry leadership on climate change, particularly through net zero commitments, has been impressive, but commitments need to become concrete action. That is why the Chancellor announced at COP26 that the UK would move towards making the publication of transition plans mandatory in the next 12 months. A transition plan should set out an organisation’s high-level carbon targets, its interim milestones and, most importantly, the actionable steps it plans to take. That will improve transparency around how those headline commitments translate into action.

My hon. Friend the Member for Thirsk and Malton asked me a number of questions about which businesses will have to report, when those requirements will come into force and how reporting will help us reach net zero, and I will take those in turn. We will ensure that any burden on business is proportionate and provides useful information for investors’ decision making. Exact details of organisations and products in scope will be determined by the relevant regulators and Government Departments following consultation. Anticipated timings are set out in the roadmap that we published in October.

The UK’s approach ensures that the SDR will come into force in a sequenced, co-ordinated manner, so that reported data flows from corporates to the financial sector, investors and financial market participants make sense, are logical and are scrutinisable. The “Greening Finance” road map, published by the Government in October, sets out the indicative path to introducing integrated sustainability disclosure requirements across the whole economy. The implementation of legislative and regulatory measures will be subject to the parliamentary timetable that I referenced earlier.

In terms of the impact of reporting on the UK getting to net zero, high-quality corporate sustainability reporting is clearly foundational to investors having the information that they need to make well-informed investment decisions. Any action to align capital investment with the transition to net zero is contingent on financial markets having access to the right and relevant information, and identifying which companies are successfully managing their climate-related risks and opportunities. Fixing that information gap is the first phase of the UK’s approach, and getting market participants to act on the information is the second phase, which will ensure that financial flows across the economy shift to align with that net zero commitment. There has been a concerted attempt across Government to ensure that we are very clear about what that journey needs to look like, and more will flow from the legislation next year. I hope that addresses my hon. Friend’s points.

The Government are taking determined action to tackle greenwashing and maintain trust in the growing market for sustainable finance. I thank my hon. Friends the Members for Thirsk and Malton, and for Central Suffolk and North Ipswich (Dr Poulter) for their well-informed contributions and challenges. I hope that this has been a helpful exchange for my hon. Friend the Member for Thirsk and Malton. I will consider his points carefully, as I always do, and take forward any elements to which I have not responded.

Question put and agreed to.

Sitting suspended.