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Local Authorities: Fossil Fuel Holdings

Volume 769: debated on Wednesday 24 February 2016

Question

Asked by

To ask Her Majesty’s Government why on 17 February they changed the guidance to local authorities regarding procurement of, and investment in, fossil fuel holdings.

My Lords, on 17 February the Government published new procurement guidance for public authorities reminding them of the existing policy that has been in place for many years under successive Governments. The guidance makes it clear that boycotts in public procurement are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the UK Government. It does not mention procurement of, or investment in, fossil fuels or any other specific type of holding. Guidance on local government pension investments is a separate matter. The Government will be issuing guidance in due course on social, environmental and ethical considerations in council pension investment decisions.

I thank the Minister for making that plain, but the diktat—or should I say the reminder?—from the Cabinet Office on 17 February has made local authorities very nervous about the new regulations coming into force. Will she champion the role of local democracy in investment and confirm that—subject to the administrating authorities publishing their social, environmental and corporate governance policies, and subject to a decent return on investment for the people whose pensions they are responsible for—they will be free to divest or invest as they see fit?

My Lords, there may have been some confusion in the press over the difference between the pension investment guidance and the procurement guidance. There will shortly be guidance on pension investment, but I think what has made local authorities slightly uneasy is the slight confusion in the press. On divestment from pension funds, it is the first duty of a pension fund to provide the best returns for investors, as I said yesterday at the Dispatch Box.

My Lords, is the Minister aware that the Government have long since abandoned their pretensions to be the greenest Government ever? What business do a Government of self-proclaimed localists—for whom ethics appears to be a county in the south-east of England—have in instructing local authorities or their pension funds as to what fuel they should buy or invest in? Is there any area of local government responsibility that they are prepared to leave to the discretion of democratically elected councils?

My Lords, this is subject to consultation. The Government are not directing local authorities to do anything other than maximise the returns on investments and provide best value from procurement.

My Lords, is the Minister aware that, in the past five years, the value of four of the biggest coal companies in the United States has fallen by 99.6% and that many firms have gone out of business? Is it perhaps time for the Government to give local authorities constructive advice on how to divest themselves of fossil fuel holdings that could well crash in the next few years?

My Lords, at the risk of repeating myself—I have said this several times over the last couple of days—if a local authority invests in a company whose share price is dropping significantly, it might be wise, in order to maximise the return for its investors, to invest in another company whose share price is increasing. That is a decision for it to make about its pension funds.

My Lords, is the Minister aware that many pension funds regard it as their responsibility to have the best long-term returns, and therefore see sustainability of investments as absolutely key? She seems to be recommending that they go with short-term behaviour in the marketplace—behaviour that the Chancellor is frantically trying to change and which responsible pension funds have long since rejected, which is why many have ethical standards in their investment decisions.

My Lords, local authorities should make decisions based on long-term and short-term investments in their portfolio and should keep an eye on both to ensure the best performance of those pension funds.

My Lords, may I thank my noble friend for saying quite clearly that trustees of pension funds have a single duty, which is to do what is best for the pensioners for whom they are responsible? The political considerations paraded today are neither here nor there. This is a complicated issue and scene, and it is for the pension fund trustees to do what is best for their pensioners.

My noble friend is absolutely right. I am glad that he said it is complicated because, as a humble junior Minister, I find it quite complicated. Maximising the returns for the investors is the prime responsibility of any pension fund.

My Lords, is the Minister aware that many local authorities, while getting a good return on pension funds, disinvest from industries such as the tobacco industry where they have policies on pursuing smoking cessation and good health, which smoking clearly threatens? If she is clarifying what she says is a confusing situation, will she make it clear what counts as being political? Is it investing in renewables? Is it disinvesting from tobacco? Is it in fact obeying government instructions, or is the local authority given some licence to make its own judgments?

My Lords, what is confusing is to confuse the issue of procurement with that of pension fund investment. I think that is where the confusion started. It has not been helped by the media. That is why I was trying to clarify the two aspects of the Question. Local authorities will have all sorts of things to consider when making their pension investments. They will have an obligation to public health. They will have an obligation to help people cut down on excessive alcohol consumption, take more exercise, use less petrol and perhaps walk their children to school, but that does not take away from the prime purpose for which pension funds are designed, which is to maximise the returns for their investors.

My Lords, does my noble friend agree that nothing could be less complicated but more important than maintaining the beauty of North Yorkshire, including the moors, for future generations to enjoy? Should it not be for the people of North Yorkshire, rather than pension funds based in London, to decide on the future of that beautiful county?

My Lords, the people of North Yorkshire elect the local authorities of North Yorkshire, which will then make decisions on the pension funds of North Yorkshire. Actually, from start to finish, it is a democratic process.