Economic Activity of Public Bodies (Overseas Matters) Bill

Committee (4th Day)

The Schedule: Exceptions

Amendment 27

Moved by

27: The Schedule, page 12, line 26, after “financial”, insert “risk, impact and” Member’s explanatory statement This amendment seeks to allow decision-makers in public bodies to consider the financial risk and impact associated with, for example, the delivery of contracted goods and services and the investments in the Local Government Pension Scheme, without falling foul of the prohibition.

My Lords, in moving Amendment 27, I shall speak in support of Amendments 45 and 46A in this group.

Part 2 of the Schedule allows exceptions for certain types of consideration from the prohibition in Clause 1. Amendment 27 seeks to expand on those exceptions by adding financial risk and impact alongside financial value and practical utility as considerations that decision-makers can have regard to without violating the prohibition. This would allow considerations of material financial risk and impact when making investment decisions in the local government pension scheme and public procurement decisions without falling foul of the prohibition.

The current wording of the Bill, which explicitly accepts consideration of financial value but not consideration of financial risk and impact, leaves investment decisions informed by such considerations exposed to legal challenges, alleging that they are influenced by political or moral disapproval. The LGPS has no trustees, but it does have decision-makers who carry judiciary-like duties requiring consideration of financial risk and impact, as recognised by the Law Commission; government legislation; statutory guidance from the Secretary of State; the Financial Markets Law Committee; and the expectations of the Pensions Regulator. All investments and divestments have territorial considerations and country-specific factors.

The Minister advises that the Government intend the word “value” to cover financial risk and impact, but relying on the exception of consideration of financial value does not suffice to address the problem of the potential for legal challenge. Financial risk and impact encompass wider consideration for informed decision-making, particularly long-term investments held by pension schemes. Financial value, financial impact and financial risk are referenced by financial services and government legislation; they are related, but separate. Financial value is narrower, often linked to the price of an investment or asset reflecting market view at a point in time.

My noble friend Lady Blackstone’s Amendment 45 addresses the impediment that the Bill places on the Local Government Pension Scheme in fulfilling its stewardship duties, and she is absolutely right to do so, because this is one of the perverse consequences of the Bill as drafted. The failure to except considerations of financial risk and impact could also complicate repatriation of local government funding to the UK under the Mansion House proposals, opening up challenges that investment decisions are influenced by political or moral disapproval.

The Government, through the Bill, by focusing on a broad definition of “public bodies” and a very narrow definition of exceptions to the prohibition, in order to catch as many boycott or disinvestment campaigns as possible, have failed to see the potentially perverse impacts on the Local Government Pension Scheme investments and public procurement decision-making, increasing the risk of bodies or persons seeking, for self-interested reasons, to argue that LGPS decision-makers have been influenced by political or moral disapproval. What could it mean for passive funds, for example, which the LGPS invests in? ESG—environmental, social and governance—fund providers often use Global Compact-type screens, which may now mean that they sift out companies in a way that falls foul of the Bill, due to the narrow drafting of exceptions.

Some passive funds have climate transition benchmarks. A company failing to reach the benchmark will inevitably have a territorial link but, without this amendment, uncertainty arises as to whether the Local Government Pension Scheme could invest in such ESG funds and whether billions need to be invested. I have not just dreamed up these concerns: there are people who hold concerns that the Bill will have that effect.

The Bill is before us. If the Government’s argument is that they intend their reference to “financial value” to include financial risk and impact, why not put it on the face of the Bill? Lots of people involved feel that leaves legal uncertainty. It just does not feel like good government when the management of approximately £360 billion of Local Government Pension Scheme assets is left to rely on a ministerial statement to mitigate legal uncertainty. The Secretary of State, Michael Gove, asserted in the Commons that

“there is no damage to the fiduciary duty”.—[Official Report, Commons, 25/10/23; col. 917.]

in this Bill. There is increasing concern abroad that that is simply not correct.

My Lords, I rise briefly to support the points made by the noble Baroness, Lady Drake, and to explain why I have put my name to her amendment. She makes a powerful case, and what I hope sways the Minister is that her case rests very much on the policies enunciated by the DWP and the Chancellor, who are very keen to see pension funds take a broader view of their responsibilities and take account of impact and risk. Indeed, the noble Baroness has cited specific DWP regulations which make it clear that risk is something distinct that it wants pension fund trustees to take account of. What she is proposing here is consistent with the wider direction of government policy about how pension fund trustees, particularly local government pension trustees, should see their responsibilities.

My understanding of the Government’s position is that actually “financial value” already captures all that and that the noble Baroness’s amendment, which I support, is therefore unnecessary. However, I must say that I think it is unlikely, given that so much effort has taken place in the Treasury and the DWP to use some other expressions going beyond “financial value” to capture the responsibilities of trustees, that anyone would automatically accept that the formulation currently in the Bill covers this wider meaning. If the Minister is right that it is the Government’s intention and it should have this wider implication, I do not see any difficulty in making that absolutely clear by accepting this amendment. I very much hope that in the spirit of constructive review and revision of legislation, without in any way challenging the fundamental electoral mandate behind it, this amendment is a proposal that the Government can accept. It is, indeed, entirely consistent with the direction of the Government’s own policies.

My Lords, I support Amendment 27. The Bill has effects that were not thought of in advance. Local government pension schemes and their administrators have one thought in mind, which is to protect the financial interests of the pensioners and of the funds, and this amendment just clarifies the financial aspects of that. The administrators should not be involved in any international political situation, but be there to look after the funds of the pensioners. Amendment 27 does exactly that in clarifying, which is all it is doing, what this aspect of the Bill does. Therefore, I support it from these Benches.

My Lords, I rise briefly to congratulate the noble Baroness, Lady Drake, on her amendment and the others in the group. I understand where they are coming from, but it seems to me that the Government’s argument that this issue is already encompassed in “financial impact” holds some sway. There are concerns that I understand, but I am not sure they are necessary. Indeed, sight should not be lost of the fact that all local government pension schemes are ultimately underwritten by the Government and taxpayers. If the stewardship of these assets were swayed by issues which the Government themselves might not be comfortable with, there are powerful reasons why that stewardship should not be swayed by the kind of considerations that the Bill seeks to ensure does not happen.

Political or moral disapproval is not the same as environmental, social and governance issues. If a board of trustees decided to boycott an investment because of the country in which it is located, based on judgments of that country which do not accord with the views of the elected Government, the duties incumbent on the Government in accordance with this Bill would be at risk. That someone might take legal action against trustees who decide that they do not wish to make certain investments because they make a political or moral judgment that is not in accordance with that of the elected Government could equally be argued the other way. Trustees, certainly local government trustees, should not be taking these decisions.

I believe that was the manifesto commitment. Private pension schemes are not part of government and therefore that is a different decision, but local authority pension assets are ultimately underwritten by government so, should there be concerns about material financial risk and impact, they ultimately rest on the Government’s underpinning them anyway. Given that, as my noble friend said, “financial value” already encompasses these issues, I am relaxed about the current wording of the Bill. I hope that noble Lords across the Committee, especially those who have worked so hard on pension issues and with whom I normally fully agree, will not be too uncomfortable with the explanations that I am trying to put forward for not using pension assets as a disguised tool for political or moral judgments in the way that could happen and which this Bill seeks to deter.

My Lords, I support the amendments in this group and will speak to Amendment 45, which I have signed. This amendment would remove “management” from the definition of a fund investment decision, allowing investors to carry out stewardship activities, including engagement and voting, without falling foul of the prohibition and enabling vexatious legal challenges.

Clause 12, on application of prohibitions, applies Clause 1 prohibitions to the LGPS. It includes acquisition, retention, management or disposal of assets in its definition of fund investment decision. However, advice from the LGPS identifies “management” as pension scheme stewardship—engagement with or seeking to influence the companies and sometimes Governments in which it invests and voting at annual general meetings. Without this amendment, local authorities would be open to legal challenge for statements made during engagement with the companies in which they invest or to votes against them at AGMs, should interested parties wish to argue that these were influenced by political or moral disapproval of a foreign state.

I hear the arguments put forward by the noble Baroness, Lady Altmann, but the breadth of the Bill means that there is an opportunity for interested parties to use the moral and political disapproval of a foreign state as a way of challenging decisions that they do not agree with. The concern is that many will choose to take that view—and the Bill allows them so to do—on risks, for example, connected with a company’s purchases from a certain market, such as the use of forced labour in China, or investment in fossil fuels, which are becoming more financially risky. These could all be interpreted as disapproval of a foreign state or moral or political disapproval and thereby attract interested parties to challenge via judicial review and the quasi-judicial review process introduced in Clause 5.

Furthermore, foreign Governments have large stakes in listed companies, so concerns about any aspects of those companies could be litigated on the basis that they were influenced by disapproval of a significant fellow investor. With such a threat of litigation, it is easy to see how advice and full and frank discussion of decisions could be severely restricted. Having been a member of a local government pension scheme, I understand the need for advisers to be able to give frank advice without fearing that their words may be used later in legal action.