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Justine Greening: If such a requirement does not help to achieve the Bill’s objective—I do not believe that it does—we should not include it. As someone who was involved in the audit profession, I know that, in the US, a tick-box mentality prevails and has led to a proscriptive audit approach, whereas the UK’s audit approach continues to be based on the substance of transactions, and auditors judging what is true and fair. The latter is a much stronger framework and I believe that we can be satisfied with the UK corporate environment and corporate governance when compared with the position in which US corporate governance has sometimes found itself in recent years.
Defining who would constitute a potential investor or customer in practical terms is such a broad concept as to be impossible to tie down meaningfully. In the case of a highly diversified company or a company that sells a wide product range, potential investors could have a variety of priorities that they wanted to highlight in a business review, and a vastly differing range of understanding of the company. Companies with a huge product range could have so many products that almost anyone could be classed as a potential customer. That is unworkable in the context of the business review.
Perhaps one of the most fundamental changes that the new clause proposes is the requirement for medium-sized companies to complete a full business review. Conservative Members believe that that would be excessively onerous, especially taken with new clause 2 and new clause 75, which deals with reporting standards and auditing the business review.
The Government estimated that the operating and financial review audit would cost business £33 million. I am concerned that formalising reporting standards, as new clause 2 proposes, and requiring an audit of the business review, as new clause 75 proposes, would risk transforming the business review exercise into nothing more than a tick-box approach, whereby the quality of the substance of the business review took second place to ticking all the boxes of a reporting standard.
Clause 510 provides that auditors must review whether the directors’ report is consistent with the accounts as a whole. The Bill therefore already contains a safeguard to ensure overall consistency. I am sure that hon. Members know that the Accounting Standards Board had prepared a robust reporting standard to use alongside the OFR. Once the OFR was amended and downgraded to a business review, the ASB similarly downgraded the reporting standard to a reporting statement. Nevertheless, it still provides clear best practice guidance to directors and their auditors on the expected content and quality of the report and can therefore provide some quality assurance in the business review narrative.
David Howarth: Surely the hon. Lady cannot have it both ways. She cannot on the one hand say that reporting standards will lead to a tick-box approach and on the other praise the reporting standard that the ASB produced.
Justine Greening:
I am amazed. There is a touch of irony to a Liberal Democrat saying that I want to have it both ways. In the House of Lords, the Liberal Democrats were happy with the business review, as we discussed in
Committee, but by the time the Bill reached the House of Commons—a matter of weeks—they were resolutely claiming that we needed the OFR back. We want an efficient, effective minimum regulation approach to the business review that will enable companies to get on with good quality corporate social responsibility reporting. We do not want to force them down routes that they may not find valuable.
Surely providing some flexibility is a better approach, especially given that we may debate a climate change Bill shortly, than tying the review down so tightly to lists of requirements for inclusion that there is no flexibility to adapt as the agenda changes and grows.
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Conservative Members want a climate change Bill to be included in the Queen’s Speech. We are disappointed that, at this late stage, the Government have changed their mind on a business review about which all key stakeholders had largely agreed. That is representative of a Government who are weak minded, badly organised and listless. We will oppose the Government amendments and new clause 1. We look forward to working with environmental groups and business in the coming months and years on the important matter of corporate social responsibility to ensure that the business review proves successful in establishing a robust corporate social responsibility framework in the UK.
Many other hon. Members want to participate, so I shall end my remarks.
Mr. Michael Meacher (Oldham, West and Royton) (Lab): I commend the hon. Member for Putney (Justine Greening) on her opening speech from the Conservative Front Bench. Her initial remarks led me to believe that she would be consensual—I was looking forward to more such speeches—but her later remarks made me doubt it. However, we look forward to hearing her arguments in future.
I support new clauses 1 and 2, which my hon. Friend the Member for Hemsworth (Jon Trickett) moved so eloquently and persuasively. They require companies to produce a business review, which examines the impact of company policies on not only the environment but employees, the local community and suppliers.
There is a long history to the proposals. It has long been understood that the best way to get industry fully to understand and tackle its social and environmental impacts is to require companies to measure and report on them. One cannot manage what one cannot measure. The Government therefore rightly initially drafted legislation in the form of an operating and financial review—or OFR as everyone fondly knows it—and required the leading 1,000 companies to produce one. A dispute then occurred about whether it was right to require those companies to report on their impacts unconditionally or only those that were material to the interests of the company.
The Government went to extreme lengths to resolve the matter. They set up an external committee to advise them on the definition of “materiality”. I believe that they did that to get agreement and, after due discussion and considerable delay, agreement was reached and a consensus achieved between the Department of Trade
and Industry, the Department for Environment, Food and Rural Affairs—I know that because I was there—and the business and investment community. However, last December, the Chancellor suddenly announced at a CBI dinner that he was shelving the OFR legislation. There was no consultation about the abrupt U-turn and the reasons that were given at the time to justify it do not bear examination.
It was argued that the statutory OFR was a prime example of gold-plating—the normal argument that Whitehall and the CBI use—EU legislation. The Chancellor said that it went beyond the requirements of the 2003 accounts modernisation directive. However, the OFR proposals predated the EU legislation by several years. Indeed, the OFR package was amended in 2004, but that was simply to ensure that it complied with the EU directive, not to enable it to go beyond it. Nor was the sudden shelving of the OFR legislation universally welcomed by industry. One had only to look at the Financial Times during that period to see a letter of protest from the Institute of Directors, no less.
It is highly relevant that, more recently, top executives from among the 14 largest FTSE companies—the list reads like a roll-call of the senior ranks of British industry—headed a delegation to the Prime Minister to demand that the Government regulate against climate change. I was delighted—if slightly surprised—by that. It showed, in contrast to the rather curmudgeonly remarks of the hon. Member for Putney about the attitude of British business, that those attitudes are beginning to change—and not before time.
I suspect that that is the reason the Government are now—in another excellent development—considering producing a climate change Bill in the next Session. I very much welcome that, as someone who—along with the right hon. Member for Suffolk, Coastal (Mr. Gummer) and the hon. Member for Lewes (Norman Baker)—is sponsoring a climate change Bill before Parliament that will require an annual 3 per cent. cut in greenhouse gas emissions in order to achieve what the scientists say is necessary to stabilise climate change, namely a 60 per cent. reduction in those emissions by 2050.
For the purposes of this debate, the key point—which we recognise in our Bill and I hope that the Government will recognise in their climate change Bill if it is forthcoming—is that, in order to meet the unquestionably demanding targets, it is necessary to make regular measurements, sector by sector. That includes transportation, industry and the domestic sector. The measurements must also be made on a company-by-company basis. They must ascertain whether the targets are being met and, if they are not, determine what remedial action needs to be taken to get back on track. That is why the business review, as it is set out in the new clauses as a replacement for the lamented OFR, is absolutely essential.
Mr. Elliot Morley (Scunthorpe) (Lab):
My right hon. Friend rightly drew our attention to the excellent points that the Corporate Leaders Group made to the Prime Minister. The Minister has also received a letter from the Aldersgate Group, of which I am a member. The group includes leading businesses that want to promote sustainable development, and to see the
establishment of reporting in relation to carbon allowances. Would the Minister for Industry and the Regions like to touch on that letter when she responds to the debate, and tell the House how those reports can be incorporated? That matter certainly seems to be addressed in new clause 1.
Mr. Meacher: I am sure that my right hon. Friend the Minister will respond to my hon. Friend’s request. The members of the Aldersgate Group, like others in the senior ranks of British industry, realise that that is the direction in which the international economy is going, and that, if we are to be smart, we need to be in there at an early stage, because, unquestionably, there will be a requirement to produce such a review in due course. This is not only a matter of environmental sensitivity but a good business move in relation to the bottom line.
The method adopted by the EU emissions trading system under the Kyoto protocol, which is highly relevant to the debate, is the national allocation plan. This requires each industry to reduce its emissions to a fixed lower level within a given time scale. The relevance of that is that the new clauses provide the framework by which those reductions can be achieved in two important ways. I am at one with my hon. Friend the Member for Hemsworth in strongly requesting the Government to reconsider their position on this. First, the national allocation plan, to which we have signed up, applies to all large and medium-sized public and private companies—some 36,000 in all. That is still fewer than 1 per cent. of all companies, but it is significantly more than the 1,300 publicly listed companies covered by the Bill as it is drafted. The Aldersgate Group and the 14 key representatives of the big companies who went to see the Prime Minister are all concerned about the need for a level playing field. They do not want to be disadvantaged, and they therefore expect there to be a general requirement for the whole of business, including large private equity firms and foreign-owned private subsidiaries. The new clauses cover such businesses, but the Bill does not.
Secondly, the new clauses would introduce a mandatory reporting standard. I strongly suggest that that is absolutely essential, because we have repeatedly tried to make voluntary codes of practice work. As a former Minister for the Environment, I speak with some anguish about this. We introduced a number of voluntary codes, but they were honoured more in the breach than in the observance. Voluntary codes of practice will never be observed, other than by a relatively small number of scrupulous and conscientious companies. They will certainly not be universally observed. If we want to establish a level playing field, the code of practice must be mandatory and universal.
There is also the question of placing burdens on business. We have only to open the papers today to see the CBI repeating its usual mantra. Even the hon. Member for Putney could not resist buzzing around it. Of course there is an initial outlay involved in meeting the proposals. The truth is, however, that having spent that relatively small sum, companies will start to measure their energy efficiency, their transport impacts, their waste generation, their water consumption and their
greenhouse gas emissions. They will then find, perhaps to their surprise, that once they have measured the waste and inefficiency that they were inadvertently generating, they will be able to make disproportionately larger savings. That is the key point: they will get a far bigger return for their initial outlay if they are required to assess the environmental impact of their work.
Proof of that can be seen in the fact that mandatory social and environmental reporting is already being pursued in various forms in other successful competitor countries to our own, including the United States, Canada, France, the Netherlands, Norway, Sweden and Denmark. I must underline strongly that sustainability is the friend of competitiveness. It is not a burden on it. For all those reasons, I hope that the Government will reconsider their position and accept new clauses 1 and 2. This would result in a win-win situation, not only for the environment—important though that is—but for the bottom line.
David Howarth: It is a great pleasure to follow the right hon. Member for Oldham, West and Royton (Mr. Meacher), who speaks with great authority on these matters. Perhaps I should say to the hon. Member for Putney (Justine Greening) that this is the stage at which the real Opposition get to have their say.
The right hon. Member for Oldham, West and Royton related quite accurately the history of how the operating and financial review was abandoned. It is alleged that the Chancellor decided to announce, without much consultation with anyone, that the OFR was to be suppressed because he wanted to make a symbolic gesture to show that the Government were willing to deregulate in matters that affected big business. That move was so surprising because, first, it was not clear that big business wanted that gesture to be made and, secondly, because we are talking about serious matters, not just symbols.
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Justine Greening: I am slightly perplexed by the hon. Gentleman’s comments about being the real Opposition. Will he oppose Government amendments Nos. 821 and 822?
David Howarth: Of course not, because the Government are giving way on a point that we are urging them to give way on. We are therefore very glad that they are doing so, and it would be perverse of us to oppose them. We are going to support that proposal. I accept that there are concerns about how it has been introduced: this is a surprisingly late concession, but late concessions are better than none at all.
In addition, it is not surprising that a concession has been made, because this matter was included in the original OFR. Furthermore, there was a clear argument that the drafting of the original clause—it talked about all the matters that were material to the company’s position—by implication included supply chain matters. There is a problem over late concessions, but it is a rather lesser one than would normally apply.
Mr. Shailesh Vara (North-West Cambridgeshire) (Con):
With respect to the hon. Gentleman’s claim that he speaks for the real Opposition, perhaps he would like to explain to the House why, in Committee, his
party either abstained or, on several occasions, voted with the Government when the official Opposition voted against them.
David Howarth: As I remember it, at that stage the official Opposition opposed even the business review, although they appear to have changed their position, presumably due to the election of the right hon. Member for Witney (Mr. Cameron). The inconsistency of the Opposition’s position needs to be explained.
Mr. Vara: Is that the hon. Gentleman’s Opposition or the other Opposition?
David Howarth: The hon. Gentleman’s question, asked from a sedentary position, shows that it is a big issue in the House as to which party is the real Opposition. [Interruption.] I want to make progress.
The question is whether the business review that emerged from the row that blew up after the Chancellor removed Government approval for the original OFR goes far enough. That is what new clauses 1, 2 and 75, as well as our amendment (a) to new clause 1, are about. The business review is too narrow in a variety of ways, and the right hon. Member for Oldham, West and Royton mentioned them all. In particular, it covers too few companies for the purposes for which we think it should be created. It does not cover the supply chain issue, although the Government have rightly introduced a proposal to correct that position.
Most important for us is the fact that the new business review fails to have proper audit requirements. There is a general requirement of audit, as the hon. Member for Putney mentioned, but what is not contained in the business review, which was contained in the original OFR, is a requirement for auditors to report on matters that come to their attention that are inconsistent with what is in the business review. The wording that we have used in new clause 75 is precisely that which was in the original OFR regulations.
I suppose that it is fair to say that our starting point, and our reason for supporting new clauses 1, 2 and 75, is perhaps rather different from that of the Government and the Conservative party. We are interested not just in the risks that the company faces, from loss of reputation through to introducing policies that are environmentally unfriendly or socially irresponsible, and unwelcome—from its point of view—regulatory activity, but in helping to create a market for ethical investment and ethical consumption. That precise point is where we differ from the other parties, because that is our first concern as to what the business review should contain and how it should work.
Justine Greening: The hon. Gentleman talks about creating an ethical market. Does he agree that there is already one established, although developing it is clearly something to be encouraged?
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