Examination of Witnesses (Question Numbers
20-39)
MR ROBIN
BUDENBERG AND
MR SAM
WOODS
9 MARCH 2010
Q20 Mark Lazarowicz: Going back to
an earlier answer—and I do not want to repeat what others
have said—but on that point, is it not the case that you
are considering performance indicators for the shareholdings you
have which would include environmental sustainability criteria
as part of those conditions? Are you not accepting that these
are things where you should put in a high priority in terms of
what you do in relation to your shareholding?
Mr Woods: We are a new organisation
and when we publish our annual report this year we will include
some account of how we think we have performed over the year which
we hope will be credible. Part of that, and certainly part of
my brief from Robin and my board, is to make sure that we have
a robust sustainability policy in place and that we have implemented
it. That will certainly form part of our wider assessment of how
we have done.
Q21 Mark Lazarowicz: Is it not the
case that many of the other shareholders in the banks—and
obviously they have rights as shareholders as well—particularly
other institutional ones, will themselves have quite high environmental
requirements now of their shareholdings and to some extent is
there not a danger you might act as a drag on what other shareholders
might want to see those banks doing?
Mr Woods: You are right, many
of them do but, in formulating our own policy, one of the things
we looked to was what other investors do, and I think what we
have done matches what they have done. I certainly do not think
we could in any sense be a drag but what Robin is saying is that
in view of our remit it is not appropriate for us to be miles
out in front and if the Government chose to put us miles out in
front there is probably a trade-off with value.
Q22 Mark Lazarowicz: Is there not
a possibility, perhaps not even consciously, that if there is
a perspective in the Government and UKFI that the Government want
to get their money back in relatively short order your approach
to sustainability issues might be different from one where you
had a 10-, 15-, 20-year perspective of ownership? Could that not
affect your approach to investment? If you wanted to get value
and money back more quickly than if you had a 20-year approach,
then you might have a different approach to sustainability.
Mr Budenberg: Our sustainability
policy is very much in line with other investors who take these
matters seriously. It is designed to create long-term shareholder
value. It is absolutely not designed to create short-term shareholder
value and I certainly have not seen any suggestion that there
will be such a conflict.
Q23 Mark Lazarowicz: Do you have
a view on whether RBS's current strategy, which I understand is
to reduce its project investment business, will in any event make
the bank greener in what it does?
Mr Woods: To be honest, I do not.
Q24 Chair: For some of us who see
business as part of the solution to climate change and very much
in the lead in creating a more low-carbon economy and infrastructure,
and accepting the urgency of the need to decarbonise the economy,
an urgency which certainly parts of government accept as well,
there is something intellectually incoherent in a situation where
a bank in which the public has a majority shareholding starts
to finance, let us say, coal-fired electricity power stations
where there is a current controversy about the conditions under
which they could actually be built. That might look like a profitable
investment in the short term, but in five years' time regulations
might mean it was no longer viable without very substantial investment.
I appreciate that you have to work within the brief you have but,
looking at it from our point of view, there looks like a sort
of incoherence. Here is the Department of Energy and Climate Change
saying we have to decarbonise power generation. The Committee
on Climate Change under Adair Turner is saying 90% reduction in
carbon emissions from electricity powered generation within 20
years. If banks are going round lending to support the construction
of new coal-fired power stations, that is directly contrary to
that objective. I understand you have to operate within your remit
but there appears to be an incoherence about the way all that
works.
Mr Budenberg: All I would say
is that, based on our discussions and our review of the sustainability
policies, particularly of RBS and of Lloyds, we believe they are
taking these issues very seriously. They have devoted board level
resource to it on a regular basis and certainly what we have heard,
read and spoken to them about suggests that they are taking their
responsibilities in this area very seriously. If you read Sir
Philip Hampton's speeches, he recognises that what he has received
from the Government as a shareholder is very valuable and they
have to play a role in society that is commensurate with that.
I think that it is the right thing from a corporate governance
point of view for these responsibilities to be primarily on the
board and our sense is that they are carrying that out appropriately
and that they are taking account of a wide range of issues in
relation to that.
Q25 Martin Horwood: I want to pick
you up on two things you said which seemed to contradict each
other. At one point you said you wanted to have a best-in-class
approach to corporate governance and corporate responsibility
and wider investment issues. Then you also seemed to say that
you would not want to stick your neck out too far ahead of the
pack. Surely, if you are in one case controlling 70% of an institution,
if you cannot lead from the front in that situation when can you?[8]
I am just trying to draw the distinction between you handling
a private portfolio where your private investor had said he wanted
to shift away from coal-fired power stations and certainly rule
out catastrophically damaging things like tar sands altogether
and he wanted to shift firmly into the new green economy, into
renewable energy. What is the difference between that and you
taking account of government policy, which is in effect trying
to say similar things?
Mr Woods: That is a very fair
question. When we say best-in-class we mean that we certainly
want to be at the front of the pack. It is also definitely the
case, because we only have investments in fact now in five companies
with Northern Rock, that we do have a greater ability to engage
on some issues with the banks than some of the other investors.
I have not attempted to calibrate the extent of our engagement
on environmental issues against those of, say, Hermes, but I would
like to think we do at least as well. It is the case that on some
things we have gone a lot further but that has been very much
around the governance side of things and that was really because
a lot of urgent changes were needed to protect the value of our
investment and if we found ourselves in that same spot on environmental
issues we would also act more forcefully.
Q26 Martin Horwood: Given that your
owner has a particular priority, in other words the UK Government
and political society has a particular priority, to avoid climate
change and shift the economy in one direction, should you not
be reflecting that?
Mr Woods: It comes down to this.
What is our job and what is the job of government broadly? We
are not a policy-making body; we are not a regulatory body.
Q27 Martin Horwood: I am not asking
you to make it; I am asking you to be conscious of it.
Mr Budenberg: It is clear that
we are meant to have an arm's-length approach to managing these
shareholdings, and indeed the Treasury Select Committee has said
that it is important that we are not seen to be an arm of government
policy in relation to these banks. I think it would be inappropriate
to try to make two banks that we happen to have shareholdings
in act differently from other banks with whom they are competing
because that may go towards a negative impact on value. We absolutely
take this role seriously but I do not think that we see that we
should be, and certainly we have not been required to be as part
of our mandate, an arm of government in terms of a policy either
in this area or in a range of other possible areas which we could
also be pressurised to put into.
Q28 Colin Challen: Is it not blindingly
obvious that the Government did not want to buy these banks in
the first place or recapitalise them, however you describe it,
and would like to offload them as soon as possible, hopefully
with a return for the taxpayer? That is all they are really interested
in. All this talk about sustainability is window dressing. Are
we going to look back in a few years' time and say this is one
of the biggest missed opportunities in terms of developing a more
coherent approach to sustainability? Do you fear that in 20 years'
time, when perhaps climate change is really beginning to bite,
we will look back and think we missed that one?
Mr Budenberg: I actually think
that there has been a real change in the attitude of those banks,
partly as a result of the very significant changes to corporate
governance that we have been part of. There are new members of
the board. I would point people to both the chairman of Lloyds
and the chairman of RBS who have made it clear that they recognise
that they have obligations and I believe, certainly from our discussions
within RBS, that there is a very different approach to sustainability
now than there might have been within the culture that existed
there before.
Q29 Colin Challen: So you are saying
that there has been an improvement in this area since the taxpayer
became involved?
Mr Budenberg: I think that is
more as a result of the change of culture of these banks. They
have always taken this side of things seriously but there is now
a different group of people in charge who have different approaches.
Q30 Colin Challen: Does this not
represent an opportunity? If they were pressed to go a bit further
than they obviously seem to want to go, it would end up with the
publicly-owned banks going a lot further and leaving people like
Barclays as the dirty bank that nobody wants to bank with. Why
not turn your argument on its head and say that that is the approach
to competitiveness and to avoiding this unfair competition from
the non-publicly-funded banks?
Mr Budenberg: Again, that is a
matter for the boards of the banks who are taking the day-to-day
decisions in relation to the running of the banks.
Q31 Colin Challen: Maybe they would
want a bit of a push, a bit of a signal. Market signals are what
people these days look to the Government to produce, albeit the
Government's policy is not to pick winners, allegedly. That perhaps
is something you could raise as an important new development and
that would encourage the public to see that the Government were
using their money wisely in propping up these banks.
Mr Woods: It is all a question
of degree. We do take an interest in this topic and we have done
the sorts of things we have talked about today. With regard to
RBS particularly, Philip Hampton has set up a new full board sub-committee,
chaired by Sandy Crombie, to look at sustainability issues. I
am under the impression, from talking to Sandy Crombie, that he
is taking that role very seriously. If we had come in front of
the Committee and said that our remit was shareholder value, we
were not interested in the environment, then what one might perceive
as a tension between different government objectives would indeed
be incoherent, but that is not where we are.
Q32 Colin Challen: How are the opportunities
for a more sector-wide approach? Do you have discussions with
people like Barclays and others so that you can maybe coordinate
efforts in any way on this agenda?
Mr Woods: That is more a question
for the Treasury than for us.
Q33 Colin Challen: So you do not
have any discussions with other banks?
Mr Woods: No, we do not; that
would be beyond our remit, quite clearly.
Q34 Colin Challen: Is that definitely
beyond your remit or do you just interpret it that way?
Mr Budenberg: It is beyond our
remit.
Q35 Colin Challen: It is beyond your
remit, so that is all part of this hands-off, arm's-length approach.
In terms of that approach, your involvement is with the Treasury
but, as this session makes clear, other people, other departments
have an interest. Should DECC or Defra have any role to play in
providing advice to you or any other bodies? Do you have advice
from people like the Sustainable Development Commission, for example,
the SDC?
Mr Woods: Our portal into the
Whitehall world is usually the Treasury. We do sometimes have
dealings with other departments. For instance, in forming our
sustainability policy we looked to the Treasury to give us some
advice because they obviously have many more people and many more
people working on environmental issues than we do, so we do draw
on that. We have not spent lots of money on buying in consultancy
on this topic because we think that we are on top of it. If we
needed to, we would certainly do so.
Q36 Colin Challen: Do you provide
the Treasury with any feedback on this kind of agenda or do you
simply take it as a given exactly what that remit is? Is a proactive
discussion taking place on these issues with the Treasury?
Mr Woods: On our remit there is
not currently an active discussion. We are taking our framework
document and investment mandate as having been fixed for the time
being. On these issues more generally, yes, we do talk to the
Treasury and we have over the last year or so just in the course
of our normal catch-ups which we do every couple of weeks.
Q37 Colin Challen: Have there been
any occasions when you felt you had to rein in any actions by
these banks which you felt was an inappropriate action, particularly
of course in the sustainability field?
Mr Woods: There has been no specific
instance on the environmental front where we have had to say we
really think that must stop. Have there been areas where we have
engaged very strongly to get things changed? Yes, and the things
I would point you towards mainly are the fact that the entire
board at RBS has changed, that the way people are paid in those
banks is very different from what it used to be and, most importantly
in a way for us, the way risk is managed is much better than it
used to be. I would not claim it was all our doing, but we have
been extremely active in that area.
Q38 Colin Challen: Are you just talking
about financial risk?
Mr Woods: It is risks of all kinds.
In fact, both RBS and Lloyds, as part of their general credit
screening process, do take account of environment and social factors
as well and if that were not the case we would be somewhat surprised.
Q39 Chair: Would you recognise any
similarity at all in the way in which the sub-prime crisis, which
was one of the triggers of the difficulties in the banking industry,
was actually not that difficult to anticipate? If you lend money
to people who have no income, no job and no assets, their difficulties
in paying it back will eventually have an impact on the lender.
Would you see any similarity between that and the present situation
which the world faces where, if we continue to emit increasing
amounts of greenhouse gases, the concentration in the atmosphere
will go on rising with a very high probability scientifically
that will affect the climate? The banks did not react very quickly
to the extremely high probability that eventually not all these
loans would be repaid. Do you think we are in a similar situation
in relation to the climate?
Mr Budenberg: I am not sure that
is for me to answer. To be slightly flippant, I suppose we are
involved in clearing up what happened after the sub-prime thing.
I will not say any more than that.
Mr Woods: That is a very broad
question. You should see what the Treasury says to it.
Chair: We are going to see the Treasury
in a few minutes' time. Thank you for your help in suggesting
these lines of inquiry.
8 Note: While the Government holds a 70% ordinary
shareholding in RBS, it holds an 84% economic shareholding. Back
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